It’s all Black and White

Paul Pacter

At IASC we recently received this inquiry from one of the large accounting firms on the use of bold faced type in International Accounting Standards:

Do you know how the concept of black letter v. grey letter guidance originated in IASC standards? Is there an «official description» of the difference? It’s never been quite clear to me. Some people believe strongly that the grey is «guidance» which may be applied versus the black-letter standard which must be applied (though I’m not sure how anyone would ever apply a standard with only benefit of the black letter). Others, as I’m sure you’re aware – like the SEC – assert that the whole thing is standard and don’t distinguish. I’m just trying to figure out what the «official» version is.

At the beginning of each IAS the following statement is made:

The standards, which have been set in bold italic type, should be read in the context of the background material and implementation guidance in this Standard, and in the context of the Preface to International Accounting Standards.

Neither the IASC Constitution nor the Preface to International Accounting Standards prescribes how an IAS should be formatted. Neither of those documents refers to black letter (bold type) paragraphs and grey letter (normal type) paragraphs in an IAS. Since the IASC Standards were reformatted in the early 1990s, the Board has used bold type to express matters of general principle (what IASC calls standards, lowercase «s»). Normal type has been used to express finer points of detail. Both, however, are part of the International Accounting Standard. (Standard with an uppercase «s» means a numbered IASC pronouncement.)

The grey letter paragraphs are intended to elaborate on the standards – to provide guidance on how to apply the general principles. They do not require accounting treatments or disclosures that do not flow directly from the standards. And, of course, they do not contradict the standards.

By convention, IASC uses the word «should» in drafting the standards in the bold type paragraphs («revenue from the sale of goods should be recognised when all the following conditions have been satisfied…»). We avoid using the word «should» in the guidance paragraphs because it might suggest a new accounting treatment or disclosure additional to those prescribed by the standards.

IAS 1, Presentation of Financial Statements, requires compliance «with all the requirements of each applicable Standard [note the uppercase ’s‘] and each applicable Interpretation» if financial statements are to be described as conforming to IAS. IAS 1 makes no distinction between black and grey letter typefaces in the Standard. It is the view of the IASC Secretariat that:

• the standards, the background material, and the implementation guidance, taken together, form the Standards to which IAS 1 requires compliance; and
• the bold type and normal type paragraphs are equally authoritative under IAS 1.

None of us would support a mandatory versus optional distinction.

Incidentally, in voting to approve an International Accounting Standard, the IASC Board votes on the Standard in its entirety. The Board does not vote only on the bold type paragraphs or on them separately from the grey.

Some IAS include appendixes with illustrative disclosures (see, for instance, IAS 35, Discontinuing Operations) or examples of applying the principles in the Standard (see, for instance, IAS 34, Interim Reporting, and IAS 37, Provisions, Contingent Liabilities and Contingent Assets). These appendixes begin with a commentary similar to the following:

This appendix is illustrative only and does not form part of the standards. The purpose of the appendix is to illustrate the application of the standards to assist • in clarifying their meaning.

The illustrative appendixes are included in the draft that is before the Board when it votes to approve a Standard, as well as in the exposure draft on which public comment was sought before the Standard was issued. While the illustrations do not form part of the standards (lowercase «s»), they do represent guidance that has been subjected to thorough due process and review by the IASC Board.

The Board has published the basis for its conclusions with some Standards. Bases for conclusions are not intended to contain any new standards or, for that matter, any new guidance. Rather, they say intended to provide background information that may be useful to understanding the reasons for the standards and the guidance in the IAS.

The bottom line, as we at the IASC Secretariat see it, is that the black letter paragraphs and grey letter paragraphs in an IASC pronouncement together, and with equal authoritativeness, constitute an International Accounting Standard.

Paul Pacter is a IASC International Accounting Fellow.