IASB Progress - Does it measure up?
We are now some four to five years on from the beginnings of major upheaval in the banking and financial services industry that reverberates throughout the marketplace and continues to cast a shadow over the global economic and financial landscape. Has the accounting profession, with its standard setters, delivered on its commitment to address perceived shortcomings in financial reporting?
It is appropriate to consider this under two broad headings:
- Have new and amended financial reporting standards been developed to address the shortcomings identified?
- Has a globally accepted and common set of accounting standards been agreed upon to provide a universal financial reporting language?
G20 - Strengthening the Financial System
G20, representing the world's 20 leading economies, meets bi-annually to address economic issues of global concern. Following their summit meeting in April 2009, G20 published its 'Declaration on Strengthening the Financial System'. Included in this is a call on accounting standards setters to work with others to improve standards on valuation and provisioning and achieve a single set of high quality global accounting standards. At their subsequent summit meetings they have reaffirmed their support for these objectives. Convergence of International and U.S. accounting standards is considered key to this. The G20 leaders have also called on the IASB to further enhance cooperation with its stakeholders.
The most recent IASB response to the calls made by G20 addresses the first of our earlier questions. In summary the IASB responded that it had:
- Completed its review of off-balance sheet financing, resulting in amendments to IFRS 7 Financial Instruments: Disclosures and a package of new standards on consolidations and joint ventures, IFRS 10, 11 and 12 which have a mandatory implementation date of accounting periods beginning on or after 1 January 2013
- Completed its reform of fair value measurement requirements, resulting in a new standard, IFRS 13 Fair Value Measurements, with implementation also in 2013
- Completed the first phase of IFRS 9 Financial Instruments - Classification and Measurement. Difficulties with this project are commented on later
- Completed a majority of projects under its Memorandum of Understanding with the FASB, and prioritised the completion of the three remaining MoU Projects - Revenue, Leasing and Financial Instruments, together with the joint project on Insurance Contracts, to a high standard. With a revised exposure draft on Revenue published in 2011, updated proposals are also expected on Leasing and Insurance Contracts for 2012. All four projects have a targeted implementation date of accounting periods beginning on or after 1st January 2015
- Significantly enhanced its outreach and stakeholder engagement activities, with amongst other initiatives, the 'Request for Views' published by the IASB in 2011, which is also commented on later
Financial Instruments - Enigma Continues
Complex accounting issues and a lack of consensus in major areas between the major standard setters continues, but then it seems to have always been so in an area which seems most exposed to external influences, much of it of a political nature. Even the first phase of IFRS 9 on classification and measurement has been reopened, with the IASB and the FASB jointly addressing a number of issues, including those relating to the cash flow characteristics of a financial asset. Considered by many to be even more complex issues are impairment and hedging.
Impairment, where perhaps the current approach under IAS 39 has been subject to most criticism, is being addressed on the basis of moving from the current 'incurred loss' model to a more forward looking 'expected loss' model, reflecting the deterioration in the credit quality of assets, when they are originated with a principle and indicators for when recognition of lifetime expected losses becomes appropriate. Broad consultation has shown that current practices diverge widely and that any solution will cause significant changes for at least some major participants in the financial sector. Application of principles to other financial assets, including trade receivables, is also under consideration. The IASB did issue an exposure draft some time ago, and later a supplemental paper jointly with the FASB, but the debate has much time to run before there is clarity.
Hedging is also a thorny issue, albeit that progress has been made on general hedge accounting with a plan for a final standard to be published later in 2012. This will provide a more simplified approach than currently applies under IAS 39 with a closer reflection of the underlying economic and risk characteristics. Macro-hedging is proving even more difficult.
The deferral of implementation of IFRS 9 to 2015 may yet, as we move through 2012, be an ambitious target.
Next On The Agenda
The IASB launched in July 2011 a public consultation to seek input on the strategic direction and overall balance of its future work programme. The IASB has identified five key aspects that should be reflected in the development of its future agenda:
- The IFRS community has become more diverse
- The market environment has become more complex
- There are a number of changes that require implementation
- The quality and relevance of the standards needs to be demonstrated
- The risk that practices related to adoption and implementation will diverge
The IASB believes that in future its work should fall into two broad categories:
- Developing financial reporting - including, inter alia, the conceptual framework, the disclosure framework, interaction of IFRS with integrated reporting, standards level projects to fill current reporting gaps
- Maintaining existing IFRS - including, inter alia, post-implementation reviews of operational issues, targeted narrow scope improvements to IFRS, integration of XBRL
The IASB received 245 comment letters, in addition to a number of queries from investor-driven surveys. The Board is considering possible ways forward to incorporate these messages, including researching the scope of prospective projects, searching for 'quick wins' and ultimately developing a proposal for more thorough deliberations at future Board meetings.
Some of the main messages received were:
- Complete the four current major projects, as a priority
- Requests for 'a period of calm', to focus on completion of the four major projects and assist jurisdictions that are first-time adopters by limiting changes
- Focus on maintaining IFRSs, including post-implementation reviews and implementation support
- Develop the conceptual framework and a disclosure framework which minimises complexity
- Devolve more of the maintenance of IFRS to the IFRS Interpretations Committee
- Emphasise certain projects cited as being high priority, including (1) other comprehensive income and performance reporting, (2) business combinations between entities under common control, (3) emission trading schemes, (4)extractive activities
The IASB is determined to strengthen and formalise its relationship with standard - setters, regulators, and the accounting profession, moving from what they consider to be the current loose affiliation to a more integrated supply chain.
The Global Question
Turning to the second of our opening questions. What progress has been made towards a single set of global accounting standards?
In the past 10 years, IFRS has become required or permitted for use by companies in more than 100 countries, including the majority of the G20 countries. Transition by Europe and its listed companies in 2005 added significant impetus with much of the rest of the world coming on board since then, and more to do so in 2012.
While adoption of full IFRS has progressed significantly at the top end, the move towards adopting IFRS for SMEs has met with more limited success. Many major countries have decided not to adopt it while others, including the UK and Ireland, are moving to an equivalent IFRS-based platform, but with significant modifications to retain major elements of their current GAAP.
Opening new frontiers has for long been a major strength of the United States of America, demonstrating substantial appetite for huge and continuing challenges. The question of moving to a universally accepted set of international financial reporting standards, from the current US GAAP framework, is very much one of those challenges. The U.S. is the largest and most liquid national capital market in the world, its outreach into global economies and markets, both developed and emerging, is equally of mammoth proportions. Transitional concerns must therefore be carefully considered. Countries that still have to make further and final steps are looking very carefully at what is happening in the U.S.
The U.S. Securities and Exchange Commission (SEC) continues its work on exploring whether and, if so, how it could or should proceed with a decision to incorporate IFRS for U.S. issuers. This decision was initially expected by the end of 2011. While substantial work has been done to achieve this, final determination is awaited, perhaps in 2012. Many leading U.S. Companies have expressed strong support of IFRS and have called for its early adoption on a selective basis.
Senior figures in both the SEC and the U.S. Financial Accounting Standards Board (FASB) have expressed concern that there will continue to be a need to retain the label 'U.S. GAAP' and for clear U.S. authority over U.S GAAP. Additionally, they express the desire to retain the ability to set standards for the U.S., if there are topics of considerable importance that are not on the IASB's active agenda or if the IASB does not provide timely or adequate implementation guidance. A potential concern with such an approach is that it may lead to a growing practice of 'where the U.S. leads, the rest of the world follows', which would seem clearly inconsistent with IASB principles.
So where are we now? Looking at the original proposed timetable, the IASB has already missed certain key dates, and with time running on may do well to meet its implementation targets in 2015. However, in the broad context of developing an improved, converged 'gold standard' of financial reporting, it is of much greater importance that the final standards represent long-term, implementable and sustainable improvements.
The IASB has had great success with gaining acceptance of IFRS as the financial reporting language throughout much of the globe. The U.S. remains to be finally won over but comprehensive deliberation by US authorities is continuing and the support expressed by major companies for its adoption is likely to influence bringing this about.
It is all taking time, but if an improved, more transparent and consistent financial reporting framework is the ultimate reward, the time and effort will be well spent.
First published in Finance Dublin Online.