Monday, August 01, 2011

IASB Chair Anticipates US Will Have National Endorsement Protocol for New and Amended IFRS

Anticipating a positive decision on IFRS later this year by the SEC, Hans Hoogervorst, Chair of the International Accounting Standards Board, said that he envisions the US having a national endorsement protocol for new and amended IFRS. In recent remarks, the IASB Chair noted that, difficult as the decision may be, it is hard to imagine the possibility of the United States not making a positive decision. US investors invest globally and US companies seek international capital, he observed, and it is in the economic interest of the US to adopt IFRS. Further, as a signatory to G20 communiqu├ęs, the US has repeatedly expressed support for global accounting standards. But the main thing, said the Chair, is that IFRS is the only possibility if you believe in a global language for financial reporting.

It is imperative to complete the G20-endorsed transition towards global financial reporting standards, emphasized Chairman Hoogervorst, and an important piece of the IFRS jigsaw is encouraging the United States to come on board. IFRS are already permitted for use by non-US companies listed on US markets. The SEC has indicated that later this year it will make a decision about incorporating IFRS into the US financial reporting regime for US companies.

The IASB Chair appreciates that this is not an easy choice for the US to make. The rationale for European adoption in 2005 was relatively straightforward, he noted, since there could not have been a European common market with 25 ways to account for the same transaction.

The United States already has high quality, mature financial reporting standards. In fact, he said that US expertise has been a very positive influence on the development of IFRS. Thus, objections regarding the cost of transition and perceived loss of sovereignty must be handled in a sensitive manner. All the same, the Chair is convinced that the United States will want to maintain its position of leadership in international financial reporting, and therefore it is hard to fathom a negative decision on the part of the SEC.

He pledged that the IASB will continue to strengthen its institutional relationships in a way that respects and enhances the independence of the standard-setting process. The Board will deepen its engagement with those around the world who are impacted by its work, and ensure that they have a sense of ownership and respect for the product that the Board is developing for investors globally

He said that the IASB and FASB must complete the remaining convergence projects to produce the highest possible standard, and do so in a way that benefits from the input that the Boards received from the entire global financial reporting community. These remaining convergence projects address some of the most difficult and important areas of financial reporting.

He said that the work to improve international and US revenue recognition requirements is at an advanced stage. After a final re-exposure, the new joint standard will replace US requirements that are generally considered to be too detailed and international requirements that are not detailed enough. The project to improve lease accounting requirements, which is also well advanced, will provide investors with better information on the rights and obligations companies have through their lease commitments. According to the IASB Chair, this project represents an important step in pushing back off-balance sheet financing.

The work to improve and align respective financial instruments accounting standards is also much needed, which effort is the most pressing item on the IASB-FASB plate right now. The two Boards have already proposed moving to an expected loss impairment model. Recently, the Boards took important steps to come to a common solution. He also noted that the IASB is re-deliberating its proposal on hedge accounting based on public comments, and is midway through developing proposals that address the challenging topic of portfolio hedging.

Although it is not part of the Memorandum of Understanding between the IASB and FASB, he said that completion of the Insurance standard is a very important priority.
It is simply unacceptable that IFRS only have a stopgap standard for this very important part of the financial industry.

More broadly, the IASB head emphasized that high quality accounting standards are a prerequisite to maintaining public trust, without which no economy can properly function. IFRS provide that trust, he said. In addition to their public interest role, high quality, international financial reporting standards are a force for economic progress. When a country adopts IFRS, he posited, it is making a public commitment to maintain the highest standards for financial reporting.

As a result, for most countries, inward investment flows, the cost of capital is reduced, and the overall prosperity of a country is likely to increase. Investors similarly will be more able to diversify their portfolios and benefit from increased comparability. Moreover, IFRS supports economic growth and establishes a high-quality level playing field for globalized markets. From a macro perspective, IFRS links the new growth economies in the East with the more established economies in the West