The Bruce Column — Stretching standard time

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23 May, 2011

Standard-setting activity has been positively thundering along.

The great batch of five new standards just published is compelling evidence of this. The fair value measurement achievement was probably the greatest. The glare of publicity and discussion made it the focus of attention. But they still managed to deliver a good converged standard. But the question remaining is whether it will succeed in the long run, and whether the convergence programme can provide further results. Sir David Tweedie retires at the end of June. And now the agenda has changed. The new plan talks of final standards on financial instruments: impairment, hedge accounting and asset and liability offsetting by the third quarter of the year; final standards on leases, revenue recognition and insurance contracts by the fourth quarter, and so on. There are only seven months of the year to go, less if you factor in the bureaucratic side of getting a standard out.

We are back to the central problem of convergence. The difficulty of completing a convergence programme is, frankly, the specific difficulty of convergence itself. Best intentions can be signalled early in the process. People can work all the hours there are. But good arguments on both sides and the difficulties they create may still remain, however much people urge convergence all round. This is the problem that the IASB and FASB have had since the outset of their convergence programme. It creates expectations that different standards on the same topic can be harmonised and brought together. But deadlines are what you fall over.

Part of the problem has been the steady realisation during the programme of how much needed to be done not so much to sort out differences but to raise the quality. As the IASB Chairman, Sir David Tweedie, said last month in an assessment of the nine years so far of the convergence programme, if the standards were 'complex or out of date there was no point in trying to converge them otherwise we would just get a complex out-of-date converged standard when what we should really do is write a better standard'.

And there, in a nutshell, is the problem. Pulling two sides of the standards together was just as likely to result in something which compounded the problem as it was to provide enlightenment and simplicity. Much better to use the experience gained to make something new, effective and useful. Where this works everyone is better off. As Sir David went on to say: 'The two sets of standards are much closer together and frankly IFRSs are much better quality than they would have been otherwise'.

In the same interview Sir David's counterpart at the US FASB picked up on this point. Leslie Seidman stressed that there had been 'very significant convergence efforts'. But it was what was left which may require time to become elastic. 'What we have got left', she said, 'is a few priority projects including leasing, revenue recognition, financial instruments and insurance, and that is what we have been focusing on'.

But those four projects have already consumed a huge amount of work, (no one who has witnessed the marathon board meetings and the hours worked by the project staff will dispute the adjective huge), and outreach and consultation. But equally no one suggests we are in sight of a conclusion or, in the case of the more intractable issues, a solution. The original deadline for much of this work was the end of June this year, which coincidentally is also the point when Sir David's decade of tenure as Chairman comes to an end.

Instead the deadlines are being steadily pushed back. But the interesting point is that they are not simply being pushed back because the technical issues are taking longer to sort out. There is another issue. As the Investment Management Association made clear in a response made earlier this year: 'The focus on convergence at all costs consumed resources that could have been used in the development of high quality standards'.

This is what is new. And this is why even the rest of 2011 may not be enough to complete this work. Quality should now be the watchword. And quality does not come about simply through upping the workload. It also depends on thought and feedback. Leslie Seidman said as much back in the April interview: 'The quality of standards remains of the utmost importance'. And Sir David emphasised the point. 'What we have done', he said, 'and I think this is a big change in standard-setting over the past couple of years, is we have gone out deliberately to get high quality input in addition to that required by our due process. This extensive outreach is something that hadn't been done to the extent that it is now. We get constant input, and we test these ideas as we finalise the standards'.

So as we watch the programme unfold with the re-deliberation on ideas on, for example, leasing, insurance and impairment, we should not be surprised if the deadline for completion slips further and further back. What is needed is the sort of quality which will ensure stability and consistency in an issued standard. The key is still time. But it is the future longevity and the shelf life of the standard, not the time it takes to produce, to which people will be looking most closely.

Robert Bruce
May 2011

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