I just finished the semester and now it’s Christmas Eve. It’s been a difficult fall–three courses (one for the first time), trips to five schools, and just getting by. Now it’s Christmas, the most wonderful time of the year.
Today’s post is in three parts. Part one deals with an idle thought: the importance of a single currencly to IFRS. The second deals with economists and accounting. The third is a new Christmas song. Well, here goes.
Should there be a common currency for IFRS statements?
Which currency should be used for financial statements based on IFRS?
The purpose of IFRS is to make it possible and easier to compare financial statements between two companies. It seems to me that comparability would be enhanced if all financial statements were denominated in the same currency? N’est-ce pas?
Let’s say a Zimbabwe investor is mulling over agri-products companies from Argentina and the U.S. One set of financials is denominated in Argentinian pesos (ARS), the other set is denominated in U.S. dollars (USD). Wouldn’t it be beneficial to that investor to have the numbers in the same currency?
If the financial statements are not denominated in the same currency, then what must the Zimbabwean do to make side-by-side comparisons? Convert them to the Zimbabwe dollar (ZWD) using XBRL? Common size them? A common sized financial statement in once that has been converted to percentage format. A balance sheet has all amounts presented as a percentage of total assets. An income statement has all amounts presented as a percentage of total sales revenue. I don’t know how to common size a statement of cash flows, never even heard of anyone doing it. Likewise, I don’t know how to common size a statement of changes in stockholders equity.
What about all of these companies adopting IFRS? If no one currency is deemed as standard for all financial statements, then the financial statements might very well be presented in a standard, common-sized format. Or not. What do you think?
Economists and Accounting
Are you an economist that has told a joke about accounting? You can be sure that accountants return the favor.
An economist tells this story:
An accountant is on-site, interviewing for a job. An HR person asks a test question, “Two plus two equals which number?” The accountant replies, “What do you want the answer to be?”
An accountant tells this story:
A chemist, engineer and economist are marooned together on a desert island, with no food to eat except a few cases of canned peaches. Unfortunately, there is no way to open the cans. The engineer constructs a system with rocks and ropes, but only manages to smash the can and scatter all the contents. The chemist also fails when his concoction of sand, rocks, mud and water does not disolve the top of a can. The economist saves the day, however, because he assumed he had a can opener.
What do economists really think about accounting? In “An Accounting Primer: For Economists’ Eyes Only!” by Judy Laux, a statement is made that:
Economists … treat accounting with disdain. Having never studied accounting, some economists see it as a poor cousin of a more intellectual discipline. Down deep, perhaps they believe the stereotypical bean counter, more comfortable with numbers than concepts, plays no meaningful role in the discourse about resource allocation.
In “Accounting as the master metaphor of economics,” by Arjo Klamer and Donald McCloskey, it is said that economists generally shun and scorn accounting and its ideas. I’ve certainly felt this scorn. I’ve heard it said, “The specifics of accounting rules don’t matter, financial statement numbers are just numbers and don’t mean much. “ Ouch!
Fast forward to IFRS vs. U.S. GAAP. Doesn’t it sound as if the reasons advanced for supporting IFRS are spoken by an economist? I’m pretty sure, although I can’t get an economist to fess up, that any difference in accounting standards is seen as inconsequential and trivial. But not so to an accountant, who believes that a devil lives somewhere in the details.
For example, an economist might say that there is, or should be, an international financial market for capital. An accountant would say that there are several financial markets for capital, country by country. An economist would say that a stockholder can sell off stock in the secondary market part of the world financial market. An accountant would say that the stockholder can sell off the stock in any exchange in which the company is listed, such ase NYSE, AMEX or NASDAQ, Stockholm, London, Tel Aviv, etc. An economist would say that company assets should be accounted for, and accountants are good at that sort of thing. An accountant would start talking about historical cost, amortized historical cost, fair value and balance sheet or off-balance sheet accounting.
Economists argue that one world-wide set of accounting standards should make it as easy for a company to raise capital from Zimbabwe or New York. An accountant says, “Hold on a minute, Ace. It isn’t that easy. The devil is in the details”
I-F-R-S Coming To Town
apologies to J. Fred Coots, Henry Gillespie
You better watch out
You better not cry
Better not pout
I’m telling you why
I-F-R-S coming to town
It’s making a list,
And checking it twice;
Gonna find out Who’s using GAAP.
I-F-R-S coming to town
It sees you count in Boston
It knows you report in Toronto
He knows if you’re using rules or not
So use principles for goodness sake!
You better watch out
You better not cry
Better not pout
I’m telling you why
I-F-R-S coming to town
Over and out – - David Albrecht
