Global Adoption of IFRS - Turbulent Times!

Published February 2013

The European Commission has labelled 2013 as the 'year of truth' regarding globalisation of IFRS and convergence.

The US Financial Accounting Foundation has warned that written commitment to a single set of global accounting standards, as currently proposed, may exclude many jurisdictions which are major players in global capital markets, including the United States.

Closer to home, the Institute of Chartered Accountants in England and Wales (ICAEW) has published a report commenting that convergence has served its purpose and there is little desire to continue with it.

Has the appetite for a single set of global accounting standards disappeared?

Why the apparent melt-down?

'The IASB has broken deadlines so often... nobody believes them any more'. Strong words, particularly when uttered by the Chairman of the International Accounting Standards Board. He has further commented that the current leasing project will be an 'uphill battle' and has described as 'deeply embarrassing' the failure to find a workable model that would require financial assets to be impaired on an expected loss basis.

There is indeed much frustration that key standard - setting projects which the IASB and FASB have been jointly working on for many years and which were originally planned for completion by June 2011 have since become moving targets. So much so that the plan for implementation of these standards in 2015 is at this stage seriously in question.

While easy to ask what has gone wrong, one should not lose sight of the success that has been achieved.

A success story?

The spread of IFRS around the globe has been - and continues to be - a major success story. Today, well over 100 countries - including more than two thirds of G20 countries - require or allow their listed companies to prepare their financial statements using IFRS or national standards based closely on IFRS. The increasingly cross - border nature of trade and capital-raising have contributed to a need for a widely accepted set of international accounting standards, and the global spread of IFRS does much to serve this.

Claims that financial reporting somehow caused or prolonged the crisis have been shown to be largely unsubstantiated. However, the financial crisis did expose the need to improve aspects of accounting. While progress has been made in such areas as the consolidation model and fair value, with revenue recognition approaching finalisation, the failure to reach conclusion on financial instruments continues to be a major gap in that progress.

Challenges to progress

The commitment of the SEC to incorporating IFRS into US accounting seems more elusive than ever. Senior US accounting figures have indicated that it may be up to another five or six years before this is achieved. Some other significant economies are hesitating, quite probably with an eye on US developments.

The complex economic trading and financial environment is reflected in the increasing complexity of standards, producing outcomes which many find very difficult to understand and which then produce financial reporting which is less than obviously understandable. This may ultimately discourage some countries from fully embracing international standards. With no easing of these factors, it is difficult to see where solutions are coming from. The increasing focus on reducing disclosure may ultimately provide some relief, but work is only in its early stages and there is a considerable way to go.

Other challenges to be dealt with include:

• G20 needs to consider whether all members should allow optional use of IFRS in their capital markets.
• Regulators around the world need to work together more closely to deliver consistent enforcement.
• An effective feedback mechanism is essential and operable models for undertaking effects and post-implementation reviews need to be developed.

The IASB has major challenges to confront and deal with from an increasingly diverse population of constituents.

IASB/FASB working together?

The IASB and the FASB no longer see a future in working together and are planning to bring their formal partnership to an end after ten years working together. The frustration expressed by the IASB Chairman further extends to complaining of 'dysfunctional working processes and dysfunctional decision making'. The IASB must not put reaching agreement with the United Stated ahead of finding quality solutions which will serve its constituents well. While convergence appears to be no longer an immediate prospect, close liaison with the US, the world's largest capital market, remains important.

A prime example of an area where substantial time has been expended by both Boards without it seems ever coming close to a properly converged solution is the impairment of financial assets. The Boards have found it impossible to reconcile their different objectives with the IASB focusing on credit risk being a component in the pricing of financial assets, while the FASB's focus is on ensuring a sufficient allowance is provided at each reporting date to cover future expected losses.

The proposed solution of the IASB is based on classifying financial assets in three separate buckets. Bucket 1 would be where there is no identified credit deterioration. Buckets 2 and 3 would be evaluated for credit deterioration, either at the portfolio level or the individual financial instrument level, with an allowance measured over the lifetime of the asset of expected credit losses.

The FASB has developed a proposed model of accounting for the impairment of financial assets - the Current Expected Credit Loss (CECL) model. This is a single impairment approach for all financial assets measured at amortised cost or fair value through other comprehensive income. Under CECL, a reporting entity would recognise an impairment allowance equal to the current estimate of expected credit losses (i.e. all contractual cash flows that an entity does not expect to collect) for financial losses at the end of each reporting period.

While the approach of both Boards is moving from an incurred loss model to an expected loss model, it is unfortunate that after such a lengthy period of evolution and dialogue a converged solution has not been reached.

Conclusion

The progress of IFRS and its continuing momentum towards global acceptance must be sustained. The development efforts of the IASB and the FASB have produced much but it is clear that despite best efforts there is an inability to come together on other substantial matters.

Time will tell whether working apart they may well come up with higher quality solutions to the advantage of all constituents and which may ultimately evolve to a global consistency of accounting.

First published in Finance Dublin Online.