THE IASB is to take a more collective approach to standard-setting as its decade-long attempt to cajole the US into adopting IFRS draws to an end.
The global standard setter is to create an advisory forum of national standard setters and regional bodies that will formalise its relationship with them in favour of the unique bilateral arrangements previously enjoyed by the likes of FASB.
Substantial resources have been devoted by the IASB to bilateral arrangements with European standard setters’ advisory group EFRAG, the Accounting Standards Board of Japan and, most notably, its convergence project with US standard setter FASB. Instead of these agreements, the IASB is to create a 12-member advisory group to formalise its relationship with the standard-setting community.
Standard setters and the profession have tentatively welcomed the approach for being “more representative” of the global nature of IFRS.
“It’s positive that it is global. That is not to say that the bilateral arrangements have not been beneficial, but this makes it more formalised and will help the IASB get its projects delivered,” says Ruth Picker, global leader, global IFRS services with Ernst & Young.
Jerome Haas, president of the French accounting standards board ANC, is also keen to see national standard setters enter into partnership with the IASB at all stages of the rule-making process.
“There are no standards that currently go out that are wholly satisfactory – there is a need for more buy-in, in everybody’s interest,” Haas says. “Input that comes from the ground has to be heard and taken into account by the IASB. Views can’t be done at the last minute of the endorsement process.”
The move was also heralded as “long overdue” by Tricia O’Malley, chair of IFASS, an informal network that represents the closest thing the community has to a global group of standard setters.
“What the IASB is trying to do is pretty sensible,” she says. “It always seemed odd that the IASB doesn’t have a group of standard setters, given we are in the same business.”
The creation of the IASB’s Accounting Standards Advisory Forum (ASAF) appears to supersede IFASS, which the IASB says “cannot function” as an underlying organisation for the IASB in engaging with standard setters in the near future.
“Currently, IFASS is a large group of representatives, lacking an organisational structure, secretariat or membership criteria,” says Yael Almog, executive director of the IFRS Foundation. “Therefore, in its current state, it does not meet the IASB’s immediate needs.”
However, she adds the ASAF will “not diminish the role of IFASS”.
O’Malley is inclined to agree. The ASAF will focus on major technical issues related to standard-setting, meaning IFASS still has a role to play.
“The piece that is missing is discussion about how standard setters work with each other and between regional groups,” she says. “Everyone says it will tread on IFASS’ toes, but it is complementary. What we need to do is fill in the middle.”
Though there is support of the principles that underpin the ASAF, the detail has caused consternation among some. The issue of membership – who will be members and the criteria for joining – will prove a thorny issue.
Firstly, the criteria for becoming a member of the forum, whereby participants will sign a memorandum of understanding to commit formally to various requirements has been described as “draconian” and will likely be subjected to a pushback from national bodies.
“We, who all have a public interest mandate, would be asked to sign an MOU to say we are fit and proper. That is a minor point, but you have to ask yourself if that is reasonable,” says ANC’s Haas.
The commitments include signing up to promote a single set of global standards “in full and without modification” and to support “consistent application” of IFRS by jurisdiction and region.
Several counties initially carved out areas in which they apply standards that are distinct from IFRS. For instance, the EU has temporarily carved out rules regarding financial instruments and hedge accounting. The membership criteria will likely reduce the likelihood of countries yet to adopt IFRS taking similar action.
“It might reduce carve outs but there is a legal point,” says Almog. “Standard setters are beholden to their own legislators so they have to maintain independence.”
The criteria could also deter the likes of FASB from joining altogether. The official line from a FASB spokesman is that the proposals are “interesting” but, given the differences between the IASB and FASB over impairments and lease accounting, the big question is whether the US could countenance accepting IFRS without modification.
While many will be happy to see FASB’s influence limited by becoming just one voice among many within the ASAF, IFASS’ O’Malley says the US needs to be on board.
“You need the FASB in. Not everyone is happy about their influence on standards but you have to have a representative from the world’s largest capital market,” she says.
“There is a lot of focus on what the IASB and FASB disagree on, but there are a lot of standards that are very similar and we now have a revenue recognition model that is almost identical.”
Despite the criteria, the largest national standard setters will want to be a part of the ASAF. Some are going to be left disappointed.
The board will be made up by three representatives from, respectively, Europe, the Americas and Asia-Oceania, with Africa taking one seat and the rest of the world getting an additional two seats. Regional bodes such as AOSSG, GLASS and PAFA are likely to be represented, leaving little room for national standard setters.
In Europe, for instance, the UK, French, Italian and German standard setters will be left to contend for the remaining spot if EFRAG took a seat, with a second seat going to a non-EU member.
“It’s a good idea for the IASB to develop more of a partnership model. It should be seeking to use the knowledge of national and regional standard setters,” says Melanie McLaren, head of codes and standards at the FRC.
“The FRC should be well positioned as a national standard setter for the largest capital market in Europe that has adopted IFRS. But if we have to work with our European colleagues to get an input, we will do. We work closely with our counterparts in Italy, Germany and France and we are a member of EFRAG.”
However, standard setters on the continent also believe they have a strong case for inclusion. According to Haas, countries that have the greatest vested interest in IFRS should have the most representation.
“For more than a year, we have been promoting our proposal to join forces in a strategic partnership and I have always said that we would invite the US and Japan and have them in the endeavour starting now, with the objective of becoming global. Then let’s be logical and pragmatic: in order to discuss IFRS, you want to have countries that apply IFRS in the first place,” he says. “In a partnership – including a body – of national standard setters, we four larger European standard setters are by far the first in the classroom with the larger constituency and our duty is to be driving the IFRS movement.”
Given the battle for influence that will be fought among the standard setters, the IASB is taking a step back from discussions within Europe over who is best suited to represent the region.
“It is for Europe to determine – we will take the lead from European institutions,” says a spokesman from the IFRS Foundation.
Questions have also been raised about who should control the global forum. The board would meet four times a year with the IASB in London and each meeting would be for 1.5 days. Crucially, the ASAF would be chaired by the IASB.
This is not to everyone’s liking. “This body appears to be chaired, staffed and run by the IASB and is only composed of two EU members out of a board of 12,” says Haas. “I’m sure we will eventually make it and achieve good team spirit between national and international standard-setters: that’s our offer.”
IFRS Foundation’s Almog says the goal is for members to feel ownership of the standards: “They have to feel there is value in it. We don’t impose standards from ivory towers.”
Counter proposals to the IASB’s plan have already been filed in a paper presented at an IFASS meeting in Zurich in October. The paper, seen by Accountancy Age, calls for a 20-member board, amd states that accounting issues should not be looked at through the sole lenses of regional bodies, that the chairmanship of the body should not be over-formalised and, importantly, that it should rotate on a two-year basis.
As it stands, broad agreement of the principles behind the ASAF have been reached, but like so much of the IASB’s work, the real wrangling will be over the detail.
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John Hitchins was a partner with PwC for 26 years until he retired in 2014