Companies that do business internationally are moving to switch their GAAP-based accounting to IFRS (International Financial Reporting Standards) accounting. The Wall Street Journal notes that under “principles-based accounting, companies use judgment in applying a set of guidelines.†The Barometer is uncertain how to take this description. I believe a good part of what lost investors who relied on GAAP-based financial statements in the dot-com bust, the Enron era, and then the subprime mess was that companies seemed to be using GAAP rules as mere guidelines. What will happen when there are no rules, i.e., guidelines are guidelines? That “wiggle-room†in the interpretation of rules will surely turn into considerable “flailing-about room†when it comes to guidelines. Also, the Barometer is fuzzy on the meaning of the word “judgment.†One man’s judgment is another man’s fraud.
Ford Motor Company has a war room dedicated to the transition and indicates that the change-over will save it money through simplification as well as uniformity across 138 countries. Sure, when you get to make stuff up as you go, it does make compliance a tad easier.
The Barometer offers what she has said since the debate over the change to principles-based accounting began – “The problem with principles-based accounting is that it assumes those who use it have some principles.†If it takes the finance folks about two weeks to get around a GAAP rule, which the accounting profession two years to develop, imagine how mere judgment and discretion will shorten that two-week effort.
Michael Rapoport, “Accounting Move Pits Big v. Small,†Wall Street Journal, July 6, 2011, p. C1.