IASB at loggerheads with FASB over impairment accounting rules, which one critic labels as faulty and "deeply discredited"
THE IASB has been branded “unfit for purpose” by a former member of the ASBs, as it emerged the international standard setter clashed with its US counterpart over impairment accounting.
Tim Bush, head of governance and financial analysis at investor lobbyist Pirc and a past member of the ASB’s Urgent Issues Task Force as well as an outspoken critic of the way deteriorating financial assets and liabilities are represented, has claimed certain flaws in IFRS, such as its decision to converge with US GAAP on segment reporting, will derail the IASB’s entire convergence project.
“The IASB took deeply compromised decisions to adopt faulty standards, IFRS 8, and the deeply discredited incurred loss provisioning model, even the Joint Conceptual Framework. It has been all for nothing. Indeed, states like India are not converging to IFRS precisely due to such faults. The IASB is not fit for purpose,” he said.
Bush’s comments follow an acrimonious meeting in which the rules were discussed. A joint meeting between the IASB and US standard setter FASB, held on 18 July, to discuss accounting for the impairment of financial instruments ended in disagreement, with FASB chairman Leslie Seidman pulling back from issuing a methodology for an “expected loss” approach to loan provisioning.
IASB chairman Hans Hoogervorst expressed frustration that FASB said it needs to do more due diligence before putting its name to a proposed solution for impairment accounting, and warned the delay could unravel three years of work on the project.
“If you go to your constituents with the message, ‘Oh, we’re so unsure, we’re so unsure’ – yes, you’re going to get a lot of additional confusion. I would also like to say that, if this is going to unravel, I find it for us as standard setters … but also for you, I think it is deeply embarrassing that in three efforts, in which we have looked at ten alternatives, in which we have left no stone unturned, we are still not able to come up with an answer after three years. I would find that unacceptable,” Hoogervorst said during the meeting, according to a transcript.
FASB chairman Seidman said the organisation is still strongly behind achieving a converged standard with the IASB and a delay would “bring clarity to this situation” and lead to “a more efficient process”.
“Our desire here is very much still to try to reach as converged a solution as quickly as we can but, in light of the very basic feedback we have heard, we feel it is our responsibility to address this,” Seidman said.
The objective of the project is to create a converged “expected loss” impairment model that deals with the deterioration of financial assets and liabilities. Under current and contention rules governed by IFRS, a so-called “incurred loss” model is used which, critics argue, allows banks to pay out on unrealised profits by not forcing them to make adequate provision for loans that could go bad.
Mark Byatt, director of communications at the IFRS Foundation, the trustee board which oversees the work of the IASB, dismissed claims that problems associated with IFRS would derail convergence of global accounting standards.
“The IASB has announced a post-implementation review of IFRS 8 and we welcome comments from all regarding how the standard is being applied and whether it meets its original objectives,” Byatt said.
“More than two-thirds of the G20 require the use of IFRS and the standards have acquired critical mass as international standards and that is unlikely to change.
“The G20 encouraged us to consider moving from an incurred loss model to an expected loss approach and the boards are three years into a project to consider such a move. We intend to publish further proposals in the fourth quarter of this year.”
The project is just one of a number that the two standards boards are currently working through to pave the way for the US adoption of IFRS. However, progress stalled last week as the US Securities and Exchange Commission published a staff report with a distinct lack of enthusiasm for setting a timetable on when the US regulator might make a decision on whether it will move from US GAAP to IFRS.
The two standard setters are also working through a number of projects on leasing, revenue recognition, financial instruments and insurance, and it is only when these are finished – probably in mid-2013 – that the convergence programme can come to end.
IASB vice-chairman Ian Mackintosh will be hoping for the project’s success after predicting in 2009 that the IASB faced “death or glory” in its approach to global standards.
Speaking at the launch of the ICAEW’s financial reporting faculty, during his time as chairman of the ASB, he said the IASB must resist extreme pressure against a European carve-out from its standards around fair value accounting, and push towards convergence with the US or face going out of existence.
“These pressures bring about threat or opportunity. It’s death or glory,” Mackintosh said in 2009.