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IFRS-skeptics criticize the standards for contributing to the growth of financial frauds. They believe that rule-based standards are more effective. Don't you think the ED General Presentation and Disclosures is significantly rule-based?

J. H:  In a word, yes – if that’s a matter of noting that the exposure draft has a lot of words, and sets out a lot of things that an issuer “shall” do. But that might mainly reflect a simplistic and perhaps not ultimately helpful view of the difference between principle-based and rule-based standards.

I was looking back recently at some old commentaries on the difference between US GAAP and IFRS, including one which said that if US GAAP lease accounting was tennis, then the old IAS 17 model was “tennis without lines.” The broad point I suppose was that IFRS lacked sufficient detail to generate reliably consistent accounting treatments. But it’s an instructive metaphor in a different way. Tennis is a closed system, entirely dependent on the rules that define it. If something that arises in tennis isn’t covered by those rules, there are no “principles” that can be looked to in order to provide an answer (other than vague ones such as fair play). By the same token, being a master of the rules of tennis doesn’t in any way equip you to address situations that arise in life more generally. Considering that the goals of financial reporting are a bit wider in scope than those of tennis, it should be easy to see that approaching accounting purely as a “rule book” would be a hopeless task – it’s inevitable that it will to some extent rely on principles. The eternal question, of course, is how much detailed description is required to make those principles practically useable, without obscuring them altogether.

It's interesting to look at some of the comment letters received on the exposure draft (there were 215 – I only looked at a small sample!). Take for example the proposal to define unusual income and expenses as “income and expenses with limited predictive value,” being “when it is reasonable to expect that income or expenses that are similar in type and amount will not arise for several future annual reporting periods.” Some commentators provided numerous examples of the difficulties that might arise in applying this concept (not least in a pandemic-affected environment), asking for more detailed requirements and guidance. But others, perceiving the same difficulties, suggested the opposite, that the IASB not define such unusual items at all, perhaps setting out a broad disclosure requirement, but leaving the details to the judgment of preparers. There’s an old saying that when you’re being criticized from both directions, you’re probably in just about the right place. I don’t know where the IASB will end up on it, but it illustrates how different, equally thoughtful commentators may see fundamental issues quite differently.

And such differences, if you engage with them, are healthy and stimulating, leading to better standards and practices in the long run. “Rules” may be effective in enforcing certain kinds of behaviour but they’re not a sufficient way of collectively moving forward for the greater good (one can likely draw on any number of examples from daily life to support this view). Even if it were true that rule-based standards are more effective in preventing financial fraud (which I very highly doubt, but I’ll let it pass by for today), that doesn’t mean they provide the best way of generating financial information that’s meaningful to users. That’s surely best done by viewing financial reporting as a wide-ranging ongoing conversation, rather than as a defensive-minded series of restrictions.