Friday, November 13, 2009

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.

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