The Economist: U.S. Adoption of IFRS “Seems Off the Table”

A Schumpeter blog at The Economist online recently discussed the convergence process between the United States-based Financial Accounting Standards Board (FASB) and the International Accounting Standards Board after a recent conference at Baruch College in New York. Top brass from the FASB and the Securities and Exchange Commission (SEC) were on hand to discuss the convergence process and potential adoption of International Financial Reporting Standards (IFRS) by the United States. The SEC is currently reviewing whether or not to adopt IFRS, with a decision expected fairly soon.

But The Economist’s bloggers remain pessimistic of such an adoption or merger. “A wholesale adoption of the international standards now seems off the table,” it reads. The FASB seems likely to remain in power, utilizing an “endorsement” of international standards instead.

“American critics of IASB make several points, many to do with fair-value or ‘mark-to-market’ accounting of financial instruments,” the editorial notes. The difference between the two schools of thought has narrowed, though a gap remains. The IASB still prefers that assets be booked at historical cost; the FASB has softened and is now considering a “three-bucket” approach which would book some assets, depending on their characteristics, at either market value or historical cost.

Mark-to-Market Places Too Little Emphasis on Useful Investor Information

In an editorial piece to Bloomberg, University of Chicago Booth School of Business professor of accounting and Harbor Funds trustee Ray Ball says that “the theory on which [mark-to-market] is founded places too little emphasis on what investors actually use the information for.”

Noting that for the better part of financial history, assets have been recorded at historical cost, a recent push by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to provide more up-to-date information has led to the adoption of and continued discussion of marking assets at market value on a balance sheet.

However, Ball takes several issues with the theory and practice. “Under the new rules, published financial statements don’t reveal whether mark-to-market gains and losses are due to shocks to expected returns or shocks to expected cash flows, or both,” he says. As such, “by omitting causes, mark-to-market accounting doesn’t provide enough information to form expectations of future earnings,” he continued.

Manipulation of numbers is another issue that is exacerbated by mark-to-market, says Ball. “Securities that aren’t actively traded attract ‘mark-to-model’ accounting, which bases the reporting on subjective judgment and is subject to even greater abuse.”

Marking liabilities to market is one last issue Ball takes with the practice. “Paradoxically, increased default risk reduces the value of debt and then triggers book gains,” he notes.

Tweedie, Herz, and Cherry Speak on U.S. Adoption of IFRS

In a panel discussion of three former accounting standards setters – Sir David Tweedie, the former chairman of the International Accounting Standards Board (IASB), Bob Herz, the former chairman of the Financial Accounting Standards Advisory Board (FASB), and Paul Cherry, the former chairman of the Canadian Accounting Standards Board (AcSB) – spoke about the potential for the United States to adopt International Financial Reporting Standards (IFRS) and the political pressures facing standards setters today.

The US Securities and Exchange Commission (SEC) is still debating and has not yet sent down a decision on whether or not to adopt IFRS. Tweedie noted how important the U.S. is to international synchronization of accounting standards, noting that other major economies such as Japan, China, and India are hinging their decisions on IFRS adoption on the United States’ decision. “The world is waiting,” said Tweedie.

Herz spoke at length regarding the role of politics in standards setting, bringing up the proposed amendment to the Dodd-Frank act that would have required fair value accounting much more broadly in U.S. reporting standards.

Pressure from Congress is often pointed to as the main reason for the removal of fair value in 2009. “Some people would take the view that politicians should just stay out of standard setting and leave it completely to the independent standard setters and the like,” said Herz, “but it’s not the real world. People have the right to go to their elected officials and complain about things if they don’t like what’s happening.”

FASB and IASB Stumble in Convergence Efforts on Leasing Standards

March 12, 2012 by · Leave a Comment
Filed under: Financial Accounting Standards Board, IASB 

In efforts to converge the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) rules, the two rule-setting bodies appear to have arrived at an impasse regarding leasing standards.

The meeting, which took place in London, “was essentially a discussion intended to respond to the feedback we have continued to receive about the income statement effects for lessees,” said FASB chair Leslie Seidman. The boards voted for different proposals, however. “There was a fair amount of frustration at the board table,” she continued.

FASB expressed concern over IASB’s model, which required estimating the fair value of an asset. Seidman and the FASB felt most lessees would not be in a proper position to do so. “If you think about property leases, where you’re renting an apartment or something like that, you have no idea what the fair value of the building is or what the fair value of your floor is,” said Seidman.

Seidman still sees the negotiations and convergence on track. “I think we will be in a position to conclude our discussions in the second quarter,” she said. “To me that is not a material delay.”

Norris: Accounting for Financial Institutions Is a Mess

December 14, 2011 by · Leave a Comment
Filed under: Financial Accounting Standards Board 

In a New York Times editorial, contributor Floyd Norris says that “accounting for financial institutions is a mess,” noting recent earnings turnarounds due to mark-to-market application on debt value adjustments (DVA), among other balance sheet changes.

Investment giant Goldman Sachs has been questioned for its hedging practices after posting massive third quarter gains after generally dismal results for the past few quarters. The reason for Goldman and others’ gains is due to an accounting rule “that has the counterintuitive result of increasing reported profits – and revenues – just because people are losing faith in the ability of the bank to meet its obligations,” says Norris.

The rule creating the confusion is the fair value rule, says Norris. The rule is voluntary, meaning that banks can choose whether or not to apply the rule and – within reason – pick and choose which assets and liabilities to apply the rule.

Pressure from the financial crisis allowed banks more leverage to shift Financial Accounting Standards Board (FASB) principles their way. “We are moving back to the past,” says former FASB board member Ed Trott.

Next Page »