On December 19, 1980, the CICA Special Committee on Standard-Setting (SCOSS) presented its Report to the CICA Board of Governors. This comprehensive 158-page report states (pages 9-10) that: “If one is to consider the means by which accounting and auditing standards are to be set and maintained, one should first have a clear understanding of what is, or should be, the appropriate role, nature and scope of those standards.”
According to the SCOSS report: “A brief history of the standard-setting function in Canada and the way the nature and role of standards have evolved may help to set the stage. This history will essentially be that of accounting standards, since accounting standards as such have been in existence for much longer than auditing standards and they are, besides, much more in the public domain than auditing standards.
There have been accounting standards in Canada for a very long time. At no time in the past century would it have been possible for a preparer of financial statements to make up his own accounting practices without considering conventional usage, even though the accepted conventional practices may not have been published anywhere. Although our main concern today is for the development of published standards, it should not be forgotten that there are, even now, many accounting standards that are generally accepted and universally followed but have not yet been published. For example, there is no requirement in the CICA Handbook to depreciate fixed assets or to follow the matching principle generally.
The CICA published its first accounting standard in 1946. It was published in the form of a Bulletin, which continued to be the form of publication for more than twenty years. Twenty-six Bulletins were published between 1946 and 1967. Of these, six were published in the years 1965-67. In 1967, as a result of the report of a committee such as ours, the CICA Handbook came into existence and the Bulletins then in force were incorporated into it. The bulk of the material in the present Handbook has been added since 1968. The pace of standard-setting has clearly accelerated, and continues to do so.
It is difficult to generalize about the thought processes involved and the purposes behind projects carried out by standard-setters in the past. Nevertheless, it appears that the early Bulletins were essentially attempts to codify best existing practices rather than to change existing practice generally. In most cases the early Bulletins were non-controversial and the best practice was fairly clearly recognized. Their purpose was to discourage less desirable practices that were being followed in a minority of cases. Over time, however, the Bulletins, and later the Handbook, became progressively more innovative in the sense of changing practices generally rather than merely eliminating minority practices.
The trend away from codifying consensus to establishing new practice was due, in part, to the 1967 Report of the Study Group on Methods of Work and Organization (chaired by P.H. Lyons, FCA) which stated: “The Research Committee, to a much greater extent than it has in the past, should engage in initiating and overseeing basic research at the frontiers of our profession rather than gathering together to record the best current practice.”
Recent accounting standards, such as those on segmented reporting, accounting for leases and disclosure of transactions with related parties, have clearly changed the accounting and disclosure practices of the majority of Canadian enterprises rather than merely imposing on a stubborn minority accounting and disclosure practices already adopted by the majority. It is not always easy to categorize a particular standard as being essentially a codification of consensus on the one hand or a changing of the rules on the other – but, in general, the trend from the former approach to the latter seems indisputable. Moreover, the history of the process makes it apparent that this attitudinal change was primarily internally generated rather than forced on the profession from outside.
Undoubtedly, the most important development in the standard-setting arena since the Handbook came into existence is the conferring of quasi-legislative status on the Handbook. This process began with National Policy #27 adopted by the Canadian Securities Administrators in 1972. Since then, various federal and provincial statutes (and regulations thereunder) have come to require that financial statements prepared pursuant to those statutes must comply with the CICA Handbook.
The impact of this development on the perceived authority of the Handbook and the additional responsibilities it may, or may not, impose on standard-setters will be discussed later. However, while it is not possible to tell whether standards issued since the acquisition of this quasi-legislative status would have been different if such status had never been granted, it is possible that they might have been affected by the existence of this factor, and that future standards may be affected. The Handbook in its present form might be said to be largely a professionally- oriented set of standards with some of the latest (and future) additions perhaps being legislatively oriented. There could be conflicts in this potentially dual character of the Handbook.”
In addition to the above-noted discussion on the evolution of Canadian standards, the SCOSS report (pages 11-14) discusses the need for professional judgment in standard-setting, taking a principles-based approach, using principles rather than detailed rules, and clearly stating the role of professional judgment in the CICA Handbook. Although the report was issued more than 30 years ago, the observations and views of the Special Committee appear to be equally valid today. (For a review of the discussion on professional judgment, refer to the four-part series posted in the blog on Professional Judgment Matters.)
