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.

IASB Publishes Proposed Due-Process Enhancements

The International Accounting Standards Board (IASB) has published proposed due-process enhancements, seeking to clarify some of the steps the board takes when making ruling decisions. The proposed revisions explain in further detail how the board will assess the potential impact of a new rule, lays out a method of post-implementation reviews, and details how the board will conduct outreach activities.

Facing political backlash from global economic leaders as well as the United States Securities and Exchange Commission, the IASB is seeking to diffuse any tensions that may still be present in heated discussions on the integration of United States-based Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRS).

Political tension, stemming from the global financial crisis and both boards’ decisions to make sudden sweeping changes to mark-to-market accounting regulations, has been a driving force to make the standards-setting process more transparent. Agreeing on mark-to-market accounting standards has been a major impediment in merging global and domestic reporting standards.

This move comes on the heels of a similar move by the Financial Accounting Standards Board’s overseer last year. The domestic due-process enhancement is now on its second performance review.

British, U.S. Companies’ Debt Reporting Altered by Fair Value

May 14, 2012 by · Leave a Comment
Filed under: Fair Value Accounting, IASB 

In a Wall Street Journal commentary, Max Colchester discussed The Royal Bank of Scotland’s (RBS) recent reporting of a $2.46 billion (£1.52 billion) net loss, mostly due to fair value reporting on RBS’s debt. “We wouldn’t be a bank if we didn’t have some interesting accounting charge below the line,” said RBS Chief Executive Stephen Hester. Debt valuation adjustments, as they are called, theorize that when a bank’s debt loses value, the bank could buy back its very own debt at a discount, thus making it profitable.

“The ‘fair value’ of own debt conundrum continues to haunt the banking sector, making it hard for analysts to value stocks and investors to see how profitable a bank really is,” notes Colchester.

“It’s an absolute mess,” said Mike Trippitt at Oriel Securities. “At the moment we are seeing fair value gone mad with swings of £2 billion per quarter.”

American banks have recently undergone similar paradoxical results in financial reporting. Bank of America, having posted large gains in 2011 when the price of its debt fell, now is facing setbacks due to increased investor confidence and increased debt value.

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have discussed rule changes to fair value accounting in attempts to merge standards. The IASB has submitted new rules for debt valuation adjustments, but they are currently being held up by European Union approval.

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.”

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