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It is the first time the IASB has been confronted by such a heavyweight
alliance of investors and the board is likely to be troubled by fresh signs
of wavering support for its flagship convergence project.
In the letter sent last week, the ICGN board sets out its concerns about a
joint discussion paper on the objectives of accounting published by the
IASB and its US counterpart, the Financial Accounting Standards Board.
Anne Simpson, executive director of the ICGN, said the discussion paper
had set off "a struggle for the soul of accounting".
The ICGN represents more than 400 institutional and private investors,
corporations and advisers.
The IASB was shaken in May when a leak from PwC, the world's biggest
accounting firm, revealed that some senior partners in the UK wanted
harmonisation tobe halted. The harmonisation of global rules has long
been viewed as accounting's "holy grail" and had not been seriously
questionedby practitioners until this year.
The ICGN and other critics of the IASB are concerned that accounting
standards are increasingly theoretical and filled with proscriptive,
American-style rules.
enormous pressure from all sides," said Tom Jones, vice-chairman of the
IASB, at a conference this month. "I rarely address an audience that isn't
at least 50 per cent hostile. Whatever we do, half the world wants it and
half the world hates it."
"You can't have a single set of accounting standards for multiple forms of
capitalism," said Martin Walker, professor of finance and accounting at
Manchester University, earlier this year. "Accounting has to reflect the
economic, legal and political systems in which it is operating. Until those
systems are the same, you can't standardise accounting."
Securities and Exchange Commission has said that could happen in the
US, subject to certain conditions, as early as 2007 - prompting a rush to
narrow differences between IFRS and US standards.
listens carefully to the SEC but not so closely, it seems, to Europe," says
Stig Enevoldsen, chairman of the European Financial Reporting
pressure for change in the structure and style of IFRS. Due in large part
to litigation worries, which are unlikely to disappear, the US has highly
prescriptive standards: they make compliance easier, but Europeans
warn they do not allow the best reflection of economic reality.
"Convergence is very much in principle a good idea. But how far should
we go?" Mr Enevoldsen asks. "Should we put all our effort into
convergence rather than having the best standards for Europe? I'm not
sure."
Fresh accounting rules will hit profits and may damp mergers
Companies around the world will have to change the way acquisition
costs are handled under new accounting rules - a move that will hit
profits and could damp the urge for mergers.
Separating the fees will force companies to book a one-off expense for
each deal, denting their net income for that period.
Deal fees vary, but the International Accounting Standards Board said
that, on average, they work out at about 1.5 per cent.
Global deal volume reached a record of more than $4,840bn last year,
according to Dealogic, the data provider. About three-quarters of those
deals would have been accounted for under either the IASB's
international financial reporting standards or US rules.
"Although not 100 per cent identical, the two boards worked to reach
agreement not just on concepts and principles, but also on using the
same wording," said Mary Tokar, head of international financial reporting
at KPMG.
Peter Holgate, senior technical partner at PwC, said: "It is a big shame
these are not exactly the same standard, but if we can get this close on
one of the most difficult topics in accounting, it bodes well for the future
of convergence."
The chief US financial regulator has warned the European Union not to
water down controversial accounting rules on derivatives, fearing that it
could endanger global accounting convergence.
The IASB is under intense pressure from the European Commission for
further concessions on its derivatives rules, known as IAS 39, because
EU banks fear they could inject strong volatility into their accounts.
Mr Nicolaisen told the Financial Times: "There are legitimate issues that
need to be resolved. It absolutely has to be sorted out. We do not want
[the IASB's proposals] watered down."
The EU's plans for listed companies to use the IASB's full set of
international accounting standards from 2005 could be wrecked by the
dispute over the derivatives rules, which are based on US equivalents.
The SEC said last year it would consider dropping the requirement that
European companies with US share listings produce accounts under US
rules after 2005, which would provide cost savings.
By Douglas Flint
Published: November 5 2008 17:22 | Last updated: November 5 2008
17:22
There are usually two reactions to a crisis. There are those who want
nothing more than to wind the clock back to calmer times. Opposing
them are voices raised in support of radical reform, a clean sweep of the
discredited regime and the construction of a pristine new system in which
nothing bad can ever happen again.
EDITOR’S CHOICE
Neither is right, but at least there is a debate. We can talk about what
success might look like because most of us are speaking the same
language: accounting. And that’s what it really is: a language, defined by
conventions and rules, used to define the financial picture of a business.
How much more difficult would that task be if every nation still clung to its
own language for defining commerce? How much simpler would it be if
everyone could understand each other perfectly? The current crisis has
increased focus on what has worked well and what has not. It reinforces
the need to move together to make things better and we are seeing real
momentum towards achieving a shared universal language of
accounting.
They complain when the rules don’t change to suit their position and they
claim lack of governance when changes, with which they disagree, are
made quickly to respond to calls for clarification or correction.
The messenger in this case is the International Accounting Standards
Board, whose mission – to form a system within which everyone can be
held to the same standard – is more rather than less relevant now.
Difficult market conditions inevitably inspire calls for action to relieve the
symptoms of stress, presenting a challenge to distinguish between
discomfort with accounting rules which are accurately describing
economic value destruction and those which unnecessarily precipitate
actions that serve to exaggerate economic loss.
EDITOR’S CHOICE
Some analysts have calculated that the change could allow a profits
boost of up to 20 per cent in the quarterly earnings of some banks.
The changes come after pressure from Congress and intense lobbying
by some corners of the financial sector, including a number of large
lenders. They have argued that so-called “fair value” accounting, which
demands market prices where possible, has magnified the problems
caused by market turmoil because the prices they have been forced to
reference are from distressed sales and do not contitute a real objective
market.
But critics of the changes have warned they will in fact undermine
investor confidence in the battered sector by reducing the transparency
of banks’ balance sheets.
In comments sent to FASB, the CFA Institute, the trade body for more
than 80,000 analysts and fund managers, said the new rules would
damage the credibility of the rulemaker and US accounting standards
generally.
“Investors will not be willing to commit capital to firms that hide the
economic value of their assets and liabilities,” it warned.
The SEC hopes that, together with a reform to the implementation of the
Sarbanes-Oxley law, it will boost the attractiveness of the US capital
markets by cutting compliance costs.
However, the decision comes amid heightening tension over the change,
which is seen as a key step in the long-running process of converging
US accounting standards, known as US Gaap, with IFRS, which is used,
or being adopted, by more than 100 countries including European Union
members, China and India.
EDITOR’S CHOICE
Under the SEC’s plans, US groups are likely to adopt IFRS in 2014
providing certain conditions are met, a decision that will be taken in 2011.
Some companies may be allowed to adopt IFRS sooner.
Christopher Cox, SEC chairman, said more groups were reporting under
IFRS than US GAAP and the number would rise as other large
economies made the switch. He said US GAAP would be marginalised if
the US did nothing, making it harder for international investors to
consider US companies.
The SEC last year signalled its support for IFRS when it dropped the
requirement for foreign groups that use IFRS to produce a reconciliation
of their numbers with US GAAP.
In switching to IFRS, the SEC would in effect hand over authority for
accounting rules to the International Accounting Standards Board, which
is based in London. Concerns have been raised about the fact that the
IASB is a private sector body that sets international law.
International codes
EDITOR’S CHOICE
The SEC will test the new system with a few large companies before
making a decision on whether fully to adopt IFRS in 2011. The SEC is,
however, very enthusiastic about IFRS. Rightly so. The standard would
remove a serious barrier to operating in the US. It seems unlikely that the
SEC will not press ahead. Companies should now start preparing for
IFRS; switching over will prove difficult.
The real risks to full IFRS implementation are political. Even if the SEC
has a final say over which IFRS rules are implemented and which are
not, these proposals will give a group of foreigners a say in US
regulation. This will attract fire from congressional windbags.
If any of the large US companies road-testing IFRS shed any jobs during
the trial period, the new foreign accounting system will be used as a
scapegoat. The change may be caught up in the rising tide of populist
protectionism in the US.
EDITOR’S CHOICE
Instead of sensible debate, there have been skirmishes that damage the
credibility of accounting rulemakers and politicians alike. The risk is of
more to come. There are murmurings in Brussels about pushing the
IASB to follow its US counterpart’s latest changes. Some Group of 20
leaders would like to go further: South Korea, for example, is unhappy
about how currency values are treated – a point that really matters to its
shipbuilders.
Mr Brown was also warned that some Asian and developing countries
felt they were being patronised ahead of the summit, threatening
possible tensions with Europeans and the US.
EDITOR’S CHOICE
The prime minister and Alistair Darling, chancellor, hosted a meeting with
international bank chiefs at Downing Street as part of the final
preparations for the G20 meeting on April 2.
Mr Brown, who later left for a tour of Europe, the US and South America,
supported the bankers in calling for world leaders to fight protectionism
and to work towards stabilising the banking system.
He added: “The Asian countries are worried that this G20 meeting is
being dominated by the Europeans and the US. Asian and emerging
market countries have this feeling that the developed markets have been
lecturing them for years but they don’t want to learn the lessons from
their own experiences. We need a common set of accounting standards
that would apply worldwide as well as global regulatory norms . . . we
also think that having a global regulatory co-ordinating council is
necessary.”
Downing Street said there was agreement on the need for countries to
use fiscal and monetary tools to stimulate the economy.
European banks will be able to more easily shield assets from the
scrutiny of marking to market prices under emergency changes agreed
by international accounting rulemakers.
The adjustment will allow companies to more easily shift their holdings
from being marked at fair, or current market, values and instead report
them at amortised cost, which means they will not have to report any
further falls in market prices and any gains will be spread evenly over the
lifetime of the asset.
Fair value accounting, where assets are reported at their current market
price, has become increasingly contentious as the credit crisis has
worsened. Those against it include a number of, but not all, banks and
insurers who believe that it is making their balance sheets unnecessarily
weaker by forcing them to report current depressed prices that do not
reflect their longer- term expectations. Those in favour, which includes
most regulators and auditors, believe that using market prices reflects
the current economic reality, however harsh that may be.
The rule change marks a retreat by the IASB, which has defended
staunchly fair value, and only came after intense political pressure.
The issue has stirred up a political storm with French and Italian leaders,
among others, pushing for an easing of the rules. However, Gordon
Brown, UK prime minister, said in a press briefing: “Some people are
looking for a get-out-of-jail-free card and an easier way of registering
their financial position than is the truth.”
Sir David Tweedie, chairman of the IASB, told the board it was better if
the changes were made by accountants rather than politicians. The
changes are accompanied by extra disclosure requirements that mean
although the new rules could alter balance sheets, it should be possible
to use the footnotes to find details of which assets were transferred.
There will be no let-up in the use of fair market values for banks’
holdings, even in illiquid markets, according to international accounting
rulemakers.
EDITOR’S CHOICE
Fair value, or marking holdings to market prices, has become the subject
of heated argument as the credit crunch has forced banks and other
institutions to write down hundreds of billions in the value of their
holdings.
Those against the practice claim that they have been forced into paper
losses based on hypothetical sales, while advocates believe the clarity it
has produced has helped banks and others face up to and deal with, the
crisis.
“The key point is that the paper does stress that you cannot default to
some ‘fundamental value’. You are required to find an estimate for the
current price. That price might be thought to be irrational, exuberant or
completely depressed but this makes it clear that is what you must use,”
said Anthony Clifford, partner at Ernst & Young.
The paper was published alongside an update from the IASB of its
response to other crunch-related issues raised by the Financial Stability
Forum, a group of regulators and other officials.
The draft paper is designed to clarify the existing concepts underlying the
rules, which are based on determining who controls the assets, and/or
assessing who holds the risks and rewards of the vehicles.
“They are seeking high-level linkage of those two points and they’ve had
to do it quite quickly. It will benefit from a bit more thinking,” said Ken
Wild, a partner at Deloitte.
By Jennifer Hughes
Published: January 21 2009 22:39 | Last updated: January 21 2009
22:39
Given the importance of the US, the views of the nominee for Securities
and Exchange Commission chairman on accounting topics are about
more than simply which accounting system US companies should use.
EDITOR’S CHOICE
In August, the SEC announced it would produce its “roadmap” plan for
how to switch to International Financial Reporting Standards, and in
November it did so. Comments are due by the middle of next month.
Last week, Ms Schapiro was asked her opinion on switching to IFRS at
her nomination hearing by Senator Jack Reed. She said she would
“proceed with great caution” and would not be bound by the roadmap.
She also raised the cost of switching rules, for which she said she had
seen estimates of $30m per US company.
She could have been talking for her audience, since Senator Reed’s
question was laced with his own reservations about making the switch.
But she did preface her remarks with support for the notion of a single
set of global standards.
But so much for the SEC’s somewhat under-the-radar efforts to push the
project as far as possible. It announced its roadmap plans in the dog
days of summer, before the Labor Day weekend and published the plans
on a Friday in November with no fanfare whatsoever.
There were those who had hoped the SEC’s approach might allow the
plans to get to such a stage that turning back would be too expensive or
troublesome.
There were murmurings of this last year, with US senators and European
leaders asking questions about “fair value” accounting, where marking
assets to current market prices has decimated banks’ balance sheets.
There was also political anger way back in the early days of the credit
crunch over the off-balance sheet accounting rules that had allowed
many banks to hide the full extent of their activities.
These issues are all still very relevant and will mean a lot more limelight
for accounting.
For those hoping the US will eventually convert to IFRS – a move that
would seal the deal on a single set of global accounting rules – the good
news is that the International Accounting Standards Board and its US
counterpart have made it very clear they will only work together on rule
changes. This is part of their efforts to resist attempts by politicians and
interest groups to play them off against each other.
To that end, they have also assembled an impressive advisory group that
met for the first time this week. Members range from Jerry Corrigan,
former head of the New York Fed and a senior Goldman Sachs banker,
to Lucas Papdemos of the European Central Bank and Michel Prada,
former head of the French securities regulator.
But in all this kerfuffle, where are the Big Four, particularly in the US?
Eager to discuss the need for American companies to begin preparing for
switching accounting standards – with their help, of course – they have
been rather more quiet in public on how the accounting rules could be
improved.
Talk to them, and they’ll tell you that politicians don’t always fully
understand the ramifications of their suggestions. Now is their chance to
stand up and help them.
jennifer.hughes@ft.com
Corporate Governance
The Fault, Dear Enron, Is In Ourselves
Ari Weinberg, 02.14.03, 11:25 AM ET
NEW YORK - While global risk has become a focal point for
investors, corporate malfeasance is still a hairy elephant. But if
the recommendations made Thursday by the U.S. Congress'
Joint Committee on Taxation after a year-long investigation of
Enron's tax schemes show anything, it is that the Feds are still
trying to kill the elephant with a thousand pea shooters.
In recent weeks, that motivation has forced out the top two
executives at Sprint (nyse: FON - news - people ) for employing
tax shelters related to stock options. It has also brought
attention back to the cretins formerly running Tyco
International (nyse: TYC - news - people ). In fact, the Internal
Revenue Service is on a stated mission this year to root out
other egregious tax minimizers.
Sir, Jennifer Hughes reports (January 14) that the heads of the six
largest accounting firms are calling for more freedom for people to use
their own judgment in preparing and auditing company accounts, instead
of having to follow highly restrictive and complex regulations. The latest
UK Companies Act weighs in at more than 700 A4 pages, in addition to
more than 2,000 pages of accounting standards. So it is high time that
the leaders of our profession paused to consider where the modern
tendency to over-regulate has got us.
We must throw off the shackles before it is too late! We need much
simpler, much shorter financial statements. And we should stop
pretending that annual company accounts can be anything more than a
very rough interim guide to financial performance and position. The latest
(2006) annual reports of three large well-respected companies – British
American Tobacco, GlaxoSmithKline and Royal Dutch Shell – contain
148, 188 and 232 pages respectively. The idea that any ordinary
shareholder could use them to help “make decisions” is ludicrous.
D. R. Myddelton,
Emeritus Professor of Finance and Accounting,
Cranfield School of Management,
Cranfield, Bedford MK43 0AL
By Jennifer Hughes
Published: October 5 2008 10:14 | Last updated: October 5 2008 10:14
EDITOR’S CHOICE
However, many in the industry have linked the accounting changes with
the significant rise in the closure of defined benefit schemes to new
entrants in recent years as companies feel they can no longer face the
risk of these volatile liabilities skewing their balance sheets. In the UK,
less than a sixth of DB schemes are now open to new entrants, down
from half in 2003, shortly after the ASB’s rules were introduced.
This year, the UK’s ASB came back with another suggestion that could
have a dramatic effect on reported funding levels; in a paper produced in
January, the board suggested changing the rate at which future liabilities
are discounted – a move that will make the liabilities look bigger.
The good news for scheme sponsors is that the ASB no longer sets their
accounting rules; that is now down to the International Accounting
Standards Board.
The bad news is that Sir David Tweedie, the man blamed by newspapers
for “destroying” pensions when he led the ASB in introducing the
previous changes, has moved from the ASB to head its international
counterpart, which is considering altering its rules on the topic.
The reason was a surge in corporate bond yields – which links directly to
the ASB’s latest proposals. The future liabilities of a scheme are currently
discounted to their present value using a blend of AA-corporate bond
yields, which are designed to reflect the returns expected on fund assets.
What the ASB has proposed is using the much lower “risk-free” rate,
usually the yield on long-term government bonds. The suggestions
triggered a wave of protest at the extra burden this would place on
schemes as their reported deficits leapt overnight.
The National Association of Pension Funds said the idea could double
the liabilities reported by “young” pension schemes while Pension Capital
Strategies, a consultancy, calculated the “risk-free” rate would have
raised the combined deficit of FTSE 100 schemes from £8bn to £100bn.
Although the ASB no longer has the power to change the rules directly, it
does have a high profile in the pensions accounting world and strong
links with the IASB. The IASB’s own current review has focused on
removing “corridor” accounting, which allows some smoothing of the
effect of market moves. But in a second phase, it is likely to address the
thorny issue of discount rates.
“Given the revolution that has already been launched by pensions and
accounting standard setters in their drive to reflect economic reality, it is
easy enough to see more changes coming,” says Dawid Konotey-Ahulu
of Redington Partners, a pensions consultancy, who warns that if
anything, the credit crunch will speed up the ongoing trend towards
making full market volatility transparent for investors.
IASB watchers say there are criticisms of its current proposals, which
include new methods for classifying schemes, but that it would be unfair
to say the pensions world was speaking with one voice.
“There are grumblings about how accounting has forced the closure of
DB schemes, and I’m sure there will be more, but the experts don’t
actually speak with one voice on this, you get some widely divergent
views,” says one accounting rulemaker, who staunchly defended the
central premise of transparency in what must be a warning to anyone
hoping to change accounting’s current path.
Sir, Readers over the past few days will be rightly perplexed about the
significance of non-financial data to assessments of a company's
performance. On the one hand, it is contended by one US academic that
"non-financial measures just don't add up" (March 29). On the other, the
FT reports growing market interest in non-financial data, on the part of
both fund managers ("Fortis plans CSR action in Europe", March 29) and
rating agencies ("Companies face an avalanche of questionnaires",
March 26).
Global ambitions
By Robert Bruce
Published: September 17 2008 10:51 | Last updated: September 17
2008 10:51
In recent years, however, this has changed. And one of the people who
had been instrumental in this has been Allen Blewitt whose five years as
ACCA chief executive came to an end at the beginning of September.
The ACCA is well-placed to reap the benefits of this demand around the
world, he says. “We are the only UK body to change its fundamental
business model and produce a generic internationally based
qualification. More than 50 per cent of our members and 70 per cent of
our students are outside the UK, and our future growth will be
predominantly non-UK.”
In the past five years, membership has grown from 98,000 to 122,000
and student numbers from 220,000 to 325,000. “So we have a great
resilience,” he says.
This has not always been the case. There was a period when, as
overseas sections of the ACCA grew, they came to resent the control
exerted from the London headquarters. “We have tried to change the
fundamental relationships with the marketplace,” says Mr Blewitt. “It is
now more of a partnership.” This has been a cultural change for the
ACCA – which has tended to represent the Middle England to which it
appealed last century when it set up a model to allow people of ordinary
means to earn a living while qualifying as accountants.
There have been two sides to this cultural legacy. “This organisation
used to have a chip on its shoulder,” he says. “We have gone past that
now. We have moved it to where it should be. We have put the paranoia
behind us.”
Mr Blewitt admits that “it left us with a legacy of being a challenger brand.
ACCA took a long time to see itself as a successful mainstream brand.
“ACCA needs to move and it needs to recognise that it has to move from
a centralised to a regional model,” he says. “Multinationals do this.
Professional bodies haven’t really tried this before.”
This recognition, often forged with great difficulty, has probably now
given the ACCA the international edge. “If you take our global
membership as a whole, a sixth of those people moved from one country
to another in 2007,” he says, “so it is a truly mobile qualification.”
The profession is now in better shape and Mr Blewitt has been a part of
that process. He suggests that the profession’s showing during the credit
crunch has shown how things have changed.
“Hopefully, we are now on the way out of the trough of the credit crunch,”
he says, “and I think that the attacks on the profession were mere flea
bites and mostly from bankers who don’t like the mark-to-market of fair
value. The principle is right. It was a classic case of self-interest from the
banks. They just don’t like it. It was blatant self-serving.”
The profession is stronger and more resilient these days. And the breezy
Australian ways of Mr Blewitt have made a difference, particularly to the
cultural changes at the ACCA.
By Robert Bruce
Published: September 17 2008 10:51 | Last updated: September 17
2008 10:51
One of the greatest successes of recent times has been the International
Accounting Standards Board. Over the past eight years, the IASB has
provided the impetus and the tools to create a set of accounting
standards which are, increasingly, the world standard. From the initial all-
consuming task of ensuring that all listed companies across the
European Union implemented International Financial Reporting
Standards, (IFRS), by 2005 the work of the IASB has acted as the
springboard for more than 100 countries around the world to follow suit.
Even the proudest and largest of the world’s financial markets, the US,
has in recent weeks announced a road map towards accepting IFRS as
the primary means of financial reporting.
What has been even more remarkable is that the IASB is a small
privately run organisation based in London. The speed of the acceptance
of IFRS around the world has astonished everyone involved.
Hence, the current proposals from the IASB’s trustees to enhance the
public accountability. For the chairman of the trustees, Gerrit Zalm, who
was previously deputy prime minister and finance minister of the
Netherlands, it was a question of finding “a way of keeping standard-
setting independent and free of outside influence but making ourselves
more accountable”.
A discussion document that the trustees have issued, which is open for
comment until 20 September, points out that the objective is to keep the
IASB independent, “appropriately protected from particular national,
sectoral or special interest pleading” while at the same time recognising
“the need to demonstrate the organisation’s public accountability”.
Mr Zalm says: “The IASB is a very open body and has won international
awards for its openness. But it has no formal links with, for example, the
European Parliament or organisations in the US.”
“We want IFRS consistency around the world,” says Mr Rainey, “and the
fact that we have four regulators sitting on the monitoring group is really
good. To have IOSCO there, for example, is very important. Renegade
regulators around the world try to impose their own interpretations of
IFRS that are contrary to the spirit of IFRS. Having IOSCO there would
help drive global consistency. They would see what is going on and they
have a vested interest in the success of IFRS.”
“Regulators have objectives just like everyone else – like not getting the
blame.”
He wonders how long they would sit on their hands. “They are not just
going to talk about recruiting trustees,” he says. “It is a bit un-exciting
talking about due process. They will start to make their views known
about specific projects and if a tricky issue comes up you could imagine
that they might say ‘Shouldn’t we be involved in this?’ ”
Ken Wild, global leader for IFRS, at Deloitte, says: “The fear would be if
the monitoring group started to interfere more widely. It could take on a
role beyond its original design.”
By Jennifer Hughes
Published: September 17 2008 10:51 | Last updated: September 17
2008 10:51
The comments were part of his presentation of the “road map” for US
companies to switch from US Generally Accepted Accounting Principles
to International Financial Reporting Standards – a long-awaited
development by US and international accountants alike.
More than 100 countries use, or are adopting, IFRS and the US was the
only remaining significant holdout. If the road map is followed, by 2014
the world’s biggest economies will all be following the same accounting
rules – a massive achievement and deserving of the revolutionary tag
given that the system only came to prominence this decade.
The SEC has taken its time in drawing up the road map, which has
several stages and a number of conditions to be met before final
approval for the switch is granted. But for the companies who will make
the change, there was something like relief that the news was finally out
there – because now their work officially begins.
The biggest companies have already begun preparing for the switchover.
“You need to start now,” says Bob Laux, director of technical accounting
and reporting at Microsoft. The software giant is already looking into
how different accounting rules will affect its results and what systems
changes will be needed to produce the necessary data.
“We have meetings on this almost every day and, at nearly every one,
there’s at least one case of ‘Oh I didn’t think of that’,” he adds.
Danita Ostling, an audit partner in the US, agrees. “It’s about so much
more than an accounting exercise – that’s what I say over and over
again. You need to think about the big picture right now – what are the
most significant effects that conversion will have on your business?”
“The biggest difference is the volume of guidance the US has for almost
every bit of accounting literature. It is probably the reason that they want
to move to IFRS rather than going for a long-term gradual convergence –
they’d face an enormous challenge getting rid of the detail,” says one
close observer of the SEC’s deliberations.
“Revenue recognition is one that we’re still trying to get our arms
around,” says Sam Ranzilla, audit partner at KPMG. “US GAAP is
overloaded with guidance on this and you might argue that, currently,
IFRS is a little bit short on the same,” said Mr Ranzilla.
“It will require changes from us in the way we research and come to
conclusions on guidance – and how we document how we arrive at that
judgment,” says Mr Laux. “It is a change too for auditors in how they
judge what we’ve done, and also a change in the way the way the
regulator works.”
The US regulatory system also presents its own wrinkles in the form of
Sarbanes-Oxley, the corporate governance reforms brought in in the
wake of the scandals at Enron and WorldCom. The rules include section
404, which requires companies and their auditors to document the
adequacy of their internal controls over financial reporting.
“That makes it a little more tricky,” says Alex Finn, a partner at PwC, who
believes it might prove an unexpected help, too. “Having to have all your
controls in place can force companies to take a more strategic approach
to the whole project.”
For the larger companies which have begun the preparations, the
strategic approach can be particularly important. IFRS allows companies
to choose certain options on how to report previous periods when they
convert to it, but not to change those choices after that.
“Once it’s there, you can’t go back and change it,” says Mr Osnoss, who
warns that US companies with overseas subsidiaries need to be
particularly careful.
“There are situations where decisions are being made on how to account
for something under IFRS at subsidiary level that will be difficult to
unwind later at the company level.”
This year, the Big Four accounting firms and their rivals have been busy
gearing up for IFRS, developing websites and producing webcasts, client
briefings and papers on what needs to be done. There was some relief at
the fact the SEC timetable is finally published. But they, and their clients,
know that the real hard work is just about to begin.
By Barney Jopson
Published: April 10 2007 03:00 | Last updated: April 10 2007 03:00
His opening words are always the same. "Dear Doris and Bertie,"
writes Warren Buffett, the second richest man in the world. It is his
annual report to shareholders and the iconic boss of Berkshire Hathaway
imagines he is penning a down-home letter to just two of them.
They're a smart duo, Mr Buffett tells the Financial Times - and they
happen to be his sisters. "They've got practically all their money in
Berkshire Hathaway, so they're interested. And they don't want to be
talked down to.
"I pretend they've gone away for a year and want to know what's
happened. They want to hear what I'm worried about and what I'm
pleased about," he says. "Then when I'm through I take their names off
the top and put: 'To the shareholders of Berkshire Hathaway'." The result
is a frank and folksy report, which is lapped up each year by the retail
investor groupies who flock to see Mr Buffett at Berkshire's annual
shareholder jamboree in Omaha, Nebraska.
To many institutional investors, too, his report is a laudable example of
clear corporate communication. But, they lament, Mr Buffett is often in a
minority of one. That he stands out for talking straight is testimony to the
fact something is wrong with the information flows that sustain markets.
Financial statements and annual reports are becoming longer, but less
useful.
The latest tome from HSBC, the UK-based bank, runs to 454 pages and
is so heavy the bank says the Royal Mail has had to limit the number of
copies postmen deliver each day. But size, say many, is not translating
into clarity. The notion of greater transparency as an unequivocal good is
being debunked as it becomes clear that excessive disclosure can be
counter-productive: when information is unfamiliar or irrelevant, too
technical or too promotional, the essentials get lost.
Sir Michael Rake, outgoing global head of KPMG, the accounting firm,
and incoming chairman of BT, the telecommunications group, has
described the corporate reporting model as"broken". Roel Campos, a
commissioner at the Securities and Exchange Commission, the US
financial watchdog, says: "Investors are clearly not receiving through
current financial statements what they need. There is not even a
consensus as to how to define the problem."
There are myriad views on what exactly is wrong - but there is a growing
consensus that corporate reporting has reached a crossroads and
radical thoughts are emerging about how to set it on a new path.
Sir Ian Prosser, audit committee chairman at BP, the oil giant, says
annual reports are in danger of becoming "compliance documents". He
argues that face-to-face meetings with investors - even if they reveal
nothing not already in the public domain - are much more useful. "In 40
minutes you can distil the key issues for investors," he says. "We are in
danger of every word written in annual reports having to be crawled over
by lawyers." Michael Mauboussin, chief investment strategist at Legg
Mason Capital Management, says useful information is scattered across
accounts, but adds: "Very often it is strategic discussions with companies
about the size of markets and their drivers that inform us, more than the
annual report."
The current discontent has two origins: the first relates to accounting
standards, the second to the "narrative" prose meant to flesh out the
story the numbers tell.
Lord Browne, the outgoing chief executive of BP, has said: "Some would
argue that [IASB] standards neither produce a record of the
accountability of management nor a measure of the changes in the
economic value of assets and liabilities. I would agree with them. What
IFRS actually does is make our results more difficult to understand."
A lightning rod for criticism has been the IASB's fondness for "fair value"
accounting, whereby assets and liabilities are reported at an ever-
changing market value. The IASB says that reflects economic reality
better than the alternative: historic cost. But critics say it makes earnings
volatile - and can be misleading when fair values are derived from
mathematical models.
BP, for example, has had to start reporting the ups and downs of
"embedded derivatives", theoretical instruments that have arisen from
the price clauses that exist in its run-of-the-mill commercial contracts.
But Mr Lever, who has joined forces with PwC, Radley Yeldar and the
Chartered Institute of Management Accountants to push for more straight
talking, says there is an inevitable tendency to avoid total honesty
because executives are ultimately trying to sell their businesses. "There
is a focus on the good, less about the bad and nothing on the ugly," he
says.
Only as the sense of disquiet turned critical in the past 18 months did big
institutions begin to designate point people on reporting and organise
themselves to speak out. Now, beyond the remedies of Cruf and the
Report Leadership grouping, more profound thoughts are emerging on
how to shift corporate reporting to a different track.
Extra regulation is not among them - not least since the UK botched its
attempt to legislate for narrative reporting in 2005 by over-engineering a
set of criteria that scared companies and led to a last-minute order to
scrap it from Gordon Brown, chancellor of the exchequer.
One idea is to take a leaf out of the private equity book. Buy-out houses
such as Blackstone and Kohlberg Kravis Roberts, which have snapped
up a growing list of big public companies, are exploiting what they see as
a gap between the market value of a business and its intrinsic value.
Given the buzz around private equity, it is worth asking whether public
company reporting could be built around the analytical techniques of the
buy-out houses. That would mean an unswerving focus on one number -
cash flow, the only thing private equity groups can use to pay off the debt
they take on. As an old accounting adage has it: "Cash is fact and
everything else is opinion."
James Turley, chairman and chief executive of Ernst & Young, the
accounting firm, says that could lead to chaos. But he says there will be
no single, neat solution either. Corporate reporting is likely to go plural -
in numbers, words and timing - because investors are heterogenous and
inclined to take different perspectives.
"When you say 'investors want . . . ' do you mean institutional investors,
long-term retail investors, day traders or hedge funds?" Mr Turley asks. "I
think it's going to take a multi-disciplinary process to figure out what is
really needed."