By Anne Rosivach
Speaking at a seminar in Moscow on International Financial Reporting Standards (IFRS), sponsored by Ernst & Young, Hans Hoogervorst, Chairman of the International Accounting Standards Board (IASB), said that he expected the IASB and the US Financial Accounting Standards Board (FASB) to make progress on their remaining convergence projects in the coming year. Hoogervorst also predicted that the Securities and Exchange Commission (SEC) would eventually approve IFRS for US companies.
"Both I and my counterpart at the FASB have made it clear that a continued program of convergence by another name is not an acceptable way forward. I do believe that the United States will ultimately come on board. Quite simply, they need us and we need them," said Hoogervorst.
The IASB and the FASB signed a Memorandum of Understanding in 2006 in which they agreed to develop single global standards in a number of agreed-upon areas of accounting.
Hoogervorst focused on three areas in his address: the IFRS roadmap, the prospect for global standards, and support for emerging economies.
He began his remarks by commending Russia's commitment to IFRS in full from 2012.
Hoogervorst spoke about the obstacles to achieving convergence on the three remaining projects: revenue recognition, leasing and financial instruments, and the new insurance project. The need for a second exposure draft for revenue recognition, revised proposals for lease accounting and areas where the two boards are working separately can all be seen as evidence of problems.
Hoogervorst described the current status of the projects in general terms:
Revenue recognition – "Revenue is the top line number and is important to every business. We have published a second exposure draft and the consultation period runs a full 120 days until March 2012."
Lease accounting – "For many companies, lease obligations represent their greatest area of off-balance sheet financing," Hoogervorst said. "All we ask is that these transactions are accounted for in a way that is transparent to investors. The boards are finalizing the revised proposals and we expect to publish a further exposure draft for public comment shortly."
Financial instruments – "This project was always going to be difficult. . . . We and the FASB have been pulled in different directions. . . . We now have some difficult choices to make, beginning with classification and measurement."
- IFRS 9: IASB issued IFRS 9, the replacement for IAS 39, independently at the end of 2009. Hoogervorst said that some revisions of IFRS 9 will be required because of interactions with the insurance standard. Other adjustments may be made.
- Fair value: In response to feedback on their exposure draft, the FASB has moved from a full fair value approach to a mixed measurement model. "There are still differences in our positions, but we are not a million miles apart."
- Impairment: "IASB and the FASB are finally on the same page with a workable model. We have recently agreed on an approach that divides expected loan losses into three categories, referred to by our staff as 'the good, the bad, and the ugly.'"
- Hedging: "The IASB will soon publish on our website a staff draft of our model to make sure, that, in this case as well, we have got everything absolutely right."
Insurance – "The project is challenging because different financial reporting practices have become embedded in different parts of the world. We are working with the FASB to develop a model that lifts financial reporting for insurance contracts to a common and improved level. We are committed to completing this project in a timely fashion."
Prospects for Global Standards
IFRS are now required or permitted for use by companies in more than 100 countries, Hoogervorst said. The move toward global accounting standards is seen as an essential part of the global financial reform agenda, providing the transparency on which to build a better more resilient global financial infrastructure.
"With Russia joining Brazil in fully adopting our standards," he said, "the BRICs are more than halfway there. Real progress is also underway in China and India."
Hoogervorst reported that Chinese accounting standards are now closely aligned with IFRS. India still has obstacles to overcome on the way to full adoption. Japan is expected to decide this year whether to mandate a national transition from Japanese GAAP to IFRS, and if so, when.
"That leaves the United States. . . . I do not deny that they are real," Hoogervorst said.
Support for Emerging Economies
Hoogervorst addressed the challenges emerging economies will face in adopting IFRS and the need to provide support: "International financial markets may be closely coupled, but not all markets are the same. In the United States, Japan, and many parts of Europe you see mature capital markets that are both deep and highly liquid. In other parts of the world, such as Russia, you see markets that are growing at an astounding rate but from a much lower base, so applying market-based pricing, to pick one example, can be challenging."
What Is Next?
Hoogervorst concluded by saying that a period of slowing down may be needed in global standard setting. "Our future agenda consultation recognizes that many new jurisdictions, such as Russia, have their own legitimate requests. . . . We will have to make a judicious choice here, being mindful that we do not overload our agenda. However, I suspect that after the somewhat frenetic period of the last few years, a slowing down in the pace of change would be welcomed by most if not all of our constituents," he said.