Proposals to change the emphasis of international accounting standards have been emphatically rejected by the IMA in a letter to the International Accounting Standards Board and the Financial Accounting Standards Board on the basis it would increase exposure to risk among its members and raise the cost of being a shareholder.
At stake is the shift from a so-called ‘parent concept’ to one known as ‘entity concept’. The IMA says the shift would result in an increase in opaqueness of accounts relied on by shareholders – whether they be institutional pension fund managers, or retail fund asset managers – to make investment decisions.
Under the parent concept, assets and liabilities of an entity, even where it is not fully owned (e.g., a subsidiary) are consolidated in full, while minority interests (non-controlling interests) and transactions with non-controlling interests are identified separately in the accounts.
Under the entity concept, business groups are seen as single entities, combining interests of shareholders in the parent company with non-controlling interests. It would also be the case that instead of recognising only a portion of goodwill in part-owned subsidiaries, the goodwill instead would be recognised at 100%.
The IMA says accounts should always be prepared on the basis of what current shareholders actually own, rather than taking a top-down look at the whole group. This should be so because shareholders bear the ultimate risk to their money. It is also important in context of industry debate ongoing into the ‘stewardship’ role of shareholders such as institutional investors.
”Shareholders do not want simply to value companies and assess whether they should sell or buy the shares, they want to assess management and the strategies adopted for the business for the longer term,” the IMA’s letter, signed by senior advisor on corporate governance Liz Murrall.
”Accounts provide shareholders with some of the crucial information to enable them to discharge these responsibilities and as such we consider accounts should focus on them.”
The letter states the IMA recognises there are a number of stakeholders, such as creditors, employees, bankers, customers and suppliers to any company. But, it adds that if the shareholders are satisfied it should also be the case these other stakeholders are too.
”In the event that other users’ needs are so specialised that they are not satisfied then we consider that specific reporting should be developed to address them.”
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