Robb on Cooperation

‘Sector neutral’ standards? Phooey!

Posted by Alan Robb on 29 September 2009 | 0 Comments

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Financial reporting in New Zealand is currently being hampered by the belief of the Accounting Standards Review Board that accounting standards can and should be ‘sector-neutral’.

That view is rejected by many other accounting bodies and for good reason.

Accounting standards are largely developed for and in the interests of investor-owned companies.

The process of harmonization or convergence of accounting standards is explicitly in support of the globalisation of financial markets.

As such, the present process of standard setting is fundamentally irrelevant for those entities such as cooperatives and mutuals, charities, educational organisation and governments.

Their objectives and performance measures are quite different from companies whose objective is to maximize the return on financial capital. Their concepts of basic elements such as assets, liabilities and equity are also different.

By attempting for force investor-focussed accounting on other sectors the standard setters are creating nonsensical numbers in annual reports and are failing to allow the reporting of what may be more truly relevant.

Two examples will illustrate this.

To a publisher or bookseller an inventory of books is a trading asset. Efficient operations involve turning over the stock of books as rapidly as possible and at more than cost. Both cost and selling price are clearly relevant in determining profit and financial position.

However, in a research library the stock of books is held for use by readers and researchers. Some of the books will have been purchased, others may have been donated.

Cost and selling price are irrelevant. Indeed, so far as rare books are concerned a primary concern of the library will be the protection and preservation of the collection for future generations.

The financial reporting that is relevant for the book trader is quite different from that needed for the library.

To investor-owned companies, labour is an input cost which is to be minimised if the return on financial capital is to be maximised. Often this is achieved by reducing the terms of employment or outsourcing work. By contrast, a workers’ cooperative may be formed to provide jobs (including apprenticeships) and strengthen a local community.

Reducing labour costs would certainly not be an indication of improved performance and return on capital will have little relevance in this sector as a measure of success.

The nonsensical effect of applying business accounting to government reports was given by Professor Allan Barton, in Australia. The Department of Defence reported a substantial profit in 2000/2001.

This arose because the department was required to account for all tax funding as revenue (in accordance with accounting definitions) while excluding capital expenditure from the profit calculation (in accordance with business accounting).

A similar effect will be seen soon when the University of Canterbury reports its 2006 figures. The merger with the Christchurch College of Education will have to be accounted for as a purchase because investor-based standards do not allow the recognition of mergers.

The net assets of the College will be reported as revenue as if they had been purchased at zero cost. The University will report a corresponding ‘profit’ of several millions of dollars even though they will be at pains to point out that it is not a profit at all!

This nonsense is directly attributable to the ASRB’s fixation with sector-neutral standards.

There are increasing signs of opposition to sector-neutral standards across the Tasman. The Australian accounting profession has conducted a series of roundtable meetings with members in the not-for-profit sector.

One report on the web page of CPA Australia makes it clear that members present, who were all involved in producing and using financial reports, are convinced that the sector-neutral or ‘one size fits all’ approach is fundamentally flawed:

● All participants agreed that the conceptual framework was a major bugbear, with some suggesting that it was time to return to ‘ground zero’ and redevelop the framework.

● … users of reports have little need for like-for-like comparisons in the current one-size-fits-all framework. … it would be more useful if the standards enabled comparison between like-minded NFPs than to compare ‘BHP with the Uniting Church’.

● FRC chair Charles Macek agreed that there must be change. ‘Unless the reporting system is relevant to users we are failing them.’

The Institute of Chartered Accountants in Australia (ICAA) has taken the unusual step of formally opposing the conceptual framework proposed by the International Accounting Standards Board and the Financial Accounting Standards Board.

The announcement on the ICAA web page said:
“Whilst the Institute is supportive of the need for an updated Conceptual Framework, the Institute believes that unless some fundamental amendments are made to the current Draft, there will be a need for the Australian Accounting Standards setter (AASB) to incorporate a number of significant changes to ensure that the Conceptual Framework caters not just for the Listed Private-for-Profit Sector, but also the Non-Listed Private-for-Profit, Not-for-Profit and Public Sectors. As the Draft Conceptual Framework is currently structured, the Institute is unable to support that Draft for Australian use, without significant amendments.”

This enlightened approach by the Australian profession is, I regret to say, in marked contrast to that found in New Zealand.

I hope, for the sake of cooperatives here, that the Australians can persuade their New Zealand counterparts to recognise that sector-neutrality is a fatally flawed concept.

– from the February/March 2007 Cooperatives News