Hoogervorst gets tough over IASB framework deadline

THE CHAIRMAN OF THE IASB has vowed that the standard setter’s conceptual framework project will not be blighted by “dysfunctional” processes that have stymied the pace of other reforms.

In a stinging criticism of the board’s inability to deliver its projects to deadline, Hans Hoogervorst said the IASB’s credibility is being damaged by the duration of some of its projects.

“It’s indicative of dysfunctional working processes and dysfunctional decision-making,” Hoogervorst said. “Part of the problem is that we have broken deadlines so often that nobody believes them anymore. I am determined that this is not going to happen to this project.”

Speaking at the IASB’s September board meeting, Hoogervorst said revising the framework that underpins the way the IASB develops and rewrites accounting standard was urgent because the board is “struggling with so many basic questions in terms of measurements”.

Hoogervorst said the project should be treated as the board’s “main deliverable” focus over the next three years, but conceded there was scepticism about the IASB’s ability to deliver.

“Everybody who talks about the conceptual framework expects us to take at least 10-20 years to finish it,” he said, before saying he wanted to see the project finished before the end of his tenure. “We need to work in a disciplined way and we can get this done.”

Veiled criticsm

In a veiled criticism of the way US counterpart FASB is slowing down the push to converge global accounting standards, Hoogervorst said the IASB would benefit from working on the conceptual framework alone.

“This is the first big project that we are going to do IASB-only. That means that we are in complete control of the process. And that is going to be an enormous gain in terms of being able to be time efficient,” he said.

The IASB has been working with FASB to develop a single standard for the impairment of financial instruments for the past two years. Relations between the two boards have become increasingly frosty in recent months, with Hoogervorst previously labelling their inability to come to a conclusion as “deeply embarrassing”.

With enthusiasm for the convergence project fading on both sides, FASB recently said it will issue its own exposure draft for a new expected loss model for financial instruments. The US standard setter has been developing a current expected credit loss model since January after distancing itself from the IASB’s ‘three bucket’ approach.

The first bucket, under the IASB’s plan, would contain ‘healthy’ assets, those for which banks expect a reasonable return and need only make minimal provisions. Bucket two is reserved for assets with some level of impairment, but which are not completely useless, while bucket three is for assets that are undeniably ‘bad’.

Throughout its life, the asset can move between buckets according various triggers.

Dysfunction

The “dysfunction” criticised by Hoogervorst may have been aimed at the IASB’s relationship with FASB, however critics of the current incurred loss model used by banks to value their assets and loans under IFRS claimed the comments were emblematic of the flawed standard developed before Hoogervorst’s tenure.

“This is the first sensible thing to come out of the IASB in a long time. It takes dysfunctional people to produce dysfunctional standards,” says Tim Bush of investor body Pirc. “This is the legacy of a single-minded predecessor who tended to appoint people who agreed with him. The IASB’s standards have been weapons of mass value destruction.”

The way banks calculate profits and liabilities was also raised by two key policymakers at last week’s British Bankers’ Association annual conference.

Paul Tucker, deputy governor of the Bank of England, told delegates the time might have come to “disregard” accounting rules and adopt a “common sense” approach for regulatory purposes, the Guardian reported, while Andrew Bailey, the head of the Prudential Regulation Authority being set up inside the Bank of England, talked about the “possible shortfall in asset values relative to their book value which is exacerbated by the accounting standards preventing provisions bring taken against expected future losses”.

Prudence

Hoogervost previously outlined a need to revise the conceptual framework at a FEE conference on corporate reporting in Brussels in September, where he said the current iteration has definitions of assets and liabilities that are not “completely satisfactory”.

Referring to the IASB’s decision to replace the concept of prudence with neutrality in September 2010, Hoogervost conceded the existing framework “is still the subject of intense controversy”.

“Ever since, IFRSs have been periodically criticised for actually being imprudent, allegedly leading to overstated profits and/or understated liabilities,” he said in his speech.

“Critics blame the incurred loss model for understating losses on bad loans and the use of fair value accounting for inappropriately recognising unrealised profits. This criticism needs to be taken seriously.”

While Hoogervorst did not accept that IFRS has led to a loss of prudence, and that the concept continues to permeate accounting standards, he did admit there was room for improvement to standards with the concept in mind.

“A final example of our efforts to build sufficient caution into our standards is our work on an expected loss model for financial instruments,” he said.