G20 calls for acceleration of global convergence

A major driver of the current progress being made in accounting standard-setting are the recommendations made by the G20 leaders in their declarations following their meetings in November 2008 and April 2009. Having been established in 1999 to bring together the finance ministers and central bank governors of twenty systemically important industrialised and developing economies to discuss key global economic issues, recommendations made by G20 clearly carry substantial weight. G20 met again in late September and called on international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards and complete their convergence project by June 2011.

G20 Recommendations and IASB Response

The International Accounting Standards Board (IASB) wrote to G20 prior to its September meeting and the following paragraphs summarise its comments in relation to both the G20 recommendations arising from their April meeting and the IASB response, with the focus being more so on the further steps to be completed.

Recommendation 1: Accounting standard-setters should improve standards for the valuation of financial instruments based on their liquidity and investors'' holding horizons, while reaffirming the framework of fair value accounting.

Following the amendments to standards made in late 2008 in relation to reclassification of certain financial instruments, a number of developments have taken place in recent months with the most significant being the publication by the IASB in May of an exposure draft on fair value measurement. A final standard on fair value measurement is expected to be published in the first half of 2010.

Recommendation 2: The standard setters should reduce the complexity of accounting standards for financial instruments.

Following agreement earlier in 2009 between the IASB and the Financial Accounting Standards Board (FASB) to undertake, on an accelerated basis, the replacement of existing financial instruments standards (IAS 39 in the case of the IASB) progress has been made:-

• Before the end of 2009 the IASB will publish a final standard on the classification and measurement of financial instruments in time for 2009 year end financial statements - the exposure draft was issued in July.
• In October the IASB will publish proposals on the impairment of financial instruments, including consideration of an expected loss model.
• In December the IASB will publish proposals on hedge accounting.

Recommendation 3: Standard-setters should strengthen accounting recognition of loan loss provisions by incorporating a broader range of credit information.

The IASB is meeting on a regular basis with the Basle Committee on Banking Supervision and has received recommendations from the Financial Crisis Advisory Group. As stated above, the IASB intends to publish proposals on impairment in October.

Recommendation 4: Standard-setters should improve accounting standards for provisioning, off-balance sheet exposures and valuation uncertainty.

In addition to the measures already referred to, the IASB has published proposals regarding both consolidation and derecognition with final standards expected to be published in the coming months. A focus of both will be the accounting for off-balance sheet exposures.

Recommendation 5: Standard-setters should make significant progress towards a single set of high quality global accounting standards.

The IASB and the FASB will work as a matter of priority on projects related to the Joint Memorandum of Understanding with the objective of achieving convergence of IFRSs and US GAAP by 2011. This will assist with providing an orderly transition for several countries intending to adopt IFRS around that time.

Recommendation 6: The International Accounting Standards Committee Foundation should improve the involvement of stakeholders, including prudential regulators and emerging markets, through the IASB''s constitutional review.

Several measures have been taken, including public round-table meetings in various global locations, to enhance the consultation process on the IASB''s constitutional review.

Improving Financial Regulation

The Financial Stability Board (FSB), comprising senior representatives of national financial authorities of leading countries, also submitted a report to G20 - ''Improving Financial Regulation'' - prior to their September meeting. In commenting on accounting, the FSB expresses some concern regarding the divergence of approaches currently under consideration by the IASB and the FASB in relation to:-

• Improving and simplifying financial instruments accounting - the FASB approach proposes increased use of fair value accounting while the IASB is proposing a mixed model of fair value and cost.
• Provisioning and impairment - the IASB plans to propose a standard using an expected loss model, whereas the FASB is still considering a fair value approach.
• Off-balance sheet standards - the IASB''s proposal on derecognition moves away in certain respects from the current position under both IASB and FASB standards.

There are other continuing differences in accounting between the IASB and the FASB which pose problems, including the requirements for offsetting assets and liabilities.

The FSB is urging renewed efforts by the IASB and the FASB to achieve the objective of converged standards, and refers to the issuance by the Basle Committee for consideration of principles for the revision of accounting standards for financial instruments, agreed by all G20 banking supervisors, that address issues related to provisioning, fair value measurement and the related disclosures.

Additional work in all of these areas is urgently needed in order to meet the important objectives of convergence, transparency and the mitigation of pro-cyclicality.

Global Convergence of Standards

While clearly there are many issues yet to be resolved if globally accepted standards are to be achieved, substantial progress is being made on an overall basis towards global convergence.

Since 2001, IFRS has become accepted or been adopted for public reporting purposes in over 100 countries, including the 27 member states of the European Union. Others scheduled to follow in the next few years include Argentina, Brazil, Canada, Chile, India, Korea, Singapore and Mexico, with Japan also taking positive steps towards adopting IFRS. As more and more countries adopt IFRS, a robust conversation has begun about whether the United States should take this step or otherwise participate in a process that leads to the acceptance of more uniform global accounting standards for use in the U.S.

A recent Deloitte survey of US financial executives shows encouraging signs with 89% of respondents expressing the view that mandatory IFRS conversion in the U.S. is likely and 80% of the companies already taking action. These results, compared to trends indicated by a similar survey earlier this year, are a strong indication that attitudes and dynamics around IFRS are changing in the U.S.

The U.S. Securities and Exchange Commission received more than 200 comment letters to its proposed 'roadmap' that would have U.S. companies filing financial statements in accordance with IFRS commencing in 2014 with the option for some companies to adopt IFRS earlier. The overall view from the comment letters is consistent with the Deloitte survey in that there is very clear agreement there should be a single set of standards but that various milestones and pillars would need to be put in place to achieve that goal.

In conclusion, the opening preamble of the leader's statement from the September summit of the G20 nations expresses the view that the corner is being turned but that there is still a long road to travel - "we meet in the midst of a critical transition from crisis to recovery to turn the page on an era of irresponsibility and to adopt a set of policies, regulations and reforms to meet the needs of the 21st century global economy."

Reflecting on this, it is clear that the accounting standard-setters must play their part in ensuring that standards are converged and developed in a manner which will ensure that they are fully accepted on a global basis as the reporting medium. In addition to the fundamental economic, regulatory and other initiatives being taken, accounting standards which lead to understandable, transparent financial reporting of the highest quality on a globally uniform basis are essential to completing the full circle.

Brendan Sheridan, Director of Financial Reporting Services, Deloitte