This week saw Hans Hoogervorst, the Chairman of the IASB, ably abetted by his IFRS Foundation Trustee colleague and onetime SEC Commissioner, Harvey Goldschmid, sounding the clearest of warnings about the impending SEC decision on the future of financial reporting in the US.

Goldschmid described need for the SEC to 'make a firm, affirmative IFRS incorporation decision' in the next few months as a 'National Imperative'. 'The future path of financial reporting, and of investor protection and effective financial markets on a global scale, may well be determined in the next few months', he said. 'It is difficult to imagine that, after a decade of investment in convergence a negative decision could be a possible outcome', said Hoogervorst, 'or that the US would intentionally choose to discard international leadership in something as fundamental as financial reporting'.

Pretty unequivocal stuff. But the underlying arguments which both men employed during their speeches to the AICPA conference in Boston sought to allay any fears. Hoogervorst in particular addressed the argument, prevalent in the US, that somehow IFRS is not much used in full, particularly in Europe. 'Some even say that Europe does not use IFRSs due to the optionality of nine paragraphs of IAS39 Financial Instruments', said Hoogervorst. 'Yet this option is used by less than 30 companies. That is less than 1% of listed companies in Europe. The other 99%, some 8000 listed European companies, all use full IFRS'.

Another frequently expressed worry in the US is that somehow enforcement would move offshore and that the US would lose its sovereignty. Again Hoogervorst was patient and placatory. 'A major comfort to the United States should be that if you adopt IFRSs the SEC will remain in full control of enforcement', he said. 'So there is absolutely no danger of importing different enforcement standards from abroad into the United States. Indeed', he continued, 'it is much more likely that international standards of IFRS enforcement will benefit from the SEC's rich experience and active participation'. And Goldschmid echoed this view. 'Would there be effective enforcement if the US adopted IFRS?' he asked his audience. 'The short answer', he said, 'is "yes". Put bluntly the rigor of US enforcement fundamentally pivots on the leadership at the SEC'.

Goldschmid also took regulatory arbitrage as one of his themes. 'Too often during the financial crisis', he warned the conference, 'we have witnessed the danger of arbitrage and unhealthy political interference when the two systems, IFRS and US GAAP, can be played off against each other. Cries of "level playing field" and "unfair competition", for example with respect to financial instruments and fair value reporting, have been used to try and weaken both systems. The lesson to be learned', he said, 'is that incorporation of IFRS into US GAAP, so that we have only one set of high quality global standards, will, as the G20 implicitly recognised, largely eliminate the arbitrage problem'.

Both men cited the advantages already seen in US companies. 'There are good commercial advantages to everyone speaking the same high quality financial reporting language', said Hoogervorst. And he used the Ford Motor Company as an example. 'Standardising on IFRSs has the potential to allow Ford to use the same financial reporting language for both internal management reporting and external financial reporting on a worldwide consolidated basis. One language will eliminate duplication and translation risks across all Ford international subsidiaries. The long-term savings could be substantial'.

And both men suggested the downside, if the US turned its back on IFRS or took them up half-heartedly, would be great. Hoogervorst made the point that 'the US's current share of global market capitalisation now stands at just over 30%, compared to an average of 45% between 1996 and 2006. US financial markets have not shrunk', he said, 'it's just that other parts of the world, in particular the Asian financial centres, have become global players'.

The lesson which he drew from this was simple. 'These developments call for the United States to play a key role in developing global standards'. And he cited investor pressure, quoting CalPERS, the largest public pension fund in the United States, when it said in its submission to the SEC that "the SEC has the opportunity to effectively improve accounting standards, and to regain and increase investors' trust in financial reporting". 'To me', said Hoogervorst, 'that says it all'. And Goldschmid delivered the same message. 'I believe the best way to protect US stakeholders, including investors who are increasingly investing globally, is for the SEC to make an affirmative incorporation decision'.

These two speeches showed the advantages of making IFRS the truly global financial reporting language. But their real importance is that they also addressed a few of the most common objections which have come from within the US.

Robert Bruce October 2011

Related links

• Our IASB and US SEC page for information on the SEC and the convergence project

 

Mr Hoogervorst focused on the possible SEC decision on incorporation of IFRSs. He addressed the concerns of Americans and other nations that haven't formally committed to IFRSs yet:

A decade of joint work to improve and align IFRSs and US GAAP means that both sets of standards have improved and are moving closer together. Each is used within major capital markets. Each has its relative strengths and weaknesses. While I am not dismissing these differences, I am not convinced by the arguments that one set of standards is clearly superior to the other. A more compelling criticism of IFRSs is that inconsistent application of the standards makes international comparison more difficult. . . . If you do not have a single language, international consistency in financial reporting will always remain an illusion. A major comfort to the United States should be that if you adopt IFRSs the SEC will remain in full control of enforcement. [I]t would be reasonable that a relatively long transitional period is provided, particularly for smaller publicly traded companies. An option to allow early adoption of IFRSs also seems sensible for those companies that can already see substantial net benefits of IFRSs.

Please click for:

• Hans Hoogervorst speech (link to IASB website)
• Harvey Goldschmid (IFRS Foundation Trustee) speech (link to IASB website)
• Robert Bruce's column on the speeches made at the AICPA/IFRS Foundation conference

 

One of the enhancements is a newsletter for investors entitled Investor Perspectives. A new edition is now available. Paul Pacter, IASB Board member and former webmaster of IAS Plus, explains the IASB's outreach activities:

• 5 October 2011 — Paul Pacter: Using outreach activities to get the views of investors and creditors

All Investor Perspectives are archived on the IASB's website.

Click for our earlier story on programme to enhance investors' participation in the development of IFRS.

Stevenson admits that this media release is an unusual step, but he feels it is warranted as this draft raises fundamental questions about existing requirements and may have far-reaching impacts.

"In my view it could lead to increased use of off-balance-sheet accounting, see us depart from the concept of control and lead to unjustified changes in requirements accounting for associates and joint ventures. The exposure draft seeks to include in IFRS accounting practices previously used in North America and would be a step back from the universal consolidation model that we have followed. In this regard, I note that three IASB members have expressed alternative views on ED/2011/4."

The AASB has released the IASB's ED as AASB ED 220 in September. Stevenson urges constituents to carefully review the proposals and make their views known to the AASB and the IASB – to answer the question whether this proposed standard is in the interest of Australian reporting and of international reporting.

Comments are due to the AASB by the 30 November 2011 and to the IASB by 5 January 2012.

Click for:

• Kevin Stevenson's media release (link to AASB website)
• Our earlier story on IASB's Exposure Draft: Investment Entities

In January 2011, the 'Blue-Ribbon Panel' addressing how U.S. accounting standards can best meet the needs of users of private company financial statements issued a report of its recommendations to the Financial Accounting Foundation (FAF) Board of Trustees. The recommendations included the creation of a new board, to be overseen by the FAF, that would focus on making exceptions and modifications to U.S. GAAP for private companies. However, the Trustees concluded that creating a separate standard-setting board for private companies would likely lead to the establishment of two separate sets of US accounting standards, a result that seemed not desirable.

The "Private Company Standards Improvement Council" (PCSIC) now called for in the plan would have the authority to identify, propose and vote on specific improvements to US accounting standards for private companies. However, changes would be subject to ratification by the Financial Accounting Standards Board (FASB). Also, the PCSIC chairman, who would be selected and appointed by the Trustees, would be a FASB member. The FASB believes that it is well prepared for this move of the Trustees by having recently appointed a likely candidate for this position as a board member.

In publishing the new plan, the FAF has concluded, as the Blue-Ribbon Panel has done before, that mandating the use of the IFRS for SMEs in the United States is not appropriate at the current time.

Comments on the plan are requested by 14 January 2012.

Please click for (all links to FAF website):

• FAF press release
• Plan to Establish the Private Company Standards Improvement Council
• Executive summary of the plan
• Podcast interview with FAF President and CEO Terri Polley

 

EFRAG recommends not issuing any of the Q&As since EFRAG is concerned that the SMEIG is not focusing on a limited number of pervasive issues when issuing Q&As, as specified in its terms of reference and operating procedures, but is creating rules in a principle-oriented environment.

The draft comment letter notes that four of the Q&As consider issues on which the requirements of the IFRS for SMEs seem clear, and the answer to the question raised in the last draft Q&A always seems to depend on the SME's specific circumstances and management's professional judgement.

Comments on the letter are invited by 18 November 2011. The draft comment letter can be downloaded via the press release on EFRAG's website.

Click for our earlier story on SME Implementation Group five questions and answer documents.

Mr Hoogervorst noted that Europe's adoption of IFRSs in 2005 has led to the IASB becoming the global standard-setter with many countries having followed Europe's by adopting IFRSs. He noted that he is optimistic for a positive decision by the US Securities and Exchange Commission to incorporate IFRSs into US standards, but a negative decision would not stop the progress of IFRS adoption throughout the world, though it would delay it.

In regards to the relationship between accounting standards and the financial crisis, Mr Hoogervorst noted that "in many cases there was insufficient transparency for investors to be fully aware of the risks they were taking". Mr Hoogervorst noted that the accounting profession will need to improve transparency to contribute to the long-term stability of financial markets, and further stated the following:

Transparency does not always paint a pretty picture. Much of the current economic volatility is deep-rooted. The CEO of Deutsche Bank recently said "volatility is the new normality". The days of 'risk-free assets' are long gone, if ever they existed. If volatility is indeed the new normality, how should accounting standard-setters respond? Should we artificially shield investors from learning of this underlying economic volatility? Or should accountants try to describe, as accurately as possible and with full transparency, this new normality? Most people I speak with believe that financial reporting should tell it how it is, rather than how we would like it to be. If the emperor really has no clothes, then it is the responsibility of financial reporting to say so, no matter how unpopular the truth may be. There is however one important caveat to this. Asking accountants to describe economic volatility is one thing, but we should be careful that in doing so financial information does not become the source of economic volatility. For that reason the IASB has always remained pragmatic about which measurement techniques to adopt. We know there is no one right answer and therefore we have always employed a mixed measurement approach, combining historic cost with fair value. That is why we have recently completed the reform of our fair value measurement standard that provides new guidance on illiquid markets. It is why we are proceeding with caution in the reform of financial instruments accounting. Our upcoming hedge accounting rules will prevent artificial accounting volatility to companies who hedge their risks. Accounting should not mask volatility, but neither should it be the source of it.

Please click for Hans Hoogervorst speech (link to IASB website).

Staff Audit Practice Alert No. 8 Audit Risks in Certain Emerging Markets discusses examples of conditions that may indicate greater fraud risks, procedures auditors should perform to address fraud risks and other items auditors should consider when performing an audit of an entity with operations in emerging markets.

Click to download PCAOB Staff Audit Practice Alert No. 8 (PDF 113k).

A Brussels event will be organised by EFRAG and the European Commission. The purpose of the events is stimulating debate in Europe and collecting European views. Please click for more information in the EFRAG press release (link to EFRAG website).

"At the beginning of the crisis, in 2007 and 2008, a lack of transparency regarding exposures to subprime mortgages created a situation of uncertainty about the financial positions of banks," Maijoor says in his speech and continues "in the more recent months of the financial crisis a lack of transparency from banks on their exposures to sovereign debt and related instruments are generating new suspicions about the conditions of individual banks."

Transparency on financial performance and positions will restore trust into markets and banks, Maijoor claims, and IFRSs have contributed to both the quality and quantity of the information provided as part of the financial statements presented by listed companies. However, IFRSs need to be applied correctly to serve the end of transparency, and national supervisory authorities and ESMA have to and will ensure consistent enforcement across the EU.

As you will understand, we are currently looking at how banks are applying IFRS for the valuation of sovereign debt. It is very important for ESMA that financial institutions apply IFRS correctly, and are consistent in their valuations of sovereign debt exposures. This especially holds for the upcoming annual financial statements.

In July 2011, ESMA published a public statement on disclosures related to sovereign debt to be included in IFRS financial statements.

Click for:

• full text of Steven Maijoor's speech (link to ESMA website)
• IAS Plus overview of accounting developments in Europe