Thursday, December 11, 2008

IASB Members Say Fair Value Not to Blame for Financial Crisis; Will not Include FIN 48 in IFRS Tax Standard Proposal

IASB Chair David Tweedie and Board Member James Leisenring both said at a recent AICPA seminar that fair value accounting was not the cause of the current financial crisis and should not be suspended. Fair value means transparency, said Chairman Tweedie, and a return to the relative inaccuracy of historical cost is not an option. To emphasize his point, the chair asked if anyone would be willing to pay the historical value of Bear Stearns securities.

While recognizing that the fair value standard is difficult to apply in illiquid markets, Member Leisenring said that we need fair value even more in an environment of declining asset values. He believes that any attempt to weaken the fair value standard would concomitantly weaken financial reporting. That said, the Member acknowledged that the fair value standard is complex and has too many exceptions. Moreover, any mixed measurement models would cause more complexity. Financial instruments must all be measured at fair value, he emphasized, in order for it to be a true principles-based standard.

Mr. Leisenring also noted that the coming exposure draft on IAS 12 dealing with accounting for income taxes will not include FASB’s FIN 48. He said that the IASB does not agree with FIN 48 and will expose a different approach. FIN 48 was adopted to provide for increased relevance and comparability in financial reporting of income taxes and to provide enhanced disclosures of information about the uncertainty in income tax assets and liabilities. The genesis of FIN 48 is FASB Statement No. 109, which established financial accounting and reporting standards for the effects of income taxes that result from an enterprise’s activities during the current and preceding years. It requires an asset and liability approach to financial accounting and reporting for income taxes

Member Leisenring also noted that the standards on revenue recognition present a difficult convergence problem. Differences between the IASB and FASB, and even within both Boards, have made it difficult to find common ground. He described the present standards as hopeless.

But both IASB officials said that FASB is committed to achieving a single global set of high quality financial accounting standards. This is not a rivalry between the two Boards, said Member Leisenring, they both have the same ultimate goal of one set of uniform converged accounting standards. He cautioned, however, that the process of interpreting the global accounting standards must be carefully watched lest we allow differing interpretations of the standards to destroy uniform international standards. He noted that the SEC favors IFRS as adopted by the IASB, unmodified by any other entity.

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