Imagine playing a game of chess in the dark.
Now imagine playing that game in the dark as the rules are being rewritten after every move.
Businesses around the world are in a situation just like that, having to deal with the uncertainties of the global economy on the one hand and evolving accounting rules on the other.
But accountants say the changing rules are generally a step in the right direction, as they ensure that everyone is playing the same game.
And while the implementation of these changes may present challenges, businesses would do well to invest in education.
Playing the same game
Accounting rules have always been subject to regular revisions, oftentimes a function of the need for accounts to reflect changing times accurately.
But, in recent years, some of the changes have also been motivated by one principle - convergence.
Financial reports do not always tell the same story, especially if they are prepared in different jurisdictions.
In the United States, the Financial Accounting Standards Board (FASB) sets rules manifested in the US' Generally Accepted Accounting Principles (GAAP); in most other parts of the world, the International Accounting Standards Board (IASB) holds court with the International Financial Reporting Standards (IFRS).
Since 2002, FASB and IASB have been trying to converge their differing standards.
A memorandum of understanding in 2006 ratcheted up the level of commitment to unify accounting standards around the world.
Those efforts, an ongoing project, have led to convergence in terms of treatment of financial instruments.
The rulemakers are also trying to bring together the rules relating to revenue recognition, leases and insurance contracts by the middle of next year, said Deloitte Singapore assurance and advisory partner Shariq Barmaky.
"There's been significant progress with the completion of a number of key projects," he said.
But convergence has oftentimes been easier said than done.
The process is notoriously slow, with changes often taking years to bake before finally coming out of the oven.
Take the current debate over revenue recognition, for example.
IASB began seeking preliminary views on the subject back in December 2008.
It has been almost four years of consultations and revisions since then, and the IFRS on revenue recognition is not expected until the first half of next year, at the earliest.
Chris Johnson, a partner and head of audit assurance and risk management at Moore Stephens, said: "You can say it's been a very slow, drawn-out process, although you can also say they've achieved quite a lot."
He added that part of the complication came from the IASB and the FASB having historically had fundamentally different approaches to rule-setting.
Mr Johnson said: "The whole point is IASB is principle-based, and FASB is rules-based, so convergence is not a straightforward process. It's not an easy thing to do. It's two completely different approaches."
Initial expectations have also often had to be tempered by realities on the ground.
Ong Pang Thye, head of audit at KPMG here, said proposed changes to loan loss provisioning have faced issues from the field.
"This attracted significant criticism as the expected loss model is theoretically sound and the best available solution, but its practical application is very challenging," he said.
The ideals of true convergence have also been dampened somewhat as a result of the fundamental differences between the two rules bodies.
Last December, the chairs of IASB and FASB told their members that the current process of side-by-side convergence was not working as well as hoped, and that they were hoping to come up with a more effective way to achieve the goals.
There is also uncertainty about whether the US Securities and Exchange Commission will pursue the idea of "condorsement", in which the US will maintain US GAAP while also endorsing IFRS.
Setting the standards
"I don't think any decisions are going to be made in the US until after the election," Mr Johnson said.
Mr Ong reckoned that there could actually be some improvements in pace, albeit at the cost of divergence.
"As conversion between US GAAP and IFRS is no longer a top priority internationally, we can expect more and quicker progress with some standard-setting activities that were held back by disagreements between the two standard setters.
"However, this will come at the cost of continuing or even widening divergence. One example of how the future could look like would be how the standard setters have addressed the offsetting rules," he said.
Offsetting, or the ability to net out derivatives positions on the balance sheet, was a case of the IASB and FASB leaving the same port and landing in different cities.
Under US GAAP, certain derivative positions can be offset, but not under IFRS.
The compromise solution was to add disclosure requirements to allow readers of financial statements to reconcile the differences on their own.
"Users are now able to reconcile US GAAP and IFRS preparation, but the burden is on the preparers as they now have to provide almost double the information," Mr Ong said.
The move towards unifying the rules is generally welcomed by industry because of the potential for comparisons.
Mr Johnson, expressing gladness at being able to speak the same language, said: "I was in the US quite recently and it was quite useful being able to talk to my colleagues there about fair-value accounting and so on."
But when accounting rules change, they can also throw up wide-ranging challenges for businesses and stakeholders.
Mr Johnson cited the coming changes on leases and revenue recognition as two key areas that could potentially have a bigger impact on companies.
For companies, changes may need to be made to process flows and information technology systems to enable compliance with the new rules, Mr Barmaky said.
"Companies will also experience a direct impact on their bottom-line and/or balance sheet, given the change in the timing of revenue recognition, the inclusion of additional items on the balance sheet and the revision of prior-year audited balances with an impact on financial ratios," he added.
Investors will also have to get reacquainted with the new paradigms, even as they welcome the improved disclosure regime.
Calling for a mindset change among accountants, Mr Barmaky said: "Accounting is no longer as straightforward as debits and credits. Today, it is less rules-based and more principles-based. Exercising professional judgment is critical."
Mr Ong also stressed the need for accountants to undergo continuous training to stay on top of changes.
"A bigger challenge than the demise of having single accounting standards may, however, be the continuing shift from historical cost accounting to a forward-looking, fair-value method," he said.
"This will probably prove more challenging than having to cope with different accounting standards.
Preparing financial statements using the fair value method requires a different skill set from preparing financial statements using the traditional historical-cost methods.
"It will require knowledge about valuation models, their application and the different impacts of the differing assumptions used in different valuation models."
Ready, set, go
Views are split on how prepared Singapore businesses are for the changes in the pipeline. Mr Johnson is optimistic.
He said: "We've adopted IASB standards for some years now, so we're in quite a good position. I'd say we're at the forefront."
Mr Barmaky thought otherwise.
He noted that a survey by Deloitte and the Association of Chartered Certified Accountants late last year found that "there appears to be a relatively low level of readiness in regard to the changing accounting regime".
Companies tend to devote less than a year to preparing for changes in accounting standards; this time frame is inadequate, given the pervasiveness and complexity of accounting standards, he said.
The readiness of entities generally corresponds with the extent of impact and the size/scale of the entities.
Angeline Tan, partner for audit at Crowe Howarth, saw a more nuanced picture: "Typically, the bigger and more established entities are better prepared as they are more likely to be affected by the forthcoming changes and are able to devote the appropriate level of resources required."
She added that professionals such as auditors can play a key role by working closely with the preparers of financial statements by exchanging views on interpretations of the new or revised accounting standards, and assessing the impact of the changes on the accounting and financial reporting process.
On a company level, business leaders need to direct the charge.
Mr Barmaky said: "Once management appreciates the importance of financial statements, the accounting standards which form the backbone of those statements will be given increased attention from the key decision-makers.
"With management buy-in, sufficient resources - time, cost, accounting specialists - will be set aside to ensure companies stay ahead of the game and be ready for any changes that come along the way."
Given the emphasis on consultation during the rule-making process, stakeholders should also make use of the opportunity to get their voices heard.
Ms Tan said: "The IASB due process allows transparency and encourages participation from stakeholders such as accountants, financial analysts and other users of financial statements, the business community, regulatory and legal authorities and stock exchanges."
"The integration of practical issues can only be improved with more participation from the business community and the professionals," she added.
This is the last in a four-part business strategy thought leadership series that looks at how Singapore companies and business leaders can better prepare for the uncertainty and challenges ahead as Asian economies continue to face headwinds, fuelled by the ongoing problems in Europe.
The series is brought to you by CPA Australia, in conjunction with this year's CPA Congress that will be held on October 11, 2012