G20 Financial Reporting Objectives - Progress Achieved?
In these challenging times it is interesting to reflect on the past two years with regard to the changes and improvements being made to accounting standards with the objective of a more robust financial reporting framework and a more secure environment for investors and stakeholders generally.
In April 2009 representatives of the world's largest economies, G20, held a summit meeting, after which they issued a communiqué setting out their plans for stimulating the recovery of the global economy. This communiqué included a call on the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) "to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards". The accounting standards setters were asked to take action to address the following:
- Reduce the complexity of accounting standards for financial instruments
- Strengthen accounting recognition of loan-loss provisions by incorporating a broader range of credit information
- Improve accounting standards for provisioning, off-balance sheet exposures and valuation uncertainty
Achieve clarity and consistency in the application of valuation standards internationally, working with supervisors
- Make significant progress towards a single set of high quality global accounting standards
Within the framework of the independent accounting standards setting process, improve involvement of stakeholders, including prudential regulators and emerging markets
Response by the Standard - Setters
How have the standard-setters progressed in meeting these objectives? It is probably reasonable to say that it has been more steady than spectacular, and that is a product of many factors. Probably the single biggest challenge is that the majority of projects are being jointly run by the IASB and the FASB, the former having always been a proponent of a principles-based approach while the approach taken by the latter over the years has been very much rules driven. That this would have led to divergent views and different approaches being taken to many of the big issues, and a meeting of minds must in itself be a challenge. Both Boards are committed to broad-based and effective stakeholder outreach, which is seen as critical to the quality of the new and substantially amended standards. This approach must be supported as it provides best opportunity for consensus on and sustainability of the standards. It does take time and no little effort for this process to work.
IASB and FASB Progress Report
Recently the IASB and the FASB issued a joint report on the progress of their convergence work, and they have taken the following actions since their last report in November 2010:-
- Completed five projects - consolidated financial statements, disclosure of interests in other entities, joint arrangements, other comprehensive income and post-employment benefits. The IASB updated timetable published on 21 April projects that publication of these will be in May. Implementation date is expected to be for annual periods commencing January 2013 although this may change as the IASB has consulted earlier this year on effective dates for implementation and the transition process for certain IASB projects and has yet to reach conclusion. In doing this, the IASB is underlining the scale of change to standards coming down the line
- Priority is given to the other major joint projects currently in progress - financial instruments, revenue recognition and leases, with insurance accounting being worked on separately by the two Boards. To permit some further work and consultation with stakeholders, the Boards have revised their original target date of June 2011 for publication with completion now being projected for Quarter 4 2011
- The Boards are nearing completion of their programme which commenced in 2002, with many of the short-term projects completed or close to completion, and the current priority projects well under way
Before each of the priority standards are issued in Quarter 4 2011 the Boards have committed to taking the time to consult those affected by the proposed changes and work through the concerns and issues, with the possibility of re-exposure of the standards not being ruled out. While this approach is laudable in terms of gaining consensus it does open the door for further and extended discussion periods. There are indications of major concern amongst constituents, and for revenue recognition and leasing these are perhaps best summarised in the Outreach papers recently published by the European Financial Reporting Advisory Group (EFRAG), and which are intended as an aide to the public round-tables and discussions to be held in the coming months.
Package of Five Standards
In April 2011 "the package of five standards" was published in near final draft form, with final publication expected in May. The five are - consolidated financial statements, joint arrangements, disclosure of investments with other entities, separate financial statements and investments in associates and joint ventures.
The new standard on consolidation introduces a single consolidation model for all entities based on control. This is irrespective of the nature of the investor, i.e. whether an entity is controlled through voting rights of investors or through other contractual arrangement as is common in special purpose entities. Hence the definition of control and the consequent requirement to consolidate is made more robust. One of the major objectives of this is to remove the latitude available under current standards for off balance sheet vehicles and to reduce the risk of groups being able to show something other than 'the full picture' of their financial position. The disclosures standard strengthens the resolve to achieve this objective so that financial statement users may evaluate the basis of control, any restrictions on consolidated assets and liabilities, risk exposures arising from involvements with unconsolidated structured entities and non controlling interest holders' involvement in the activities of consolidated entities.
For joint arrangements, the main changes are to remove proportional consolidation as an accounting treatment option with equity accounting required in all cases, and to eliminate jointly controlled assets from the scope of the standard. Differentiation in the new standard is between joint operations, where the parties have rights to the assets and obligations for the liabilities, and joint ventures where the parties have rights to the net assets.
Financial Instruments Accounting
Possibly the area where the standard setters are having most difficulty is in relation to financial instruments. For many preparers and users of financial statements this is seen as being the accounting area of greatest complexity, reflecting on the complexity of underlying instruments, the fair value concept and its application, impairment measurement models and other issues. The IASB and the FASB have adopted different approaches, with the IASB replacing its existing standard on a phased basis while the FASB developed a single proposal for change, publishing an exposure draft in May 2010.
Progress has been made in many areas, as follows:
- A simplified approach to classification and measurement, IFRS 9 has only two classification categories, amortised cost and fair value. The FASB exposure draft proposed a much greater use of fair value measurement. It is currently refining its decisions about classification and measurement, which it expects to complete in Quarter 3 2011, after which the IASB will expose the FASB's final conclusion to seek views from its own constituents
- The model for measurement of impairment provisions will change from an incurred loss basis to an expected loss basis. The Boards have generally concurred on this, taking somewhat different routes in doing so, but both are determined to reach consensus by the end of June and assess what additional steps are necessary to enable the new requirements to be finalised
- With regard to hedge accounting, each Board has published an exposure draft in the past year. The IASB's exposure draft was concerned only with general hedge accounting, it did not address portfolio hedge accounting. It is currently developing its portfolio hedge accounting proposals and expects to publish an exposure draft later this year, before it finalises the more general hedge accounting requirements
The IASB retains its original objective of full implementation of IFRS 9 in 2013. To achieve that on a converged basis with U.S. GAAP will require resolution of many substantial issues and a still greater meeting of minds between the IASB and the FASB.
Significant progress has been made in the drafting of new and improved standards, and achieving substantial consensus between the two Boards, which should enable global convergence to take place, with substantial work to be completed. G20 are monitoring the Boards progress and their communiqué in April indicated that they would specifically refer this at their next meeting with particular focus on the completion of the convergence project by the end of 2011.
First published in Finance Dublin Online.