In my view: IASB comes to the crunch
4 Aug 08
Sir David Tweedie looks at how the international accounting standard-setter is moving into a new phase against the background of the credit crunch
by Sir David Tweedie
The International Accounting Standards Board is moving into a new phase: concentrating on setting new standards after a long period of fixing existing standards. That may seem odd – after all, the IASB is a standard-setting body – but our work programme has been driven by the growing momentum of international convergence in financial reporting.
Our initial priority was to deal with the main problems in the international accounting standards we inherited, particularly replacing sections that had been heavily criticised by securities regulators.
This gave Europe a stable platform for convergence of accounting for almost 7,000 listed companies reporting under 25 accounting frameworks towards a single set of international financial reporting standards – IFRSs. This was a remarkable achievement, which the European Commission in a recent assessment described as having been “challenging, but successful”.
In parallel we agreed a programme for convergence with the US standard-setting body, FASB (the Financial Accounting Standards Board). In the first phase, we moved far too slowly. The time estimated to draw up a new pensions standard for the US would have been longer than it took the US to put a man on the moon – surely pensions accounting couldn’t be that difficult! Ten or so standards still needed a complete rewrite and, using our previous approach, that would take at least until 2013-15.
A number of very significant economies, including Brazil, Canada, India, Japan and Korea, aim to adopt or converge with IFRSs in 2011. Further significant changes so soon after that would cause unnecessary disruption.
The IASB and the FASB are now giving priority to the most important projects, including lease accounting and accounting for pensions. For the latter, we are focusing on existing problems (see box, right). We will refrain from telling people exactly what to do in all circumstances – they must use their judgement.
All this is, of course, taking place in the context of the credit crunch. Compared with past crises, this is probably the quickest to reveal the problems.
The problem with “sub-prime” loans is that, with the debts packaged and distributed very widely, no one knows who is holding the risk, causing the markets to seize up. Greater transparency in reporting is the way out of the credit crunch, not the cause of it. In contrast, in the 1990s, Japanese banks failed to disclose underperforming loans for as long as 10 years and their problems continued.
With the Financial Stability Forum, which is co-ordinating the international regulatory response to the credit crisis, we will address financial reporting questions including accounting for “special investment vehicles” (SIVs) set up by the banks, some of which have been associated with sub-prime loan problems. We will be looking to see how a bank can exercise control, even if it owns as little as 10 per cent of an SIV, and also at whether banks are bound to SIVs by reputational risk even if they have not explicitly offered guarantees for their performance.
We are looking at defining fair value in inactive markets. We aim to publish proposals in September.
Some financial institutions have not been happy with reporting fair value, and the effect on balance sheets. But what is the alternative? If it is historical cost, you still have to deal with impaired value. Is it the average value over the year – in which case does anyone want to buy Bear Stearns or Northern Rock shares from me at those prices? Or do you freeze values? Institutions presumably would soon want to unfreeze them once market values started rising again. Some say that the assets are worth more than “fair value” implies. If that is so, they should buy more. They would make a fortune – if they are right!
Ultimately, markets want our standards because they understand our accounting answers. If you do not use accepted international standards, investors will have to pay a risk premium. Our programme is about supporting economic growth, not just accountancy.
People say, “Accountancy should not drive behaviour.” I believe that it should. Good accounting is the basis for sound investment and management decisions – that is why we have to improve accounting standards!