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.
Filed under: Generally Accepted Accounting Principles, IASB, SEC
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.
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.
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.
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.”
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.”
The International Accounting Standards Board (IASB), the standard setting body that publishes International Financial Reporting Standards (IFRS), recently proposed changes to IFRS affecting investment companies. The new proposal would change how investment companies report investments in controlled entities on their balance sheets.
Presently, controlled entity investments are consolidated with assets, liabilities, income, and expenses recognized on the company’s financial statements. The new proposal would simplify this reporting to one line, measured at fair value.
International auditing firm KPMG viewed the proposal as a step towards streamlining management and better gauging performance. “This could be a significant, positive change compared with the current position in IFRS,” said Tom Brown, KPMG’s UK head of investment management and funds.
The proposal may affect firms in the United States, depending on its adoption of IFRS. The proposed IFRS changes are in consultation until January 2012 – near the time at which the United States Securities and Exchange Commission would make its recommendation. Application of fair value has been a point of contention in efforts to adopt IFRS in the past.
Speaking at the International Organization of Securities Commissions conference this week in Montreal, White House senior economic adviser Paul Volcker appealed to the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to come together in their financial instrument reforms.
“What appeared to be two organizations converging…now looks like a collision,” said Volcker. The FASB favors mark-to-market; the IASB has a mixed-measurement model in place which enables banks to measure their held-to-maturity instruments at amortised cost. If the two groups cannot reach agreement on this issue and others by June 2011, it may jeopardize US adoption of international standards.
With the deadline for an agreement looming, Volcker added, “I hope they can come together by the end of the year.”
In a recent survey conducted by Grant Thornton, 37% of U.S. CFOs and senior controllers agree with the Financial Accounting Standards Board (FASB) proposal that a balance sheet should display both the fair value (exit value) and amortized cost of assets. Whereas 37% prefer just reporting amortized cost and the remaining 26% favored fair value only.
Of the 496 respondents, only 5% agree that the income statement should reflect the change in fair value. Instead 66% believe the income statement should only reflect revenues when earned and the corresponding costs.
Grant Thornton Professional Standards partner John Hepp explains, “The data indicate that there is support for fair value accounting on the balance sheet, but not on the income statement.” He continues, “This echoes comment letters from constituents that have called on the FASB and the IASB (International Accounting Standards Board) to clarify how to present changes in fair value and the principles underlying other comprehensive income.”
This is so simple it defies conventional wisdom. 1) Disclose both. 2) Don’t take a hit to income until sale.
Sir David Tweedie, head of International Accounting Standards Board (IASB), believes that the impasse with the Financial Accounting Standards Board (FASB) regarding fair value accounting rule can be reconciled. Currently the IASB model uses a mixed measurement approach for valuing assets, whereas the FASB is proposing to measure assets at their full fair value.
In an interview with the Journal of Accountancy Tweedie says, “Say we both stick to our same positions [on classification and measurement], maybe we need to put out something that would say ‘if you want to get the same other comprehensive income as FASB, you have to add this on, which would be the fair value’” he said. “FASB would do the opposite. If you want to get the FRS number, you deduct this. There are ways to do it.
The IASB has split its accounting rules reform project into three phases. The FASB has chosen to release all its reforms at one time.
What’s the rush for Zoll? Let’s do it right instead.