US fair value rules complicate convergence, warns Turner

The head of the city regulator said US attempts to adopt international accounting rules could result in unnecessary complexity.

Adair Turner, chairman of the Financial Services Authority, told Accountancy Age that the International Accounting Standards Board (IASB) risks adding complexity to its fair value accounting rule, if it continues converging with US standards.

“It is not so much that they are in danger of compromising (international standards), it is that, in the process of trying to reconcile them, they make it more complex,” he said.

He went on to say the world didn’t need the US to adopt international standards.

“We have had a capitalist system without full convergence in the past, it can be a complete pain in the neck… it hasn’t stopped the system working,” he said.

The IASB, together with its US counterpart the Financial Accounting Standards Board (FASB), is working to harmonise US and international accounting rules. US authorities however have provided no firm adoption timetable.

Lord Turner’s comments add to growing concern surrounding the convergence project. In July the Fédération des Experts Comptables Européens said there were “diminishing returns”, from further convergence. Two months later Nigel Sleigh-Johnson, head of financial reporting at the ICAEW, said the process needed to be kept under “close review”. More recently, Stephen Haddrill, chief executive at the Financial Reporting Council, said the process should not be about “translating American standards into an international shape”.

Lord Turner’s concerns centre on the boards’ divergent approaches to fair value. The rule forces companies to value assets at market price and was blamed for exaggerating the effects of the downturn.

In the months following the downturn, both boards, under pressure from world governments, sought to revise their fair value standards. FASB’s approach would result in all assets valued at fair value. The IASB exempted banks’ loan books.

The issue has proved a sticking point in negotiations.

Within the IASB there is little appetite for steering away from convergence. US adoption is a key reason driving other nations to adopt international standards.
Walking away from convergence might also embolden Europe, especially German and France, which have attracted criticism for politicising accounting standards.
Haddrill said the IASB was “walking a tightrope” but had made progress addressing inter­national concerns. “Because of the politicisation of differences in view in the continent, people are failing to see just how far the IASB has moved towards recognising some of the concerns that Europe has had, whilst at the same time preserving the principles of fair value.”

Also this week Lord Turner delivered a keynote speech where he said the IASB were trying to address accounting and regulatory concerns.

“The IASB is again facing that inherit trade off between what are the divergent, and in a sense, incompatible demands.”

Further reading:

IASB work plan – projected timetable as of 6 November 2009

Related reading

Fiona Westwood of Smith and Williamson.