The uproar over fair value accounting practices, which some critics have blamed for the depths of the global financial crisis, threatens to sink a long-sought move by countries around the world toward a single set of international financial reporting standards (IFRS). The U.S. Financial Accounting Standards Board (FASB) has been working with London’s International Accounting Standards Board (IASB) since 2002 toward what accounting professionals call convergence. The Securities & Exchange Commission (SEC) is expected to announce its road map for conversion sometime this month, which will probably include early adoption in 2010 for about 110 of the largest U.S. companies with business operations throughout the world.
With finance ministers from the 20 wealthiest nations set to meet in Washington this weekend to discuss ways to reform the global financial system, the time seems ripe for a move to harmonize accounting standards (BusinessWeek.com, 11/8/08) across borders, making it easier for investors to compare companies operating in different geographic regions. The major stumbling blocks, critics say, include the IASB’s lack of independent funding and its tendency to cave into political pressure.
In October, the IASB bowed to pressure from the European regulators and relaxed its stance on fair value accounting by allowing companies to transfer nonderivative financial assets out of classifications that are reported at fair value into categories that use amortized cost to value assets. IASB rationalized the amendment by saying it would create a level playing field with an existing FASB standard called SFAS 115, which permits companies “in rare circumstances” to make the very same transfer. The IASB argued the current financial crisis essentially qualifies as rare circumstances because of the illiquid marketplace for financial products.
Too Much Interfering
IASB Chairman Sir David Tweedie told a group of British members of Parliament that he considered resigning his post after going toe to toe with the European Commission (EC) over the use of fair value accounting methods and warned that further interference in accounting rules could destroy the effort to adopt a unified set of standards, according to a story in the Financial Times on Nov. 12. The IASB reportedly agreed to the change only to avoid a worse alternative—the EC’s threat to carve out sections of the IFRS relating to fair value practices.
The CFA Institute’s Centre for Financial Market Integrity opposes the IASB’s change, calling it a step backward because it doesn’t improve the quality of financial reporting. The CFA would like to see a broader application of fair value into categories where it’s currently not required, such as loans and receivables, says Patrick Finnegan, director of the Financial Reporting Policy Group at the Centre.
“If you think we have problems with transparency of balance sheets now, just wait for what’s coming [under IFRS],” warns Kenneth Scott, a senior research fellow at the Hoover Institution and a professor at Stanford University’s law school. Reclassification of financial assets “doesn’t add anything to asset value. It just fixes the books.”
http://www.businessweek.com/investor/content/nov2008/pi20081112_143039.htm?chan=investing
