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On Convergence, Speed Is In; Hubris Is Out

FASB and the IASB rework their approach as Paul Volcker calls for an end to America's love affair with U.S. GAAP.
Marie Leone, CFO.com | US
October 30, 2009

If you spot Bob Herz on Cannon Street in London more often over the next year, or discover that David Tweedie is spending more time in Norwalk, Connecticut, it's because the two accounting standard-setters have agreed that their boards should meet more frequently now that the deadline for converging international and American accounting standards is creeping closer.

Speaking at an industry conference Thursday, Herz and Tweedie, who work in Norwalk and London, respectively, confirmed their goal of completing major projects in their standards-convergence effort by 2011. To do that, they will need to hold more joint board meetings, because it's a more efficient way of reaching consensus about prickly accounting issues. So every month for the next year, the boards will come together, either physically or via teleconferences, to hammer out principles and guidance on the accounting treatment for such items as financial instruments, pensions, leases, and revenue recognition.

Incidentally, look for an exposure draft on asset impairment this week, a draft on hedge accounting in December, and a more comprehensive proposal on financial instruments by early 2010.

The ultimate goal is a single set of global accounting standards that mesh the best from international financial reporting standards and U.S. generally accepted accounting principles. The timing is right for American companies, as 2011 is the year the U.S. Securities and Exchange Commission is scheduled to decide whether it will require publicly traded companies in the United States to file financial results using the new and improved (and converged) IFRS. If IFRS gets the green light in this country, the SEC expects that companies will have to file results using the international standards by 2014.

In line with their pledge of efficiency, Tweedie announced that the International Accounting Standards Board and the Financial Accounting Standards Board have agreed that neither board will jump the gun on releasing major new rules slated to be converged until the other board has had a chance to release a draft rule for public comment and gather feedback. In that way, there will be less revising of rules and guidance for standards earmarked for convergence.

From a practical perspective, "we've put a lot of effort toward convergence, but we need to go work out implementation gaps," especially regarding the U.S.'s "insatiable" appetite for guidance, added Herz. Herz and Tweedie, chairmen of their respective boards, spoke at the IFRS conference sponsored by the American Institute of Certified Public Accountants and the International Accounting Standards Committee Foundation.

The duo reassured corporate finance executives that their aim is to give financial-statement preparers one year before making a published rule effective, and they vowed to review the practical implications of the new standards two years after implementation, to gauge whether the rules work as planned.

The convergence project, which began in 2002, became an unlikely political priority last year when accounting was vilified by bankers and politicians — including some heads of state — as exacerbating the global financial crisis, especially with regard to valuing financial instruments such as derivatives and mortgage loans and setting up reserves for bad debt.

By April 2009, a G20 advisory group called the Financial Stability Board had requested that bank regulators work with FASB and the IASB to publish new rules by the end of the 2009 that would require banks to build up loan-loss reserves in good times so they could be drawn down during bad times. The goal would be to eliminate the procyclical risk related to some financial instruments.

Those prescriptive remedies didn't sit well with Herz, who said Thursday that he didn't think it was "appropriate" for world leaders to get into standard-setting details. However, he did note that by the time the next G20 meeting took place in Pittsburgh last month, the heads of state had backed away from directing rulemaking, though they still expected the boards to consider the recommendations of the Financial Stability Board.

Paul Volcker, chairman of President Obama's Economic Recovery Advisory Board and also a speaker at the AICPA conference, provided his view on the subject of political intervention. Asked whether he thought comments from the G20 would influence the SEC with respect to accounting policy, he declared, "I hope so." Volcker said he didn't see a conflict between remaining independent in terms of standard-setting and appreciating what world leaders had to say about the global economic situation.

Volcker conceded, however, that politicians and bankers are, by nature and edict, more concerned with maintaining financial stability than with delivering transparency to investors — one of accounting's roles. Still, he emphasized that there are "complicated realities" that don't fit neatly into accounting theory, and those must be dealt with. For example, the IASB and FASB are nearing the end of the classification project, one piece of a large standard on financial instruments. At its root, the classification project will help preparers determine when financial instruments must be marked to market and when they can be booked at historical cost.


A former chairman of the U.S. Federal Reserve Board and chairman of trustees that founded the ISAB, Volcker said he hoped the IASB and FASB were well on their way to resolving implementation differences. He insisted that it was time to erase "American hubris" from the accounting standards debate. He said the time had passed for declaring that the quality of U.S. accounting standards could not be matched by international standards that were based on so-called principles. "Made in America doesn't mean perfection...[and] our approach is not necessarily good for the world," asserted Volcker.

 




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