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"Convergence can never be a substitute for adoption of IFRS"

  • Speech — dark green Image

Mar 08, 2014

At the 8th IFRS Regional Policy Forum, hosted this year by the Institute of Chartered Accountants of India (ICAI) in New Delhi, IASB Chairman Hans Hoogervorst gave a speech entitled, "Closing the Accounting Chapter of the Financial Crisis," in which he detailed the IASB's response to the financial crisis and his conclusion that convergence is an ineffective means to establishing a single set of global accounting standards.

In his speech, Mr. Hoogervorst concentrated on looking back on financial reporting and the financial crisis. The Group of 20 (G20) and the Financial Crisis Advisory Group (FCAG), which was formed in 2009 to advise the IASB and FASB, had called on the boards work together to reach converged solutions and achieve a single set of high quality global accounting standards.

In November 2009, the IASB had issued IFRS 9, Financial Instruments, which introduced new requirements for classifying and measuring financial assets. This was followed in October 2010 by the requirements on accounting for financial liabilities, which had been largely carried over from IAS 39 Financial Instruments: Recognition and Measurement together with the recognition requirements for financial assets and financial liabilities. The one important change made in relation to IAS 39 was addressing the own credit risk problem. This concluded the first phase of its comprehensive financial instruments project. In November 2013, the IASB completed the third phase of the project by publishing requirements that introduced a new general hedge accounting model into IFRS 9.

The second phase of the impairment project was conducted jointly by the IASB and FASB. Under current IFRSs and U.S. GAAP, loan loss provisioning is determined based on the incurred-loss impairment model. Mr. Hoogervorst explained that, during the financial crisis, this model was blamed for the recognition of "too little [impairment], too late." As a result, the boards worked toward introducing a single impairment model that would result in all financial instruments subject to impairment accounting to have impairment measured in the same manner. This led to the development of the so-called expected credit loss model.

Furthermore, in January 2012 the IASB and FASB agreed to work together to improve the alignment of their respective requirements for classifying and measuring financial instruments. To this end, the IASB added a project to its agenda that would introduce limited amendments to the requirements issued in 2009 and 2010 that could help address the FASB's concerns with those requirements.

However, as Mr. Hoogervorst stressed, the convergence attempts  although seemingly promising initially did not lead to success:

We did not succeed in one central recommendation of the FCAG and G20, and that is in the area of convergence in the IASB's and the FASB's Standard for financial instruments. On Classification and Measurement, Offsetting and also Impairment, we had at some point reached converged positions with the FASB. With regard to Offsetting and most likely with Classification and Measurement the FASB in the end reverted to existing practice in the United States. We also did not manage to stay converged on Impairment, which was one of the main recommendations of the FCAG.

The disappointment regarding lack of success on convergence led Mr. Hoogervorst (who opened his speech by urging India to fully adopt IFRSs) to express his belief that only adoption of IFRSs can lead to a single set of high quality global accounting standards:

This inability to deliver compatible outcomes with the FASB clearly demonstrates the inherent instability of convergence as a means to achieve a single set of global accounting standards. For this reason, our Trustees wisely concluded that convergence can never be a substitute for adoption of IFRS. Thankfully, throughout the financial crisis, the momentum towards adoption has continued unabated in many countries.

Please click for the full text of Mr. Hoogervorst's speech on the IASB's Web site.

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