The chairmen of the Financial Accounting Standards Board and the International Accounting Standard Board appeared alongside each other Monday to discuss the status of their efforts to converge accounting standards over the past decade or more and their plans for the future as the convergence effort appears to be running out of steam.
FASB chairman Russell Golden and IASB chairman Hans Hoogervorst gave a joint presentation at Financial Executives International’s annual Current Financial Reporting Issues conference in New York. The two boards are putting the finishing touches on a converged revenue recognition standard, which they hope to release in the first quarter of 2014. However, persistent differences remain in the leasing standards project, especially as many companies object to the impact on their balance sheet of showing their lease obligations for the first time.
Hoogervorst insisted that investors abroad have told the IASB that they want to see leases on the balance sheet, but he acknowledged that FASB was hearing different feedback. “Our investors overwhelmingly support putting this stuff on the balance sheet,” he said. “The advisory group of the FASB says, no, it’s not necessary to see it on the balance sheet, but make it a disclosure. But then we’ll have 100,000 disclosures. Probably it’s best to leave it on the balance sheet and be more reasonable about disclosures. I think there can be no doubt that lots of investors want this. Also, we should not underestimate that they are all adjusting their numbers in their own way, and they often do it wrongly. What we have found out is that the multiples they use are too high, especially in the lower interest rate environment that we have now. So ironically this whole exercise might make a lot of balance sheets look better in the eyes of investors rather than worse.”
Hoogervorst said he thinks the redeliberations with FASB on the leasing standard will focus on reducing costs as much as possible. He wants to make the model simpler and is convinced it will be an important improvement to get leases on the balance sheet. “In the United Kingdom, during the financial crisis, a couple of retail chains went under because they could not renegotiate their leases,” he pointed out. “It was essentially debt hanging around their neck and it caused them to go broke. So this is really important information for investors, and we should get it out.”
Golden agreed that many investors effectively take into account the leases on the balance sheet anyway. “When we talk to investors, they all seem to put it on the balance sheet for their analysis,” he said. “The debate that Hans talked about with our advisory committee is not whether or not they thought it was an obligation. They did. They just disagreed with how the board was requiring the measurement of debt. They actually wanted to go further and consider more renewal options and more valuations around contingent liabilities, similar to what we had done in the first exposure draft. We recognize that it’s very costly and there’s a lot of uncertainty around that.”
Both board chairmen agreed that the main changes will be around lessee accounting. They hope to finalize deliberations in the first quarter of next year. As for lessor accounting, Golden remarked that the feedback they hear is that “if it ain’t broke, don’t fix it.” Hoogervorst agreed that it was of less importance. “Lessor accounting has always been of secondary importance to the project,” he said.
The two chairmen also gave an update on the insurance accounting project, which is generally seen as more important to the IASB because IFRS generally does not have as many accounting standards developed for insurers as U.S. GAAP.
“We entered this project because the insurance industry asked us to participate jointly with the IASB,” said Golden. “IFRS does not have an existing insurance model. It is widely viewed as something that the IASB needs to create. So the U.S. industry asked the FASB to get involved to try to come up with a joint improved converged solution. There have been some minor issues over the years around long duration, about unlocking assumptions, whereas today you do not unlock assumptions in long duration unless there is a loss event. And a lot of investors today say that’s where we ought to have targeted improvements related to insurance. Most investors say that the accounting for short duration, that is, property and casualty, gives them the information that they need, but they need more current measurements for long duration.”
[IMGCAP(1)]Hoogervorst said that the insurance project is of enormous importance to the IASB since much of the world does not have proper insurance accounting standards. “I think the changes in the United States to current measurement are not a minor change,” he added. “It’s a very big change, especially in the current low interest rate environment that we are in, which is basically killing the business model of life insurers around the world. It’s having a devastating impact. A lot of products need to be changed.”
Hoogervorst acknowledged that the IASB and FASB are in different places right now with development of the standards. He added that most people believe both boards’ standards will be based on current measurements and will end up much more converged than they are currently.
Financial Instruments and Private Companies
The two chairmen also discussed the status of the financial instruments project and their difference in areas such as credit losses and loan impairment. Golden indicated that FASB hopes to simplify the impairment and credit loss standards, and FASB’s staff is modeling different scenarios, including under the IASB’s approach.
Hoogervorst called the U.S.’s application of the incurred loss model “extraordinarily aggressive,” and added that the IASB doesn’t favor FASB’s approach of upfront loss-taking, noting that it could produce some strange results.
Golden acknowledged that the U.S. is coming from a different place than the IASB in its cost-benefit analysis on incurred losses.
In terms of the hedging standards part of the financial instruments project, the two boards appear to be moving more toward finding common ground. Hoogervorst said preparers are “wildly enthusiastic” about the IASB’s hedging standards, and Golden indicated that FASB may move to follow the IASB’s approach, using its model as a starting point.
[IMGCAP(2)]Golden and Hoogervorst also discussed the accounting standards for private companies, with Golden talking about the work of the Private Company Council and how its recommendations in areas such as goodwill impairment were influencing the standards for public companies. Hoogervorst highlighted the IASB’s set of streamlined standards for small and midsize entities, IFRS for SMEs, which he credited former IASB member Paul Pacter of the U.S. with practically creating and promoting single-handedly. The standards have caught on abroad, but Golden pointed out that few companies in the U.S. are using them, even though the American Institute of CPAs allows CPAs to use them.
Asked about their future agendas, Golden said they need to be aligned more with the IASB on both the conceptual framework and the disclosure framework to stay aligned in the future. FASB also plans to start working on standards for discontinued operations. A FASB advisory committee has been polling accountants about what they would like to see the board tackle next. Among the most popular suggestions are pension accounting and employee benefit plans, and the U.S. may look to the work of the IASB on pension accounting.
“There has been a significant change in our country as companies provide pension benefits in cash balance plans, and yet there is no GAAP in the U.S. about how you do a cash balance plan,” said Golden.
Hoogervorst said the IASB is working closely with regulators on reducing disclosure overload as part of its disclosure framework. It is also trying to reduce the number of differences in the ways various countries are applying IFRS.
“We are working very closely with global, regional and national regulators on efforts to get more even application of IFRS around the world,” he said. “We have done some in-depth research about that. Everybody says they apply IFRS, but they all have their own version of IFRS.”
He noted that now that there is a single set of standards in Europe, it is much easier for national regulators to compare notes about the application of the standards in various countries. “Yes, they do see uneven application, but now they can finally do something about it,” he added. “If you have all these different languages, there’s no way to start.”
Later during a press conference after his presentation, Hoogervorst elaborated on the differences that were being seen in application of the standards. “Since the spread of IFRS, the number of languages has become smaller and smaller,” he said. “We won’t give up on our goal of a single set of global standards. There are those who would rather see that they remain as close together as possible, but the economic blocs have their own versions.”
He noted that he had been concerned when the European Commission considered creating its own version of IFRS earlier this year. “To be frank, when Mr. [Philippe] Maystadt, the former Belgian Minister of Finance, was asked by Commissioner [Michel] Barnier of the European Union to take a look at the whole endorsement process, I was rather worried that might be his conclusion, that now that the United States is not on board, Europe should make it much easier to carve in or to carve out and make its own variations of IFRS,” said Hoogervorst. “If this were to happen, I think that could be the beginning of the end of IFRS as a global set of standards. Much to my relief, in his final report, he made it very clear that would be a very bad outcome.”
Hoogervorst was also asked by Accounting Today about the pressures that the IASB was coming under in Europe to add the concept of “prudence” to its standard-setting policy.
“In our previous conceptual framework, we had a concept of prudence,’ which was basically saying if you are in doubt and there is a lot of uncertainty, be cautious and make sure you do not overstate assets and you do not understate liabilities,” he explained. “At the same time, this was not an excuse for a bias in accounting toward conservatism or a bias toward provisioning and creating hidden reserves. That’s not what we want.”
In a previous revision of the conceptual framework, the reference to “prudence” was struck out because the board felt at the time it was seen as an alibi for a bias toward conservatism in accounting and it stood in the way of neutrality. “I think if I had been a member of that board, I wonder whether I would have struck that out,” said Hoogervorst. “I think the concept, as it was being described, was very clear that it was not an infringement on neutrality. It made a lot of sense. I think if you look at our standards, for example the revenue recognition standards, there are a lot of elements of prudence there, say in the collectability threshold. But there are a few investors in England, and they have found some followers of the usual critics of IFRS, which can be found in France, for example. They have basically said, Since the removal of this concept, IFRS has been based too much on fair value accounting standards and subject to optimism, etc., etc.’
“I don’t believe that to be true at all,” said Hoogervorst. “Fair value accounting can actually be extremely prudent because it gives information about assets going bad very early on. The prudence concept was removed after the onset of the financial crisis and had absolutely nothing to do with it. But it has become a sort of political discussion, and we are asked by many people to reconsider it in the reconsideration of the conceptual framework. We haven’t really started debating it yet. I’m sure we will give it serious consideration. Whether it will be included or not, I don’t think it will make much difference in practice.”
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