Against the backdrop of pending developments involving US GAAP and IFRS, the SEC’s Deputy Chief Accountant set forth principles-based initiatives that can be immediately implemented within the current framework. In remarks at the recent SEC and Financial Reporting Institute, James Kroeker said that meaningful improvements can be made right now by focusing on the objectives or principles underlying the accounting standards when considering how to account for a transaction. And, he continued, the vast majority of US standards were written with a principle in mind.
The deputy chief accountant also said it is not clear exactly what a principles-based standard setting regime should look like. In his view, it is even less clear that U.S. standards are inherently less principles-based than those established in London. In fact, he argued that the vast majority of U.S. standards were established with a principle or objective in sight. But he acknowledged that, over time, exceptions, bright-lines, application guidance and interpretations, what some may call rules, have blurred the principles.
He also asked standard-setters and regulators to resist the temptation to provide guidance on the host of potential financial accounting difficulties. Similarly, he urged preparers of financial statements and auditors to refrain from asking for such guidance. Rather than seeking detailed guidance, the given difficulty should be addressed by looking to the objective of a standard and applying professional judgment, which the senior official views as a valuable component of the financial reporting framework.
While not suggesting that existing accounting guidance can be ignored, he is saying that, when bright-lines, exceptions and rules do not exist, the regulated community should resist the temptation to ask for them. Accounting standards will be overly burdensome and detailed, he reasoned, if more and more interpretative work, scope clarifications, and the like are demanded.
He noted that the use of professional judgment will mean accepting some level of diversity in practice.
This has to be the case since there will certainly be times when reasonable people acting in good faith will not reach identical conclusions in practice. The SEC official recognizes that there will be situations when the reasonable application of judgment will result in more than one acceptable accounting or financial reporting conclusion. But the payoff is that the exercise of professional judgment by preparers and auditors should increase the transparency and comparability of financial reporting.