Sunday, November 16, 2008

G20 and International Financial Accounting Standards

Will IFRS have a larger role in the future of providing transparency in financial reporting?

The Munk Centre for International Studies, Trinity College at the University of Toronto in Toronto Canada has been monitoring the G20 discussions on the credit crisis on its G20 information site. You can find a copy of the Declaration of the Summit on Financial Markets and the World Economy November 15, 2008, Washington DC on its site.

For a change accountants and accounting at least when it came to external financial reporting were not blamed for the credit crisis. Much of the blame was given to poor control of risks and to inadequate regulation, in a number of aspects. (Of course, there are many accountants in those areas as well). I am not as familiar as I perhaps should be with the Sarbanes Oxley - SOX- rules and their Canadian equivalents. It is curious to me that controls seemed to be inadequate to catch some of this activity. There will be a lot of second guessing going on with the benefit of 20/20 hindsight. The important thing now is what to do to fix problems and develop solutions to prevent further issues.

The Declaration does however set out some tasks for accountants over the next number of months. A key recommendation is to improve transparency:

Strengthening Transparency and Accountability: We will strengthen financial market transparency, including by enhancing required disclosure on complex financial products and ensuring complete and accurate disclosure by firms of their financial conditions. Incentives should be aligned to avoid excessive risk-taking.

This is elaborated on in more detail as follows:

G20 Information Centre. 2008 G20 Finance Documents

Strengthening Transparency and Accountability

Immediate Actions by March 31, 2009

  • The key global accounting standards bodies should work to enhance guidance for valuation of securities, also taking into account the valuation of complex, illiquid products, especially during times of stress.
  • Accounting standard setters should significantly advance their work to address weaknesses in accounting and disclosure standards for off-balance sheet vehicles.
  • Regulators and accounting standard setters should enhance the required disclosure of complex financial instruments by firms to market participants.
  • With a view toward promoting financial stability, the governance of the international accounting standard setting body should be further enhanced, including by undertaking a review of its membership, in particular in order to ensure transparency, accountability, and an appropriate relationship between this independent body and the relevant authorities.
  • Private sector bodies that have already developed best practices for private pools of capital and/or hedge funds should bring forward proposals for a set of unified best practices. Finance Ministers should assess the adequacy of these proposals, drawing upon the analysis of regulators, the expanded FSF, and other relevant bodies.

Medium-term actions

  • The key global accounting standards bodies should work intensively toward the objective of creating a single high-quality global standard.
  • Regulators, supervisors, and accounting standard setters, as appropriate, should work with each other and the private sector on an ongoing basis to ensure consistent application and enforcement of high-quality accounting standards.
  • Financial institutions should provide enhanced risk disclosures in their reporting and disclose all losses on an ongoing basis, consistent with international best practice, as appropriate. Regulators should work to ensure that a financial institution' financial statements include a complete, accurate, and timely picture of the firm's activities (including off-balance sheet activities) and are reported on a consistent and regular basis.
One of the silver linings in this crisis, if there is one, is the degree of cooperation among standard setters and the matters covered in the Declaration are very much being addressed and continue to be addressed. Whether countries choose to converge their standards with the IFRS or choose to convert entirely a lot of work is going on. During the discussions on the responses to the credit crisis the IASB, FASB and the SEC have been in close coordination. The IASB has been very responsive to the demands of the international community and has a separate project on the credit crisis.

As I reported on Friday night, the SEC has released its proposed IFRS Roadmap for comment
It was interesting that this document was posted without any fanfare or news release and also after hours. It is not a slam dunk that the US will convert to IFRS. There are many detractors who do not believe that IFRSs are as rigorous as US GAAP, among a number of other objections. In any event, there will continue to be convergence between the FASB and the IASB following the Norwalk agreement on convergence. Undoubtedly those who favour complete conversion will be make their case over the next few months. "We live in interesting times".

For an alternative view on this G20 Declaration you can read the recent article in the blog Accounting Onion. Tom Selling does not agree with adopting the IFRS in the USA.

As I say the game is afoot.

For a more positive view point you can refer to the recent article in the FEI US Financial reporting blog.

The Declaration is worth a read I believe. Let's hope that Regulators, especially in the USA put some real meat on this. Help please we need it.

IFRS Exorcist to speak at IFRS Summit in January 2009

You may be interested that I will be presenting at an IFRS seminar in January. Readers of this blog are entitled to a 25% discount. Please come to the site for more information.

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