Standard setter minutiae kicks off conference

PWC’S MEET the Experts conference brings together financial reporting heavyweights for an annual update and high-level debate, starting with the latest developments in accounting standards.

Stephen Cooper of global standard setter the IASB and Russell Golden from US equivalent the FASB acknowledged hurdles on the road to convergence, saying sometimes the process is “painful”.

“IASB has a principles-based approach to determining the line, FASB has a rules-based approach, but we agree on where the line is,” Golden said.

Challenges lurk in reconciling conceptually perfect standards with models that can be applied and audited at a reasonable price, he continued, pointing to early lease accounting ideas that would have proved hugely costly.

Lease accounting

In outlining the complexities of lease accounting, Golden examined the minutiae of factors requiring consideration, almost as if to excuse the tardiness of standard setters slogging towards convergence.

Cooper talked of the “difficulties of brainstorming in the public eye”, saying it is hard to return to an already-considered option – a single rather than dual accounting model, in this case – without “looking like you’re going in circles”.

Currently, the standards setters favour a lessor model, whereby the lessor bestows the right to use an asset upon the lessee in return for the right to receive lease payments, while retaining residual interest.

Dubbed the receivable and residual approach, this would see the asset and lease payments recorded on the balance sheet, while the income statement would show profits made through transferring the right of use and the accretion of residual interest income.

Cooper applauded the FASB’s decision to remove detailed industry-specific guidance as a step towards convergence, before launching into “more challenging outstanding issues” – the three-part financial instrument standard.

Financial instruments

The standard setters seem to have come slightly unstuck when it comes to hedge accounting. The FASB “has not devoted significant resources” to it and is instead focusing on impairment.

The IASB is paying closer attention, but Cooper admitted “it’s one of the areas where I really don’t know what the answer is”, but both insist convergence will eventually be possible.

Matters seem even worse when it comes to offsetting assets and liabilities, with US standard setters voting in favour of a netting exception that diverges US GAAP from international financial reporting standards.

However, there is “tentative agreement” on disclosures and Golden – a proponent of the netting exception – underlined the importance of this unity.

On these less well-developed standards, the two boards diverge both in model and in progress, with the FASB dragging one step behind on financial instruments, meaning the IASB would have to wait for its counterpart to re-expose the standard if it wants to protect the convergence agenda.

Insurance

Moving on to even trickier projects, insurance is “one of the most frustrating standards I have been involved in over the past four years,” said Cooper.

Huge accounting differences around the world have made it enormously tricky to find consensus, he continued, pointing to analysts’ “frustration” at the lack of progress made.

Complex concerns

Feedback on unfinished standards indicates setters’ early efforts are often too complex, with users complaining about the difficulties of real-life application, sending standard setters back to the drawing board.

Questions from the audience showed experts are concerned with significantly polarising issues between the FASB and IASB such as recycling and hedging. The differing timetables are also causing “headaches”, but both experts insisted the show must go on.

They strongly denied there is a “date when we should give up on convergence”, saying setting a date leads to “rushing and reduced input from stakeholders”.

“Let’s achieve what we set out to do on the priority projects and then take stock of where we are,” Cooper suggested.

Overall, the standard setters presented a picture of great efforts towards unity mired in stubbornly complex issues and entrenched board positions.

While it seems both the will and certainly the effort are there, the looming convergence deadline illuminates the differences between the two in terms of both outlook and progress.

As early problems are solved, the size of the challenge involved becomes clearer –there are fewer outstanding issues, but those that remain are grimly intractable.