An Executive Guide to IFRS: Content, Costs and Benefits to Business

Anti-abuse measures

However, one qualitative characteristic that is not in the framework, but which is very much observed in writing standards, is that standards should mitigate abuse by preparers and eventually auditors. Inevitably those IASB members who are most strongly concerned about abuse are US auditors and users. The US environment is one where preparers have the reputation of pushing the rules to their literal limits in order to get the most favourable presentation of their entity’s financial position. This, and the attendant fear of very expensive litigation if people go too far, is usually given as the reason why the FASB prefers rules-based standards with ‘bright lines’ to make it clear what is allowed and what is not.

One place where an anti-abuse approach can be seen is in the IASB’s rules for hedge accounting. IAS 39 Financial Instruments: Recognition and Measurement requires that derivatives are measured at fair value through profit and loss. However, the idea of hedging is that you enter into a contract, maybe a derivative, which has an equal and opposite risk to the contract you want to protect. When this latter contract matures, you want to recognize the gain or loss on the hedging instrument at the same time, so that they cancel each other out. This means that recognition of gains and losses on a derivative can be deferred if it is a hedging instrument but must be recognized immediately if not.

One place where an anti-abuse approach can be seen is in the IASB’s ...