Monday, January 30, 2012

IASB Chair Says US Will Come on Board with IFRS, Details Remaining Convergence Projects

Noting that wherever he goes in the world the one question asked more than any other is will the US come on board with IFRSs, IASB Chair Hans Hoogervorst emphasized that the US will ultimately come on board. While conceding that he has no privileged insight regarding the SEC’s internal decision making, the Chair said at an Ernst & Young IFRS seminar in Moscow that the SEC Chief Accountant recently said that the SEC will make a decision on IFRS in the coming months.

This is not an easy decision to make, acknowledged the IASB Chair, since the US has already developed a sophisticated set of financial reporting standards over many decades. Transitional concerns have to be carefully considered. That is why Chairman Hoogervorst has consistently supported the general approach for the endorsement of IFRSs described by the SEC staff’s work plan. He also noted that the US is committed to supporting global accounting standards under SEC policy and US Government policy. A set of global accounting standards is also the policy of the G20, of which the US is a key player.

There are many practical challenges facing the SEC in making the decision, noted the IASB Chair, and they are real. However, both the IASB and FASB have made it clear that a continued program of convergence by another name is not an acceptable way forward. With regard to the ongoing convergence plan, the IASB head noted that the only projects left to complete are on revenue recognition, lease accounting and financial instruments.

Revenue is the top line number and is important to every business. It is all the more important to get this standard right. Because the topic is so important, the Boards have taken a very careful and conservative approach in developing the revenue recognition standard. A second exposure draft has been published and the consultation period runs a full 120 days until March 2012. The new standard will replace US requirements that are generally considered to be too detailed and international requirements that are not detailed enough.

Lease accounting is a difficult area, said the IASB Chair, but one where improvements are needed. For many companies, lease obligations represent their greatest area of off balance sheet financing. These transactions must be accounted for in a way that is transparent to investors. It seems odd that investors must guess what a company’s liabilities from leasing are, he noted, even though management has this information at its fingertips. These obligations can be substantial, he added. The boards are finalizing the revised proposals and expect to publish a further exposure draft for public comment shortly.

The final project is financial instruments. This project was always going to be difficult, he said, adding that it took more than ten years to develop IAS 39, the existing financial instruments standard. Doing it midway through the worst financial crisis in 80 years has made it even harder. Also, the IASB and FASB have been pulled in different directions, which has made achieving convergence very challenging.

Some difficult choices remain to be made, the Chair averred, beginning with classification and measurement. The Board set out to replace IAS 39 with an entirely new standard. The first part of this work was completed in less than a year, with the issuance of IFRS 9, which the IASB Chair described as a very good standard. Also, the complexity associated with IAS 39 has been reduced.

Meanwhile, FASB has been refining its own approach on classification and measurement. FASB responded to feedback on its exposure draft and moved from a full fair value approach to a mixed measurement model. There are still differences in the Boards’ positions, said the IASB chief, but they are ``not a million miles apart.’’

On impairment, after exploring a number of alternative approaches, the IASB and FASB are finally on the same page with a workable model. The Boards recently agreed on an approach that divides expected loan losses into three categories, he said, referred to by staff as “The Good, The Bad and The Ugly.” He is hopeful that the Boards are now in a position to move quickly to the exposure draft stage. He expects the Boards to finalize this phase of the project before the end of the year.

On hedging, the IASB has come up with a general model that has been very well received and will soon publish on its website a staff draft of the model. This will give FASB additional time to take a closer look at the IASB proposal. The IASB is convinced that its hedging model gives investors a more reliable view on the economic reality of modern business practices. By redressing accounting mismatches it gives investors a much better view of the way in which companies hedge their economic risks. This work will also establish the underlying principles for macro hedging, noted the IASB Chair, which will be subject to a separate exposure draft.