How do you tell your story?
I presented a motion today on the need for a new way of telling the story of co-operatives in our financial accounts. This is a proposal developed by a team of us around the world and I’m happy to say was approved unanimously.
It is not my usual blog post, but here below is the presentation I made at the 94-nation strong General Assembly of the International Cooperative Alliance, taking place in Rwanda.
It is hard to compare apples and oranges. That’s what I was told at school.
In French, you say it differently: don’t mix up cabbages and carrots. In Italian: don’t compare cabbages and potatoes
In Denmark, Susanne from Kooperationen who is seconding this motion tells me, it is apples and pears. In my home town of London, that means stairs.
In Russia, the saying is more subtle – that we should not confuse what is warm and what is soft
You may have a phrase in your own first language.
Well, co-operatives are apples, but financial accounting is designed for oranges… or potatoes.
Let me explain.
There has been a race towards global accounting standards in recent years, but with a single minded focus on shareholder firms and the needs of their investors.
The International Accounting Standards Committee (IASC) was established in 1973 to oversee the project of harmonising financial reporting globally. The project was, from the outset, concerned with companies whose shares are traded publically through stock exchanges, i.e. listed companies.
In 2001 the IASC was replaced by the International Accounting Standards Board (IASB). The IASB adopted the International Accounting Standards which had been issued by the IASC and developed them into International Financial Reporting Standards.
The IASB also started a project to develop a conceptual framework to underpin and give coherence to the work on issuing accounting standards. This conceptual framework explicitly states that the primary purpose of financial reporting is to give information to current and potential financial investors. The IASB sees the main users of financial reports as:
present and potential investors, lenders and other creditors, who use that information to make decisions about buying, selling or holding equity or debt instruments and providing or settling loans or other forms of credit.
The co-op sector, notably the European Association of Co-operative Banks and the UK Co-operative Performance Committee, has responded by looking to influence this agenda.
The resolution, which calls for appropriate accounting guidelines for cooperatives, recognises the work of two outstanding people and teams working on this.
First the Audit and Risk Committee of the International Cooperative Alliance and the work of Isabelle Ferrand.
Second, the Centre of Excellence in Accounting and Reporting for Co-operatives, at the University of St Mary’s in Canada, led by Professor Daphne Rixon.
One of the main problems co-operatives face when accounting under the for-profit format in the International Financial Reporting Standards is the classification of members’ equity.
Two challenges co-operatives face in the International Financial Reporting Standards, now or in future are around accounting for member capital and co-op dividend.
The first risks making co-ops appear far more fragile than they are, as member equity may be treated as a liability.
The second treats member dividends as an expense, i.e. a reduction in sales rather than a distribution of profit.
In many countries, co-ops are losing what tax advantages they might have, because their accounts don’t distinguish their cooperative difference.
While this is a technical and complex field, the resolution is a permission slip to explore the case for appropriate guidelines and a new framework for co-operatives (a Statement of Recommended Practice, or SORP) at the international level.
Others are doing the same. In July, a five year project was launched by the Ford Foundation and Open Society Foundation for a global Statement of Recommended Practice for non-profits. But that is more. about philanthropy and typically not right for us.
We need to be thinking five to ten years ahead.
It will take time and consultation to explore this further and any work will need to take into account the needs of co-operatives and mutuals across countries and in all their diversity.
It is helpful that an international working group of researcher and academics has been formed on cooperative accounting, following an international roundtable in London last year, hosted by St Mary’s so we can call on expert input.
Can I stress that most financial accounting, such as the valuation of assets, is perfectly appropriate. It is not wrong.
We need to focus on the specific areas of accounting where it is wrong for the member-owned model, where the co-operative model needs a different interpretation. It could be that we have common cause with a wider swathe of ‘for purpose’ business and social enterprise.
We need a financial vocabulary that allows us to express our performance as co-operatives. Otherwise it is like being asked to write poetry in a language that you do not speak.
We can’t progress if we are judged by shareholder value.
We can’t build a cooperative economy, if we don’t have a system of economics and accounting.
What we can do is what we have always been best at, which is to organise; and with ambition and organisation, we can over time win the battle of ideas.