Monday, November 23, 2009

Proposed U.S. Law Changed, FASB Independence Maintained

A U. S. Congressional committee last week removed language from an bill that would have given a new regulator power to oversee FASB standard-setting activities for U.S. GAAP.

The legislation, from the House Financial Services Committee would have transferred the SEC's accounting standards oversight authority to a proposed new regulator with a mandate to take an active role in accounting standards that it deemed could pose systemic risks.

The SEC has statutory authority to establish financial accounting and reporting standards for publicly held companies under U.S. law. Historically, however, the SEC has supported FASB’s independence and relied on FASB to set accounting standards.

The amendment passed Thursday acknowledged that the proposed systemic risk regulator that would be created under the bill would have the ability to comment, like other interested parties, on FASB standards-setting issues.

The AICPA, the Center for Audit Quality (CAQ) and many state CPA societies opposed earlier versions of the legislation and the CAQ held a joint press conference to highlight opposition to a legislative proposal that they said could put bank regulators in control of U.S. accounting standards and circumvent the key role of due process in standard setting.

Earlier in November, AICPA President and CEO Barry Melancon sent a
letter to the leadership of the House Financial Services Committee to state that the Institute is “strongly opposed” to any legislation that would “undermine the independent accounting standard process as currently carried out by FASB.” Melancon noted that the SEC and FASB “have made great strides” to improve financial reporting, and that if Congress were to follow through, “it will be viewed by many as disregard for the interests of investors.”

The CAQ, the U.S. Chamber of Commerce and the Council of Institutional Investors expressed similar opposition to the idea.

Tuesday, November 17, 2009

Accountants to Politicians, Bankers: Hands Off Accounting Standards

Leaders of the American Institute of CPAs and the Center for Audit Quality told legilators that bankers should not regulate accounting.

The accounting and auditing organizations are worried about proposed legislation setting up a systemic risk regulator for the financial sector. The legislation proposes creation of an oversight council that would have the ability to change accounting standards in the event of a crisis—replacing the FASB as SEC’s acconting standard-setter.

The Centre for Audit Quality states that standards are for the benefit of investors so that they can get the information that they need so that they can make valid investment decisions, and that the SEC acts as an investor advocate and is the right oversight party for helping the FASB maintain independent standard setting. Having financial and banking regulators be part of that process with veto power over accounting and auditing standards is not a good model. Particularly in this time of financial crisis, it is a bit ironic that we would be talking about watering down the process that’s designed to protect investors.”

AICPA president and CEO Barry Melancon noted that banking regulators already have the ability to adjust capital requirements and the SEC can suspend accounting rules when needed, as the SEC has the ability to suspend accounting rules, even without a crisis situation. Accountants fear a circumvention of the rule of due process in the accounting standard-setting process.

The legislation would go against SEC chair Mary Schapiro’s recent warning against interfering with the independence of the accounting standard-setting process, which seh referred to as “race for the bottom”.

Monday, November 16, 2009

Politics and Accounting: EU Delays Adoption of Fair Value Accounting Rule Changes

Politicians in the European Union have held up a radical overhaul of accounting rules for banks and insurers which came into force yesterday across most of the non-U.S. accounting world.

Politics comes to the fore in this as the rules have been postponed at a time when the commission itself is a lame duck because the commissioner’s job will come open with the new Commission beginning next year. Diplomats in Brussels say France is interested in the internal market commissioner's job in the next Commission.

The move highlights a major split among European financial institutions over the fair value new rules.

Analysts say some French, German and Italian banks with large investment banking activities would be hit disproportionately by the changes, forcing them to book losses on large holdings of derivatives.

The decision by the European Commission to delay the changes within Europe has angered other banks in the region who fear they will be put at a disadvantage compared to international peers.

The International Accounting Standards Board recently published major changes to the rules on fair value accounting, where assets are marked to market prices. Supporters of the new rules say this makes reporting more transparent. Critics believe fair value rules made the financial crisis worse by forcing banks to take losses on assets when markets fell.

The IASB fast-tracked the changes in response to calls by the G20 to make the changes by the end of the year. The European Commission said it would not adopt the changes until it had carried out an in-depth analysis, and would consider adoption in the new year.

The decision means that European banks and insurers will not use the new rules for their 2009 accounts while companies in more than 80 countries outside the EU will be required to do so.

Friday, November 13, 2009

IASB Issues New Standard on Financial Instruments

The International Accounting Standards Board (IASB) issued today a new International Financial Reporting Standard (IFRS) on the classification and measurement of financial assets.

Publication of the IFRS represents the completion of the first part of a three-part project to replace IAS 39 Financial Instruments: Recognition and Measurement with a new standard—IFRS 9 Financial Instruments.

The second part, the impairment methodology for financial assets has been exposed for public comment, and proposals on the third part, on hedge accounting, continue to be developed.

The new standard enhances the ability of investors and other users of financial information to understand the accounting of financial assets and reduces complexity – an objective endorsed by the Group of 20 leaders (G20) and other stakeholders internationally.

IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets.

The new standard also requires a single impairment method to be used, replacing the many different impairment methods in IAS 39. Thus IFRS 9 improves comparability and makes financial statements easier to understand for investors and other users.

The effective date for mandatory adoption of IFRS 9 Financial Instruments is 1 January 2013. Consistent with requests by the G20 leaders and others, early adoption is permitted for 2009 year-end financial statements.

To read the standard, interested parties wilI need to purchase it hard copy from the IASB or subscribe to eIFRSs at

IFRS: Political Sharks in the Waters

Recently the G-20 has taken an initiative in pushing for global accounting standards—specifically nudging the U.S. toward converging GAAP with IFRS. They stated that this initiative is important to restoring trust in the global financial system.

Sharks are circling in the IFRS convergence water—political sharks in the form of governments that want to accept greater political control of the accounting standard-setting process.

French minister Christine Lagarde plans to lobby other G-20 finance ministers meeting in Scotland this week and France seems determined to block the European Union's adoption of a new accounting standard for financial instruments. If France’s initiative succeeds, the goal of global accounting convergence will face a serious setback.

The IASB, which set rules for Europe and much of the rest of the world, has already bent over backwards to meet French objections over a replacement for IAS39, the accounting rules for financial instruments that were much criticized during the crisis. For example, the IASB agreed to fast-track changes limiting the use of mark-to-market accounting. The IASB also controversially agreed its new rules should apply only to financial assets and not liabilities, leaving in place widely discredited rules letting banks mark their own debt to market.

The IASB's new standard is widely recognized as an improvement on IAS 39. The European Financial Reporting Advisory Group last month endorsed the new standard -- a first step toward EU ratification. Yet Paris still isn't satisfied.

Some French objections are technical. Although the new standard would mean less fair value accounting, Paris doesn't think the reduction goes far enough, particularly in relation to derivatives -- a major concern to French banks with large exposure. French and Italian members criticized IASB for its piecemeal approach to reform, even though it was done this way to address French concerns.

Paris's real objection is to the IASB itself, which it believes is too focused on investor interests and not sufficiently accountable to politicians. Never mind that the G-20 in Pittsburgh specifically endorsed the independence of standard-setters. Never mind the G-20 also endorsed efforts by the IASB to improve its accountability by establishing a monitoring board and consulting more widely with stakeholders such as regulators. Ms. Lagarde's objective is a greater role for national governments.

Ms. Lagarde stands little chance of convincing the G-20, with most governments accepting that rules must be free from political interference to carry credibility with investors. But she may have more luck with the European Commission, which is once again threatening to introduce European "carve-ins" to existing rules if the new standard isn't agreed to. Instead of tighter convergence on accounting, that would lead to accounting fragmentation.

Thursday, November 12, 2009

High Profile Accounting Monitoring Board for IFRS Hints at Support for Convergence from U.S.; SEC's Schapiro is a member

Talks to harmonise standards receive boost from a high-powered international oversight body this week.

The oversight board, known as the Monitoring Board, said in a statement that it was “pleased” by the approach of both boards.

The full statement:

“The Monitoring Board welcomes the commitment of the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to implement enhancements to provide greater transparency to the standard setting process and to increase their efforts to reach conclusions in these major projects.

The commitment of the IASB and FASB in the joint statement issued on 5 November is endorsed by the Trustees of their respective oversight bodies, the International Accounting Standards Committee Foundation and the Financial Accounting Foundation.

The Monitoring Board believes that efforts of the IASB and the FASB will result in a set of high-quality international accounting standards that are not only converged but that improve the information provided to investors.
The Monitoring Board is pleased by the responsive approach of the IASB and the FASB to address concerns regarding the potential for the IASB and the FASB to reach different conclusion on the major projects in the Memorandum of Understanding and the impact that would have on the potential for global accounting standards.”

The members of the Monitoring Board are:

Hans Hoogervorst (Chairman) Chairman Hoogervorst represents the IOSCO Technical Committee on the Monitoring Board and is the head of the Netherlands Authority for the Financial Market

The Honorable Takafumi Sato Commissioner of the JFSA

Guillermo LarraĆ­n Chairman of the IOSCO Emerging Markets Committee and the Superintendencia de Valores y Seguros of Chile

Mary Schapiro Chairman of the US SEC


Sylvie Matherat Representative of the Basel Committee on Banking Supervision

Tuesday, November 10, 2009

Accounting Rules Mess Up Lending Market

New accounting rules on securitizations have messed up the market for bonds backed by credit-card debt.

No new credit card securities have been issued since the beginning of October. Such securities are created when card loans are packaged into bonds and sold to investors.

The new rules (FAS 166 and 167) require banks issuing the securities to account for them as if they were on their balance sheets. Previous treatment allowed off-balance sheet treatment for the securities.

On-balance sheet treatment gives federal regulators the right to claim those assets should the institution file for bankruptcy, effectively diminishing bondholders' claim to the assets.

On-balance sheet treatment also may increase banks’ capital requirements.

The Federal Deposit Insurance Corp. plans to discuss the issue at a board meeting Thursday and may make a ruling that clears up the confusion. The rule takes effect on the date companies begin their 2010 fiscal years.

From the start of the year until October, issuers had sold an average of about $3.5 billion worth of credit-card deals each month.

Under the old accounting standard, card issuers -- such as Citigroup, Bank of America, American Express, Capital One, J.P. Morgan Chase, and Discover packaged up pools of credit-card loans and sold them to investors.

Citigroup' said on Friday that the result should be an addition of about $154 billion to its assets, based on Sept. 30 figures.

If the Federal Deposit Insurance Corp does not change the rules regarding how it treats debt from these securities when a bank collapses, rating agencies may downgrade the securitized debt. The debt may not be rated triple-A securities.

The new debt could potentially be rated no higher than Citigroup's own ratings. That would likely lift the bank's borrowing costs when funding new credit card loans or other debt.

Until the accounting rule was changed, these securities didn't have to be included on the banks' balance sheets, so they weren't subject to the same accounting standards and disclosures required for on-balance-sheet items.

Critics of the old treatment argued this rule allowed companies to hide risky assets in these off-balance-sheet items. The new rule will force card issuers to bring off-the-book credit-card loans onto their balance sheets and set aside additional reserves to account for potential losses in these securities.

No new credit-card-backed bonds have emerged in the market since Bank of America issued a $300 million deal on Oct. 2.

Year-to-date issuance of securities made up of credit-card loans has fallen 41% to $32.3 billion from $55.2 billion a year ago, according to a Deutsche Bank note published Nov. 5.

The FDIC could issue guidelines Thursday on the accounting-rule change, which will include the grandfathering of existing credit-card securities so as to minimize the disruption caused to the issuance of such deals.

Monday, November 9, 2009

SEC Hints at U.S. IFRS Adoption

Following a joint meeting of the IASB and the FASB last week, SEC chairman Mary Schapiro provided a hint on U.S intentions on convergence with IFRS.

Schapiro read a 40-word statement last week that included the words "I am greatly encouraged by the commitment of the IASB and the FASB to provide greater transparency to the standard setting process and their convergence efforts. I believe that these efforts will result in improved financial information provided to investors."

Schapiro and the Obama administration have given
conflicting signals in the past as to what direction the SEC would take in light of the financial crisis. She has been quiet on the subject of IFRS convergence since taking over as SEC Chairman last in January. Schapiro has now provided a degree of direction for companies looking to decide whether to ramp up their IFRS adoption efforts. The SEC have said that they will decide in 2011 whether U.S. companies will switch from U.S. GAAP to IFRS. The SEC had previously hinted at what the convergence timeline would be.

road map would have the largest companies reporting under IFRS in 2014, with all public companies following by 2016. The SEC has sought feedback and received over 200 comment letters. The comments have not had an overall theme and 200 is a small number considering the number of potential stakeholders, which include public companies, investors such as pension funds mutual fund issuers, auditors, educators, and others.

Some U.S.-based companies, such as Microsoft have ramped up their convergence efforts and companies like United Technologies have made a decision to switch to IFRS ahead of the SEC's decision. These companies have significant operations in countries that have already converged, such as the EU. Ultimately they will save on accounting and audit costs by converging.

The SEC has previously indicated that there are a number of significant
issues to be resolved including working out convergence paths for differences between IFRS and U.S. GAAP on critical issues and funding and governance.

Thursday, November 5, 2009

SEC Calls for Less Words, More Substance in Financial Reporting

The SEC has called for corporations to stop providing thousands of pages of mind numbing needless boiler plate information in financial reports.

In recent speeches the SEC seemed to admit to some culpability in the excessive disclosures by stating that it is looking at its rules to determine whether companies are being asked to provide the right information.

The SEC complained about companies that provide laundry lists of risks they may face in dense lengthy reports containing impenetrable legalistic language.

One staffer said that quality of analysis is not measured by the length.

The SEC has pushed for plain language reporting for years. Litigation-shy companies have not been able to simplify reporting in the way the SEC desires.

In 2008, the SEC adopted rules for mutual funds to make their prospectuses easier for investors to read, understand and access.

The agency has also convened panels to make MD&A more accessible to unsophisticated investors.

Monday, November 2, 2009

SEC Chief Accountant says SEC will Clarify IFRS Roadmap by end of Fall

Last Friday, October 30, SEC Chief Accountant James Kroeker announced that the SEC remains committed to its IFRS road map.

Kroeker said he does not know the exact date the SEC will finalize its plan some time this fall. The information was provided as an answer to a question following Kroeker’s speech at an AICPA/International Accounting Standards Committee Foundation conference in New York.

The road map provides seven milestones and a tentative
timeline. The timeline depends on resolution of several issues around the milestones.

According to Kroeker,
comment letters have shown that most stakeholders support adoption of IFRS but that there are major concerns around convergence with U.S. GAAP.

Under the road map proposal, the SEC would decide in 2011 whether to require the use of IFRS. The 2011 decision point aligns with the G20 calls for accounting standard setters “to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011.”

Key accounting issues to be resolved include joint projects on
financial instruments, financial statement presentation, leases, liabilities and equity distinctions and revenue recognition, consolidations, derecognition and post-employment benefits.

Kroeker prioritizes the list with his top three being financial instruments, revenue recognition and consolidation.

About financial instruments/fair value accounting, Kroeker also said “I believe it would be a serious mistake to take our focus off of investor needs for unbiased, transparent information in order to design what some have suggested are accounting standards that attempt to rectify the banking crisis.”.

On the
debate over fair value vs. historical cost valuation of financial instruments, per Kroeker: “it’s my personal view that it’s time to move beyond the debate over whether just fair value is relevant or cost is relevant. … It’s time to acknowledge that in some cases both sets of information are important and then how to portray that.”

With information from Journal of Accountancy