Notes from the IASCF Monitoring Board meeting

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07 Jul 2009

The Trustees of the IASC Foundation held a joint meeting with the IASCF Monitoring Board on 6 July 2009 in Amsterdam. It was the second meeting of the Monitoring Board.

Presented below are the preliminary and unofficial notes taken by Deloitte observers at the meeting.

Notes from the Joint Meeting of the IASCF Monitoring Board and IASCF Trustees - 6 July 2009, Amsterdam

Hans Hoogervorst, the chairman of the Monitoring Board, welcomed participants to the meeting and introduced briefly the topics for public discussion. It was noted that the Board had met in private session prior to the public meeting.

IASB's response to the financial crisis

Sir David Tweedie outlined the IASB's activities in response to the financial crisis, in particular the current status of the financial instruments project and the IASB's efforts to find an acceptable and robust replacement for IAS 39. In particular, he outlined the IASB's conclusions in the forthcoming exposure draft on the classification of financial instruments. He noted that the IASB had been asked by some constituents to adopt certain requirements in US GAAP with respect to impairment. The IASB had concluded that, were they to do so, greater complexity would have been introduced to an already complex standard. The IASB had therefore decided that it should simplify the classification of financial instruments to two categories (fair value and amortised cost) and the impairment approach to one (impairment would be triggered by a deterioration in credit standing). The IASB was working closely with the FASB, but the two were currently in different places. As a result, it was likely that the IASB and the FASB would expose each other's potential solutions and invite comments from constituents. Alternatives to the IASB approach likely to be included in the IASB's exposure draft as alternatives are that debt instruments traded in an active market would be measured at fair value in all cases; and a fair value option for all financial assets.

The EU Commissioner for Internal Markets noted that he was increasingly of the view that for financial institutions, accounting and financial reporting should be more biased towards the needs of prudential regulators than the investor. Responding immediately to this comment, the IASCF Chairman, Gerrit Zalm, noted that the banking industry representatives on the IASB's Standards Advisory Council meeting in June 2009 had expressed exactly the opposite view.

Other participants urged the IASB and the FASB to work as hard as possible to achieve a common position on this critical project.

Hans Hoogervorst, who is also a Co-Chairman of the FASB/IASB Financial Crisis Advisory Group, gave an overview of the FCAG's final report, which is due to be completed in July 2009. He noted that the report was likely to stress four fundamental principles and make recommendations in support of those principles. These principles were likely to be:

  • Financial reporting plays an integral role in the financial system by providing unbiased, transparent information about the economic performance and condition of businesses. It assists in resource allocation decisions by investors and provides important information to prudential regulators and others. However, reporting to investors should have primacy and when regulatory requirements differ from financial reporting requirements the effects should be displayed in a manner that does not compromise the transparency and integrity of financial reporting.
  • Financial reporting is but one of the information inputs available to financial markets. All users should recognize the limitations of financial reporting. There should be better and more rigorous processes for price verification and asset valuation.
  • The global nature of the financial markets makes it critical to achieve a single set of high quality, globally converged financial reporting standards that provide consistent, unbiased and transparent information, regardless of the geographical location of the reporting entity.
  • To develop standards that are high quality and unbiased, accounting standard-setters must enjoy a high degree of independence from undue commercial and political pressures, but must also have a high degree of accountability through appropriate due process and oversight ('no independence without accountability; no accountability without independence').

There was no substantive discussion of this matter.

IASCF Constitution review

The IASCF Chairman noted the following developments:

The Standards Advisory Council now has dedicated staff to assist it in discharging its role in the organisation.

As a result of the consultation with constituents about issues to be included in the IASCF Constitution Review, the Trustees are likely to propose the following:

  • Re-branding: that the name of the organisation be changed from the IASC Foundation to the IFRS Foundation; and that the IASB be renamed the International Financial Reporting Standards Board.
  • Consultation: that the Constitution be explicit that the IASB may and should consult with those bodies with a legitimate interest in financial reporting standards (not national standard-setters alone).
  • Monitoring Board: the position of the Monitoring Board in the governance structure of the organisation will be acknowledged in paragraph 3 of the Constitution.
  • Trustees: there will be specific mention of Africa and South America in the geographical distribution requirements for Trustees; the Constitution should provide for at least two vice-chairmen.
  • 'Fast track' agenda items: the Trustees are to be consulted in the 'rare circumstances' in which the IASB is considering having an exposure period of less than 30 days (the shortest period permitted by the Constitution).
  • IASB: there should be two vice-chairmen of the IASB; terms should be set at an initial term of 5 years renewable once for a further 3 years, unless the member is a potential chairman or vice-chairman, in which case the renewal would be for a further 5 years.
  • IASB agenda setting: the required consultation with the IASCF Trustees and the SAC remain, decisions remaining with the IASB absolutely. However, comments from constituents would be invited during this period (the agenda candidates and relative priorities are in publicly-available documents). However, it is likely that the onus would be on constituents to respond to these documents and they would not be the subject of a formal request for views. In this way, the Trustees were trying to balance the openness of the agenda-setting process without making it too bureaucratic.
In response to a question from a member of the Monitoring Board, it was agreed that, in the event that the IASB was considering using a comment period of less than 30 days, that the Monitoring Board be informed. It was unlikely that they would be involved in the decision process (that was for the Trustees), but they did want to be aware of the situation.

Funding the IASCF

The IASCF staff noted that in April 2009 they had presented to the Monitoring Board a draft five-year plan that outlined resource requirements for the IASCF. As a result of further work on this budget, it is apparent that the IASCF could be in an operating deficit from FY 2010 based on current funding commitments (this assumes that the national schemes in EU Member States ceases once the central budget commitment comes on stream in FY 2011 and that the voluntary contributions from the major accounting networks and central banks is also discontinued).

An IASCF Trustee noted that the funding shortfall had the potential to put in jeopardy the extensive discretionary due process activities that the IASB was following: were these to be curtailed, the organisation would attract criticism, probably from those jurisdictions that had contributed to the funding shortfall! The European Commissioner for Internal Markets noted that the presence of a central EU budget allocation for the IASCF did not preclude Member States from continuing national contribution schemes. The EU funding started in 2011 and the number in the presentation ($4.4m) was only indicative but about right. However, it was subject to review on an annual basis as part of the EU's budget-setting process. In response to a question, the Commissioner noted that governance issues were at the heart of the concerns at the ECOFIN and the European Parliament.

The Chairman of the US Securities and Exchange Commission acknowledged that the voluntary contribution system was not working in the US. The SEC was working to achieve a solution that was fair and stable and avoided a Congressional budget line item. It was likely that this would be a levy system on listed companies, but this was still being worked out. The introduction of a stable, independent funding regime for the US was a priority for her.

There was a brief discussion of the IASCF's budget and programme spending requirements, but little new came to light.

IOSCO and regulatory developments

The representative of the Japanese Financial Services Agency noted that the FSA recently had adopted a roadmap for the adoption of IFRS in Japan. Issuers would be permitted to use IFRS for fiscal years ending on or after 31 March 2010. A decision on mandatory adoption would be made in 2012. In the meantime, there was also a convergence programme in place between the IASB and the ASBJ, which should be completed by 2011. It was hoped that this two-pronged approach would mean that the transition to IFRS would be relatively easy in Japan.

The SEC Chairman noted that the SEC had received about 220 comment letters on its IFRS Roadmap - a large proportion of these were from issuers; with users, the accounting profession and academics also well represented. A large proportion agreed that a single set of global financial reporting standards was desirable; there was less agreement that they should be IFRS. However, issuers with international operations were overwhelmingly in favour of IFRS. Areas of concern with respect to IFRS were regional/ national carve-ins and carve-outs. Many commentators had concerns that the proposed timeline for implementation was too short. The SEC Chairman noted that analysis of the comments was continuing and that the Commission would resume consideration of the Roadmap in 4Q 2009.

A Trustee asked whether the European Commission had signed the Monitoring Board's Memorandum of Understanding. The Commissioner replied that he had not yet been able to do so, but that the topic would be discussed when the Economic and Monetary Affairs Committee (ECON) was reconstituted later in July 2009 (after the new European Parliament convenes), and he hoped that as a result of these consultations and consultations with Parliament, that the MoU could be signed on behalf of the Commission.

In response to a question from the Trustees, the Monitoring Board Chairman noted that the MB had yet to agree any formal modus operandi with respect to the IASB. An IOSCO representative noted that he expected that IOSCO would operate as before: operational matters would be raised with the IASB in the normal manner. The MB was put in place to add strength and assurance at a governance level and that IOSCO would raise only policy and governance matters at the MB level.

The Chairman closed the public session.

This summary is based on notes taken by observers at the Joint Monitoring Board and IASCF Trustees meeting and should not be regarded as an official or final summary.

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