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Accounting standards rules: hitting the wall

Back in November 2008, long before the accession of Barack Obama to the US
presidency, world leaders gathered together under the G20 banner to forge a
common response to the financial crisis.

As all accountants know, a lack of transparency in balance sheets has been
named as a key culprit, and the G20 ordered action. And by the standards of
international initiatives, this was to be carried out quickly, with many actions
to be taken by 31 March.

Among these were global accounting standards bodies, enhanced guidance on
securities valuation; and accounting standards organisations ‘significantly
advancing’ work on fixing weaknesses in accounts and disclosures for off-balance
sheet vehicles.

The same organisations were to improve disclosure requirements for complex
financial instruments. A review of the governance of International Accounting
Standards Board (IASB) was to take place to boost both its transparency and
links with governments. And private sector bodies were to agree guidelines for
running hedge funds.

Looking beyond the March deadline, the G20 communique said: ‘The key global
accounting standards bodies should work intensively toward the objective of
creating a single high-quality global standard.’

And there has been a response. The London-based IASB and America’s Financial
Accounting Standards Board (FASB) set up a Financial Crisis Advisory Group
(FCAG) to consider financial reporting issues arising from the global financial
crisis in a broad brushstroke way.

Just before Christmas the IASB published proposals to require additional
disclosures on all investments in most debt instruments. It also released
proposals to clarify the accounting treatment for embedded derivatives and it
moved to improve off-balance sheet controls through proposals to strengthen
requirements for identifying which entities a company controls. A complete
‘exposure draft’ accounting rules ­ which require companies to value their
assets at current market value — is to be undertaken by the IASB by the second
quarter this year.

So detailed work is underway, but how much of the planned reforms will end up
in accounting practice laws and when will they be enacted?

The answers to these questions differ markedly by region.

In the European Union, which generally writes IASB guidance into its
accounting acquis, there will be pressure to adopt these new rules as quickly as
it can. For the EU this means using its so-called comitology procedure to get
laws past committees of member states’ national experts. As long as there are no
objections from the European Parliament and the European Commission, such
changes could become EU regulations within six months.

Speaking to Accountancy Age, EC internal market spokesman Oliver
Drewes said: ‘We are looking at these matters as a high priority. We’re not
coming into this with any fixed dogma either. We feel that, faced with the
current developments, we need to look into every dark corner of every room. And
we strongly feel that we need to look for an international solution.’

With the Obama presidency in its infancy, IASB changes will need FASB backing
to have much chance getting through Congress in the USA. American debates on
these issues have been widely reported.
But what of the Far East, which has also been suffering from the credit crunch?

The Accounting Standards Board of Japan (ASBJ) has worked closely with the
IASB on common standards and the Tokyo Agreement of August 2007 set out a
framework for complete convergence of practices by June 2011. That said, the
country’s accounting profession is not yet based on International Financial
Reporting Standards (IFRS) and now, because of the credit crunch, the goalposts
look certain to be moved again. According to Atsushi Itabashi, from the ASBJ’s
technical division, a key difference is the higher level of disclosure that is
required by IFRS compared to current Japanese standards. This bar will now be r
aised further.

With markets and indices taking a battering everywhere, the fair value issue
is another possible sticking point on convergence.

In Japan the definition of fair value accounting is similar to the US and
Europe. However, there is confusion over when market values for assets should be
used.

‘I don’t think there’s that much difference on fair value. The basic
definition in Japan is the same,’ said ASBJ’s Itabashi. ‘When a market price
should be applied or not still seems open to interpretation, however.’

While Japanese financial institutions have avoided some of the worst excesses
of their western counterparts, the country’s economy is suffering. This looks
unlikely to result in unconditional approval of the IASB’s proposals though.

‘The credit crunch has focused everyone on the need for international
standards but the IASB’s new proposals are only proposals so far ­ it’s
difficult to say at this stage how they will impact on practice in Japan,’ said
Itabashi. ‘There is opposition internationally to some of them anyway. We’re
taking a wait-and-see approach.’

Meanwhile, in China, despite the fact that this emerging market giant has
been pulling its new Accounting Standards for Business Enterprises (ASBE) into
line with IFRS, there appears limited. This is because the country has been
‘extremely conservative’ about licensing the kind of complex financial
instruments that have wreaked havoc elsewhere, says Chris Devonshire Ellis,
Beijing partner at accounting firm Dezan Shira.

ASBE became mandatory for listed Chinese enterprises from January 2007. Small
and medium-sized firms are encouraged to adopt the ASBE, but there is no fixed
deadline, says Dickson Leung, a partner at Beijing-based Lehman Brown and board
member of the Hong Kong Chamber of Commerce in China.

Leung says there is ‘90% convergence’ between the ASBE and IFRS but points to
several key differences.

ABSE uses a cost model while the IFRS uses a fair value system, for example.
Also, China doesn’t apply the IFRS asset impairment principle ­ ASBE prohibits
the reversal of any loss in subsequent years, once it is recognised in the
accounts.

Baolang Chen, a Shanghai-based partner at PricewaterhouseCoopers, points to
another divergence between Chinese and IFRS codes: grants to and transactions
between state owned firms need not be disclosed under ASBE rules.

The ASBE standards are part of China’s efforts to build global companies.
‘Under ASBE a firm should produce financial statements that are the same as
those of a company that applies IFRSs,’ said Leung. He added that the Chinese
authorities blame fair value accounting for having caused a slide in asset
values.

‘This decline has evolved into a dangerous downward spiral… and rising asset
prices have the opposite ­ and equally pro-cyclical ­ effect.’

Any swift union of Chinese and western accounting systems over fair value
seems unlikely.


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