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Investors warn over convergence

By Barney Jopsonin London


Published: November 6 2006 02:00 | Last updated: November 6 2006
02:00

A powerful coalition of investors has warned it could withdraw its


support for the convergence of US and international accounting
standards amid concern the project is threatening to weaken corporate
financial reporting.

The International Corporate Governance Network - headed by Mark


Anson, chief executive of Hermes Pensions Management - has sent a
forthright letter to the International Accounting Standards Board setting
out its fears.

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.

"An inappropriate model of convergence would bea significant enough


problem to suggest to someICGN members that convergence on such a
basisshould then be halted," the letter says.

Anne Simpson, executive director of the ICGN, said the discussion paper
had set off "a struggle for the soul of accounting".

"Convergence must be there to raise standards," she said.

"Convergence for its own sake is not of value."

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.

Copyright The Financial Times Limited 2009

Convergence comes into conflict with global realities

Published: October 17 2005 03:00 | Last updated: October 17 2005


03:00

The International Accounting

Standards Board's growing power appears to be incompatible with

making friends. "We are under

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."

The IASB is confronted by hundreds of companies, accountants,


investors and regulators from dozens of countries, all lobbying for
standards that would suit their own - often conflicting - interests. This
raises questions about the feasibility of the IASB's goal: producing one
set of high-quality accounting standards that can be used across the
world.

"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."

International Financial Reporting Standards are currently used or slated


for use in some 100 countries. The EU's adoption has raised the
standards' profile but it has also

provided hints of how harmonisation could falter. The region is effectively


using a customised version of IFRS, because EU policymakers - who are
locked out of IASB decision-making - were forced to "carve out" two rules
from the standard on financial instruments, IAS 39, which were
unpopular with banks and regulators.

One of the carve-outs is set to be reinstated but industry groups could


press for more if the IASB - as many of its critics expect - tries to
broaden the use of fair value measurement for assets and liabilities.

Under another scenario, pressure from the European Commission would


force the IASB to insert so many caveats and exceptions into its

standards that the meaning of

harmonisation would be stretched beyond credibility.

And that is just Europe. The "big prize" of harmonisation is said to be


convergence between IFRS and US accounting standards, which would
allow market regulators in the US and EU to accept accounts from over
the water without making companies do costly reconciliations. The

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.

One might expect this to be cheered by multinationals, which would gain


from an end to reconciliations. But instead it has lost the IASB more
friends in the EU, where there are concerns that convergence means

caving into US ways. "The IASB

listens carefully to the SEC but not so closely, it seems, to Europe," says
Stig Enevoldsen, chairman of the European Financial Reporting

Advisory Group, a private organisation representing accountants.

Critics have linked standard-setters' perceived stubbornness over IAS 39


to a desire to stay in sync with the US. And there are separate concerns
that US preferences will create

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."

Copyright The Financial Times Limited 2009

Fresh accounting rules will hit profits and may damp mergers

By Jennifer Hughes in London


Published: January 10 2008 02:00 | Last updated: January 10 2008
02:00

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.

Currently, fees charged by investment bankers, lawyers and accountants


are bundled into the overall cost of a takeover and go on the balance
sheet as part of "goodwill" - the accounting catch-all term used to cover
the difference between the price paid and the actual value of the assets.

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.

The new accounting standard will apply to companies following both


systems because it is the first to be developed jointly by the IASB and
the US Financial Accounting Standards Board. Companies following US
GAAP will have to adopt the standard by the end of this year, while those
reporting under international rules have until July 2009.

"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.

The main difference is in the treatment of businesses controlled but not


fully owned by the parent company. The US version will force companies
to include goodwill even for the part of a business they do not fully own,
while the IASB allows groups a choice.

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 IASB and FASB have a six-year-old agreement to work towards


converging practices to create a single set of global rules. More than 100
countries either follow or plan to adopt the IASB's standards.

Lex, Page 12 Europe eyes US model and Accountancy Column, Page 17

Copyright The Financial Times Limited 2009

US warns Europe on accounting rules

By Adrian Michaels in New York and Andrew Parker in London, Financial


Times
Published: Feb 02, 2004

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.

Donald Nicolaisen, chief accountant at the Securities and Exchange


Commission, said a European dispute over the International Accounting
Standards Board's derivatives rules could jeopardise efforts to achieve
convergence between US and international accounting standards.

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.

Brussels has to approve the IASB's rules before EU com-panies can


apply them. Relations between the two are near breaking point. Last
month, the Commission said that, if no common ground could be found
between the IASB and the banks, the disputed sections of IAS 39 should
not be applied in 2005.

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.

But Mr Nicolaisen said any dilution of IAS 39 could damage possibility


chances of dropping the requirement.

Convergence on standards is crucial

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.

Both approaches are extreme and as a result fundamentally flawed.


Nonetheless, as accountants seek to describe and to define the worst
financial crisis for several generations, we are challenged by these
competing views.

EDITOR’S CHOICE

Lex: Accounting changes - Apr-08


US body agrees accounting changes - Apr-02

IASB to consider changes to fair value rule - Mar-18

Ministers urged to ensure transparency - Mar-13

IASB warns on bank capital build-up - Feb-23

Leasing: Attempt to close a false divide - Feb-04

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.

The success of an accounting framework comes from widespread


acceptance that it provides a reasonable basis to assess past
performance and forecast future returns. That also requires the
accounting framework to contribute to an understanding of the variability
of return: risk, in other words.

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.

That’s why to converge to one set of accounting standards has never


been more important and the current financial market crisis is acting as a
catalyst to accelerate that path. The turbulence and liquidity crises seen
throughout financial markets are not restricted to one regional or national
market. Neither should our accounting definitions be trapped within those
borders.

Unfortunately, just as great strides have been taken towards the


formation of global accounting standards, some commentators look to
shoot the messenger. They point to unintended consequences and
asymmetric outcomes to question the accounting framework.

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.

Within an independent standard setting process, it is inevitable there will


be differing views. That some stakeholders feel aggrieved at the outcome
of the debate is evidence of the integrity and independence of the
consultation process.

This is an acutely difficult time. Often, regional market structures and


practices serve to polarise views. However, any international perception
of a weakening in the integrity of the accounting rules would inevitably
further erode confidence.

It could have systemic implications if competing regulators were to seek


to talk up the superiority and soundness of their own framework and, in
the process, to imply criticism of others.

The real risk is that variation in reporting, particularly in stressed market


conditions, leads to a ‘why bother?’ attitude among users of accounts
who are faced with interpreting multiple flavours of the ‘truth’.

Douglas Flint is group finance director of HSBC

Copyright The Financial Times Limited 2009

US body agrees accounting changes

By Jennifer Hughes in London


Published: April 2 2009 15:33 | Last updated: April 2 2009 15:33
Bank stocks were boosted on Thursday by an accounting rule change
that is expected to allow managers to repair balance sheets by
recalculating the value of some of their most troubled assets.

The Financial Accounting Standards Board voted on Thursday morning


to allow banks more freedom to use their own valuation models, rather
than current market prices, for assets where markets have become
illiquid. A second rule change means banks will only have to recognise a
part of any impairment in their profits.

EDITOR’S CHOICE

In depth: US banks - Dec-12

Editorial: Revising the rules - Apr-01

FT Interview: Josef Ackermann - Apr-01

Letter: Dutch securities regulator on dangers of political meddling -


Apr-02

Citigroup jumped 9 per cent in early trading, Wells Fargo was up


almost 11 per cent and Bank of America added almost 10 per cent

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.

In a letter in Thursday’s Financial Times, Dutch securities regulator chief


Hans Hoogervorst calls political meddling in accounting a “dangerous
development”.

If accounting standard-setting was seen as a political process,


“confidence in the markets will be further undermined”, he said.

The rules are also being considered by the International Accounting


Standards Board which had promised to work with its US counterpart.
The IASB softened its own fair value rules last October under pressure
from the European Union. Opponents of the political pressure fear
Brussels will exert new pressure to get the IASB to follow FASB’s lead.

Copyright The Financial Times Limited 2009

SEC approves US listing reform

By Jeremy Grant in Washington and Jennifer Hughes in,London


Published: November 16 2007 02:00 | Last updated: November 16 2007
02:00

US regulators yesterday swept aside a long-standing requirement that


foreign companies with US stock market listings reconcile their financial
statements prepared under International Financial Reporting Standards
to US standards, marking a step towards convergence of global
accounting rules.

The US Securities and Exchange Commission voted unanimously to


approve the change, which immediately affects the 1,100 companies with
US listings and any planning to list.

The move is designed to make it easier for investors to compare


companies' financial statements.

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.

The next step is expected to be to allow US companies to choose to file


under IFRS instead of Gaap - a move that the SEC says it is open to.

Copyright The Financial Times Limited 2009

SEC plans for global accounting standards

By Jennifer Hughes in London


Published: August 27 2008 20:21 | Last updated: August 27 2008 20:21

US companies are set to switch to international accounting rules in a


move that will, for the first time, see all the world’s most important listed
groups reporting according to the same set of standards.

The US Securities and Exchange Commission on Wednesday proposed


a “roadmap” to manage the migration of US companies from its rules to
the international ones. The plans are open to comment for 60 days.

EDITOR’S CHOICE

Lex: Accounting changes - Apr-08

In depth: Accounting standards - Apr-07

Brussels yet to sign key accounting pact - Apr-07

US body agrees accounting changes - Apr-02

Editorial: Revising the rules - Apr-01

US banks stand to benefit from rules change - Apr-01

More than 100 countries use, or are adopting, International Financial


Reporting Standards, including all 27 European Union members as well
as China, Japan, Canada and India. US GAAP, the accounting lingua
franca until the sudden rise of IFRS, is the last significant standard to be
switched.

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.

A single set of globally understood accounting rules is


expected to help cut companies’ cost of capital and
better enable cross-border investment. In countries
without strong accounting traditions, the rules are
expected to raise the quality of reporting, helping
inward investment.

Wednesday’s announcement will be welcomed by


many big US groups, most of which have been
reluctant to push ahead without a firm date.

The change is likely to result in a fee bonanza for the


Big Four accounting firms and their rivals. Many
companies will seek their expertise to manage a change that includes
potentially significant tax effects and the need to adapt whole systems to
collect different data.

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.

This year, trustees of IASB have proposed it be overseen by a committee


of regulators including the SEC, the European Commission and the UK’s
Financial Services Authority.
Copyright The Financial Times Limited 2009

International codes

Published: August 28 2008 19:43 | Last updated: August 28 2008 19:43

Love and Esperanto have a new competitor. Following the an-


nouncement of a US plan to adopt the International Financial Reporting
Standards, the accounting framework looks like it may become a real
universal language. This is welcome, but the changeover will be difficult
and US policymakers will need to stand firm in defending their decision.

IFRS is a principles-based accounting framework. It eschews detail in


favour of broad-brush rules. Although this means there are regional
variations to IFRS, it is possible for companies working in different
countries to operate according to a single accounting code. Following its
adoption by the European Union, it has spread around the world.

EDITOR’S CHOICE

Lex: Accounting changes - Apr-08

In depth: Accounting standards - Apr-07

Brussels yet to sign key accounting pact - Apr-07

US body agrees accounting changes - Apr-02

Editorial: Revising the rules - Apr-01

US banks stand to benefit from rules change - Apr-01

The US Securities and Exchange Commission recognised the ubiquity of


IFRS last year when it stopped asking foreign IFRS users to reconcile
their accounts with the current US system. But, this week, the SEC has
set out a timetable for a US switch to IFRS.

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.

At the moment, US companies must comply with 25,000 pages of


precise accounting regulations and guidance. IFRS is only one-tenth as
long and concerns itself with sweeping principles rather than minutiae. It
will take a while for companies to get used to the new code. They may
ask for extra rules and guidance to help them. The SEC must refuse in
order to protect the global principles-based rule-set.

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.

The SEC is right to propose a switch to IFRS. It will be helpful to the US


and to the rest of the world. But implementation will be tough on
businesses, and will need firm resolve from policymakers. Learning a
new language, even a universal one, is easier said than done.

Copyright The Financial Times Limited 2009

Revising the rules

Published: April 1 2009 19:30 | Last updated: April 1 2009 19:30

Neither accountants nor politicians are especially popular at the


moment, but that still does not make them a good mix. A rushed rule
change, due to come into effect today, has been produced by the US
Financial Accounting Standards Board, under pressure from Washington.
The way forward is not a series of piecemeal revisions.

The change by FASB would apply to first-quarter results, which should


be published over the coming weeks. Depending on how it is used, it
could make a significant difference to how banks present their numbers.
It would make some banks’ books look better than under the present
regime because the banks would be able to value more of their holdings
using their own models rather than markets, where the markets for
particular types of holdings, such as complex financial instruments, are
deemed illiquid.

EDITOR’S CHOICE

In depth: Accounting standards - Apr-07

Brussels yet to sign key accounting pact - Apr-07

US body agrees accounting changes - Apr-02

US banks stand to benefit from rules change - Apr-01

Insight: Elusive search for harmony - Mar-26

Push for common accounting rules - Mar-24

The move is part of a worrying pattern of hasty changes in valuation


rules that leave companies freer to use their own numbers rather than
market prices. In October, for instance, the International Accounting
Standards Board was forced by Brussels into a swift relaxation of its own
standards, which were then applied immediately to third-quarter results.

Marking-to-market has some clear strengths. Where there is a market to


price to, then mark-to-market accounting is more useful to investors than
a rule that tells them what a bank’s assets were worth some years ago or
in normal economic conditions. It forces banks to confront problems
rather than deny them. But no one set of rules is perfect: if the market
does not function then marking-to-market cannot work either. Even so,
any move towards marking to model must come with robust plans for a
thorough audit of the assumptions that underpin such valuations.

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.

The answer is an independent, international review of the role of


accounting in the financial crisis. This would recognise the impact of
changes in how corporate activities are reported. Policymakers have
generally seen the need to give serious thought to the future of financial
regulation. Now they should afford accounting a similar respect.

Copyright The Financial Times Limited 2009

Push for common accounting rules

By Gillian Tett,George Parker andPeter Thal Larsen


Published: March 24 2009 21:54 | Last updated: March 24 2009 21:54

Bankers from around the world on Tuesday urged Gordon Brown to


push for a common set of accounting rules and global regulatory norms
when he hosts the G20 economic summit in London next week.

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

UK cannot afford fresh stimulus, says King - Mar-24

Lex: World trade - Mar-24

Brussels Blog: All eyes on Prague - Jun-11

Philip Stephens: Brown learns a familiar European lesson - Mar-23

Brown seeks to build G20 consensus - Mar-23

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.

William Rhodes, chairman and president of Citibank, said the informal


talks covered most of the areas considered important by the bankers,
including regulation, emerging markets, the risk of protectionism and
accounting issues.

He said: “This crisis is a chance to do a lot of things that we have all


been putting off, in terms of necessary reforms.”

Mr Rhodes, also first vice-chairman of the Institute of International


Finance, warned the summit would be greeted with scepticism if it did not
deliver specific results.

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.

Lord Turner, Financial Services Authority chairman, has outlined his


proposed reforms to City regulation, which Mr Brown hopes will be a
“blueprint” for regulatory convergence.

Copyright The Financial Times Limited 2009

Fair value accounting rules eased

By Jennifer Hughes in London


Published: October 13 2008 19:04 | Last updated: October 13 2008
19:04

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 changes by the International Accounting Standards Board followed


intense lobbying by some European banks and a growing degree of
political pressure. European companies had complained that US rules
were allowing their rivals options that they did not have and the changes
are designed to bring international standards into line with their US
counterparts.
EDITOR’S CHOICE

Lex: Accounting changes - Apr-08

In depth: Accounting standards - Apr-07

Brussels yet to sign key accounting pact - Apr-07

US body agrees accounting changes - Apr-02

Editorial: Revising the rules - Apr-01

US banks stand to benefit from rules change - Apr-01

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.”

He warned that changing the accounting was not a quick solution. He


said the world had to find “a level playing field” and not just offer “a
breathing space”. “It’s just a lot of money put on one side of the accounts
to make things look better.”
IASB members made their distaste clear but accepted this was an
extreme situation.

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.

Copyright The Financial Times Limited 2009

Accounting experts push fair value rules

By Jennifer Hughes in London


Published: September 16 2008 23:03 | Last updated: September 16
2008 23:03

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.

The stance came in a draft paper published on Tuesday by an expert


panel convened by the International Accounting Standards Board.

EDITOR’S CHOICE

It’s time to put the brakes on convergence - Oct-30

IASB defends clarification of fair value rules - Oct-03

Top BP accountant critical of rule-makers - Jun-11

Accountancy: Off-balance sheet accounting - Jun-04

Finance briefing: system depicts risk more accurately - Jun-01

IASB to tackle securities valuations - May-25

Although the group, consisting largely of representatives of banks and


accountants, cannot mandate changes in the rules, it is likely that the
guidance will set a new standard for reporting.

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.

“Much of this is no more than a restatement of best practice. But for


people who were not already expert, this guidance could be helpful.”

Among the paper’s recommendations is an extremely narrow definition of


a “distressed” sale. Auditors have privately reported attempts by clients
to widen the definition of distressed, or fire, sales. If they had succeeded,
it would have allowed the asset holder to record higher prices than the
last traded fire-sale price.

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.

Among the topics were proposals on “consolidation” – the accounting


decision whereby holdings are put on, or kept off, the balance sheet. The
IASB has produced a draft paper for consultation and will hold a series of
round-table talks on the matter, beginning in London on Wednesday. It
plans to produce a full proposal later this year.

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.

Copyright The Financial Times Limited 2009


FRS gets political as SEC unfolds roadmap

By Jennifer Hughes
Published: January 21 2009 22:39 | Last updated: January 21 2009
22:39

Was Mary Schapiro playing to her audience, or is she really as chilly


as she sounded last week on the notion of the US switching to
international accounting rules?

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

Lex: Accounting changes - Apr-08

In depth: Accounting standards - Apr-07

Brussels yet to sign key accounting pact - Apr-07

US body agrees accounting changes - Apr-02

Editorial: Revising the rules - Apr-01

US banks stand to benefit from rules change - Apr-01

US influence is such that the SEC’s viewpoint is likely to shape a great


deal of the debate about all sorts of changes to accounting rules over the
coming years, including international ones.

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.

But no such luck. Accounting in general is about to get political.

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.

Accountants are by nature cautious and, in fairness, this is also auditors’


busy season. I should also note that last year PwC did in fact make a big
and controversial stand in defence of fair value. But that was an
exception and public silence is the profession’s default position on too
many real accounting issues.

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

Copyright The Financial Times Limited 2009

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.

Taxes are what tie recent acts of corporate indignity together.


Everyone--even inanimate corporations--pays taxes, but not
before keeping as much as possible.

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.

It's doubtful that new schemes were hatched since the


legislative and regulatory crackdown began in earnest last
spring, so said Federal Reserve Chairman Alan Greenspan on
Tuesday. Still, it will be years before it's known if new law was
the true salve, or whether it was plain fear of jail and loss.

Fear didn't stop Enron (otc: ENRNQ - news - people ). Thursday's


congressional report harped on the discrepancy between
Enron's financial statement income and its IRS filings. But what
evidence is there that completely shunning taxes is a good
thing? In 2001, General Electric (nyse: GE - news - people )
set aside $5.5 billion for taxes on $19.7 billion in pre-tax
income. And thanks to excise taxes and its industry,
ExxonMobil (nyse: XOM - news - people ) reserved $9 billion,
or 38%, of its $24 billion pre-tax earnings for government duty.
At last check, both stocks had outpaced the S&P500 over the
last 10 years.
Such performance can't be said for most technology, telecom
and energy companies. In the 1990s, they grew on the backs of
excessive debt financing, options-charged executives and
capital-appreciation happy investors. In one way or another,
each of these phenomena comes back to taxes.

The treatment of interest payments as a tax deduction on


corporate income statements allowed a company like
WorldCom (otc: WCOEQ - news - people ) to borrow
tremendously for capital projects. Bond buyers were more than
willing to jump in, taking a nice coupon and/or convertible
shares.

Could the company have even conceived or financed its


projects through equity? To do so would have meant taking on
investors looking for returns and, one day, dividend payments.
And those dividends--a sign of real earnings--would be taxable
for Joe Investor.

Even in President George W. Bush's plan to end the double


taxation of dividends, the corporation must still pay taxes on its
earnings before passing the cash on to shareholders. Despite
efforts to the contrary, many of those shareholders are stock
and option-possessing corporate insiders.

The options culture itself came about due to the accounting


advantage of options over restricted stock. Restricted stock
grants count as compensation expenses and, therefore, a hit on
earnings. Until recently, on the other hand, most U.S.
corporations didn't account for the value of employee stock
options.

Given options--with a defined strike price--an executive can be


motivated to take corporate actions to inflate revenue or
earnings to sustain the shares. Such a practice is clearly against
the spirit and the letter of the law. And wouldn't a company,
wanting to motivate employees across the entire enterprise, be
more interested in endowing true owners and not just
contingencies?

Could it be that the U.S., on the edge of business innovation for


the past ten years, has actually fallen behind in tax reform?
Sure President Bush has signed a big tax cut and is pushing
another. Their effect will be heard every two years at the polls.
But over the past decade, the United States has gone from
having one of the lowest corporate tax rates of the 30 countries
in the Organization for Economic Cooperation and Development
to having the fourth highest, according to Chris Edwards, a
tax expert at the Cato Institute.

Edwards argues that an increasingly complex economy doesn't


have to be matched by a similarly complex tax code.
"Corporations are just the canary in the mineshaft," says
Edwards, referring to the millions of tax avoidance and evasion
strategies that riddle personal services jobs such as waiters and
contractors. He's not saying there should be a manhunt in every
kitchen and bathroom, but the corporate crackdown is avoiding
the real issue of re-examining the inconsistencies in the tax
code that motivate such avoidance.

Politicians have shown that they'll advocate individual income


tax cuts in an instant. But corporate tax relief is hard to come
by. Maybe now is the time for corporation suffrage. After all,
U.S. companies contribute roughly one-quarter of federal
revenue through income tax and social insurance payments.
The District of Columbia has nothing on corporate taxation
without representation.

Imagine what kind of political clout voting companies would


throw to Bentonville, Ark., the headquarters of Wal-Mart (nyse:
WMT - news - people ).

Urgent – we need much simpler and shorter financial statements

Published: January 21 2008 02:00 | Last updated: January 21 2008


02:00

From Prof D. R. Myddelton.

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.

The driver seems to have been a vain hope of achieving “comparability”


between the accounts of different companies in different industries in
different countries; but that is a will o’ the wisp. Far better to try to give “a
true and fair view” of the financial position and performance of particular
individual companies on a consistent basis over time.

Unfortunately, standard-setters do not seem to listen very well. When the


leaders of the six (then) largest accounting firms responded very critically
to the draft “Statement of Principles” more than 10 years ago, the UK
Accounting Standards Board took hardly any notice; so little, indeed, that
Ernst & Young did not bother to comment in detail on the “new”
proposals, but simply sent the ASB another copy of their earlier letter!
And “our” standard-setters are still trying to organise a global monopoly
with the Americans, whose approach to regulation is even worse than
ours.

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

Copyright The Financial Times Limited 2009

Drive for clearer accounting continues

By Jennifer Hughes
Published: October 5 2008 10:14 | Last updated: October 5 2008 10:14

Since pensions were first dragged onto company balance sheets in


the UK almost a decade ago with large parts of the industry kicking and
screaming, the hullaballoo has rarely died down.

That move, by the UK Accounting Standards Board caused a furore in


part because of its timing. Although many did not in principle like the light
shed on scheme funding, the most immediate problem was that it came
into force as the dotcom bubble burst, meaning that tumbling stock
markets savaged the value of pension holdings, making deficits look
even larger.

EDITOR’S CHOICE

European regulated funds see inflow of money - May-26

Get ready for the impact of Ucits IV - May-24

Tax threat to traded life funds - May-24

Call for levy on risk pollution - May-24

Blueprint to address the democratic deficit - May-10

Push for shareholder votes on pay - May-03

Accounting rulemakers believe that by making the funding, and how it is


managed, clearly visible on the balance sheet, investors and other
company stakeholders will have a clearer picture of the risks and
demands of pension schemes.

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.

The more recent introduction of similar rules in the US by the Financial


Accounting Standards Board in 2006 has attracted less controversy,
perhaps because the switch from DB to defined contribution plans was
well under way. But talk of convergence between US and international
accounting standards may heat up the debate in the US as tighter rules
are put on the table for discussion.

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.

That pensions pose a volatility risk to balance sheets is not in doubt.


Recent market gyrations are a case in point. According to Watson Wyatt,
the actuarial consultants, the combined schemes of FTSE 100
companies had a deficit of £12bn (€15bn, $21bn) at the end of August,
but by the middle of last month, that had swung to a £7bn surplus.

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.

However, in the current crisis corporate borrowing costs have spiked


sharply higher as investors have demanded higher returns for the greater
risk they perceive. In spite of that rising risk, the bigger number has
served to reduce scheme deficits, meaning it has worked in the opposite
way to that intended, since expected fund returns have not changed and
if anything given the current market, are under some threat.

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.

He adds: “It’s the job of accountancy to portray as fairly as possible the


true economics of what is going on. DB pensions have always been
expensive to provide and they’ve only become more so given longevity
and other factors. Accounting has just made that cost more transparent.”

Copyright The Financial Times Limited 2009

Non-financial reporting is set to grow in importance


By Paul Hohnen, Financial Times
Published: Mar 31, 2004

From Mr Paul Hohnen.

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).

They might consider three points. First, non-financial performance is


difficult to measure. This is precisely why the global reporting initiative
(GRI) was developed. When it was created five years ago, few
companies reported non-financial performance information because it
was not comparable. Now, however, more than 400 companies in some
40 countries prepare reports using the GRI guidelines.

Second, the issue of "questionnaire fatigue" is probably one of the many


reasons these companies use the GRI. Because GRI indicators
correspond in large measure with questions from SRI (socially
responsible investment) fund managers and ratings agencies, a GRI-
based report can be an effective first response to incoming
questionnaires.

Third, as to the contention that reporting companies do not see the


benefits, various studies confirm what seems intuitive: that greater
transparency translates into higher market trust, with a positive impact on
share price.

As non-financial reporting develops further, including through software


applications that will make reporting easier and of higher value to all
users, many see non-financial reporting as significant in this century as
financial reporting was in the last.

Paul Hohnen, Strategic Development Director, Global Reporting


Initiative, Amsterdam, The Netherlands

Global ambitions
By Robert Bruce
Published: September 17 2008 10:51 | Last updated: September 17
2008 10:51

It has long been a peculiar feature of the UK accountancy profession


that, despite being the largest in the world, it has not stepped up to
become the heart of an international profession.

It has a longer history, larger numbers, and greater domestic dominance


than any other accountancy profession in the world. But while wielding
great influence around the world, it has never translated that into a global
presence.

The nearest to a truly international professional body with a global reach


is the ACCA, the Association of Chartered Certified Accountants. But
even that organisation has a complex history of international expansion.
For years, its expansion overseas was criticised for depending more on
the huge income deriving from exam fees than properly building a
genuine overseas presence.

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.

A policy of international expansion, along with a loosening of the central


ties of the London headquarters, has been the key. “Globalisation of the
profession will continue to accelerate,” he says. “China, as a result of its
one-child policy, will have an insatiable demand for accountants, for
example.”

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.”

He contrasts this with other UK bodies, particularly the ICAEW, the


institute of chartered accountants in England and Wales, the largest in
the land. “The ICAEW has always gone for senior people overseas, but
that was never likely to create a beachhead. The ACCA has gone for the
mass market.”

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.”

He sees the growth as inexorable. “For example, the level of ambition


amongst young accountants in eastern Europe and Russia is scary”, he
says.

It is clever positioning. The partnership model with developing nations


works both ways. “Educationally, they have to satisfy IFAC [the global
body representing accounting bodies around the world] regulations, and
mostly they can’t. And they have trouble with regulatory issues and
practice monitoring”, he says. “We are here to help developing nations.
We do the education, the regulatory structure for continuing professional
development and practice monitoring. The philosophy is now partnership
and that is the antidote to any post-colonial kickback. We have learned
our lessons and adapted our strategy.”
Mr Blewitt says that when he arrived at the ACCA from Australia five
years ago, “the profession was still in the end of the post-Enron
maelstrom. The profession was quite badly battered. So we needed to
build the reputation of the profession generally”.

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.

Copyright The Financial Times Limited 2009

Regulating the regulators

By Robert Bruce
Published: September 17 2008 10:51 | Last updated: September 17
2008 10:51

Accountants are in the midst of a period of consultation which is of


enormous importance to the task of building a common financial
reporting language around the world.

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.

This is where the question of governance comes in. It is the age-old


question of who regulates the regulators. And that leads to the question
of how the independence of mind and action which has been the
hallmark of the IASB can be safeguarded. It is a paradox. The more
successful the independent IASB proves to be, the more other
organisations seek to hedge it about with restrictions.

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.”

The foundation that governs the IASB intends to create a monitoring


group made up of representatives of public authorities, such as the
chairman of the World Bank, the chairman of the Securities and
Exchange Commission in the US and the chairmen of both the emerging
markets committee and the technical committee of IOSCO, the securities
markets regulator. The proposals also suggest increasing the members
of the IASB to 16 and clarifying the geographical diversity of members.

By linking the IASB to a monitoring group of senior members of bodies


that are themselves accountable to public authorities, the trustees hope
to create an accountability link that would satisfy critics while maintaining
the crucial element of independence.

The monitoring group would have no responsibilities for the setting of


standards but would review the effectiveness of the trustees in, for
example, appointing members of the IASB, reviewing the IASB’s
strategy, its operating procedures and its financing arrangements.

To retain the IASB’s independence of mind in setting accounting


standards it would maintain the trustees’ distinction between considering
the IASB’s agenda, while not determining it. “The important thing is that
the monitoring group is to monitor, not to set policy and not to set
standards,” says Will Rainey, global director of IFRS services at Ernst &
Young. For him, it is all a question of objectives. “We want to get to one
set of globally accepted accounting standards,” he says. “If that means
demonstrating your governance is part of that, then we have to go with
it.”

There are both advantages and disadvantages to the proposals. The


members of the proposed monitoring group could provide valuable
insights into where capital markets around the world are going wrong.
But they could also start to itch to have more influence over the IASB.

“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.”

But Robert Hodgkinson, technical executive director at the Institute of


Chartered Accountants in England and Wales, is dubious. “If you are
talking about an international accounting language for investors and
preparers, the proposed members of the monitoring group are not the
most obvious guardians of the system,” he says.

“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.”

In the end, it is an emphasis on independence that the proposals for


altering the IASB’s governance structure need to enshrine. “We need to
keep it independent,” says Mr Zalm. “I am a former politician. I
appreciate politicians, but they should not be involved in standard-
setting. At the same time, we need to be responsible to other
organisations. It is a balancing act.”

Copyright The Financial Times Limited 2009

The US joins rest of the world

By Jennifer Hughes
Published: September 17 2008 10:51 | Last updated: September 17
2008 10:51

Christopher Cox, chairman of the US Securities and Exchange


Commission, is not known for fanciful language. But, last month, he
described international accounting standards as a “revolutionary
development” in the business world.

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.

“An international language of disclosure and transparency is a goal worth


pursuing on behalf of investors,” said Mr Cox.

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 most far-reaching of these is likely to be the switch in mentality from


the detailed, rules-based approach that US GAAP has developed to the
broader principles-based system of IFRS, where the standard-setters
have deliberately avoided going down that route.

“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.

US GAAP, including guidance, staff interpretations, other official literature


and the rules themselves, comes to about 25,000 pages. IFRS – albeit a
much younger system – is about 2,500 pages long.
Joel Osnoss, a partner at Deloitte, says the switch in mentality was one
of the biggest issues. “We’re helping clients adjust to understanding the
economics behind each transaction and not get so wedded to rules.”

A number of individual standards will need close examination on how to


apply them.

“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.

The cultural change to relying more on judgment than detailed rules is


one that many accounting experts welcome, but they warn that it will not
be an easy shift.

“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.

Copyright The Financial Times Limited 2009

Enough already - why corporate reporting so seldom enlightens

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.

Company executives worn down by red tape blame regulators for


mandating reams of disclosure to "protect" shareholders without
consulting investors about what they would like. Regulators, meanwhile,
wonder just how committed companies are to telling the truth.
Shareholders say both could do better.

Anne Simpson, executive director of the International Corporate


Governance Network, which represents an assortment of big-name
investors, has said a "struggle for the soul" of corporate reporting is
under way.

At a catastrophic level, murky and misleading communication creates the


conditions in which costly corporate scandals, such as the collapse of
Enron, can gestate. Less dramatically, but just as importantly, investors
need accurately to gauge corporate success and judge future prospects
if they are to allocate funds effectively in the market. If they cannot, their
returns will suffer. Economic growth could be harmed, too, if capital is not
channelled to the most deserving outlets.

Symptoms of what is wrong with regulated reporting are manifold.


Perhaps the most striking is that the most prized communication
between companies and investors takes place outside the confines of
the accounts and annual report. Share prices are more likely to move on
the content of earnings press releases - which are not specifically
regulated in the US or Europe - than on the accounts (which take longer
to read) or annual reports (which take longer to arrive).

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."

David Phillips, a partner at PwC, points to another manifestation of what


is wrong with corporate reporting: the ever-present gap between the
value of most companies' balance sheets and their value in the eyes of
the market. If regulated reporting better expressed what companies are
and what they do, that gap would be much narrower, if it existed at all.

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.

In the European Union, the International Accounting Standards Board


sets rules - International Financial Reporting Standards - that came into
force across the region at the start of 2005. High hopes that harmonised
rules would make accounts cheaper to produce and easier to read have
given way to gripes that the IASB is taking accounting into a new
dimension - one that makes the theoreticians purr but bamboozles
everyone else.

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.

The writers of US accounting rules - at the Financial Accounting


Standards Board - are getting similar flak, which is not surprising given
that it and the IASB are working to bring their respective standards closer
together.

US accounting kerfuffles tend tobe episodic - sparked by proposed


changes to pensions, leasing or stock option accounting - whereas
morephilosophical European investorsplace their worries in the contextof
grand polemics on shareholder rights. But there is a shared anxiety
about the complexity of accounts,on which Christopher Cox, the SEC
chairman, has declared "all-out war".

Carrying its own prescriptions for change is a group of London-based


analysts from the likes of UBS, Barclays Global Investors, Citigroup
andJPMorgan Cazenove who have assembled in the Corporate
Reporting Users' Forum (Cruf). They want to estimate the worth of
companies, they say, so standards should give them the following
"valuation toolkit": a price/earnings ratio (the IASB is suspicious of a
single figure); a balance sheet that reflects the capital invested in a
business, not its fair value; a profit-and-loss statement that shows the
return generated from the capital invested; and a cash-flow statement
that highlights what is driving that flow.

Crispin Southgate, a consultant who is a Cruf member and former credit


analyst at Merrill Lynch, says: "This is a bunch of people paid to
disagree. So when we agree as individuals, it suggests someone should
take notice. And when we agree with the companies, all the more
reason."
The problem with narrative reporting is one of empty words rather than
baffling numbers. In an effort to comply with broadly defined regulations
while looking socially responsible, many companies produce a strange
mix of legalese and public relations puff that does little to illuminate their
performance or prospects.

Richard Carpenter of Radley Yeldar, a consultancy, has trawled through


the annual reports of the UK's top 100 companies and concludes that a
lot of corporate reporting is "awful". On an annual report from Next, the
retailer, Radley Yeldar said: "It lacks a decent overview of the business. If
you do not know what Next does, then you would struggle to be much
the wiser after reading the report."

Mr Carpenter says: "It's annoying that companies spend so much money


on it and it doesn't do what it's meant to. It should be about
communicating, but companies say, 'Oh, it's legislation,' and then can't
stop thinking about ticking boxes."

HSBC's 2006 risk management coverage, for example, spans 83 pages


and includes a cautious list of almost every possible danger. Ken Lever,
finance director of Tomkins, the engineering group whose shares are part
of the FTSE 100 index, jokes: "A lawyer gets hold of it and you almost
end up with something saying: 'There's a risk that if you don't sell
anything you don't get any sales'."

A bigger issue is a lack of Buffett-like frankness. At one point in his 2006


letter to shareholders, the Berkshire Hathaway chief says of a
lossmaking derivatives operation: "The hard fact is that I have cost you a
lot of money by not moving immediately to close [it] down."

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.

In a mock annual report compiled under the banner of Report


Leadership, as the grouping has been named, Mr Lever and the others
promote the use of non-financial indicators measuring things such as
customer satisfaction, employee morale and innovation. They also show
how to write a narrative that weaves together strategy, an explanation of
a company's competitive position and an analysis of how its markets are
evolving.

"What level of investment do you need to maintain your margin? What's


your pricing power? How are you going to be affected by low-cost
competition? How will you pass on input cost increases? These are the
things investors are interested in," says Mr Lever.

Yet the most recent onslaught of capital markets regulation - inspired by


the Enron collapse and symbolised by America's 2002 Sarbanes-Oxley
Act - did not focus on corporate reporting. "Perhaps one of the big 'take-
aways' from Enron should have been to ask: is the reporting model
flawed?" saysMr Phillips at PwC. "Instead, they tried to fix the systems
and controls."

Another problem is that most investors lack the time or inclination as


individuals to become immersed in often desiccated debates on
reporting. "Most investors have day jobs. They aren't in a position to get
deeply involved in theological arguments," says Peter Montagnon,
director of investment affairs at the Association of British Insurers. "The
problem is not that they don't know what they want. It is the ability of both
sides to engage in dialogue at a level that satisfies everyone. You get
three accountants talking about something and it very quickly gets very
technical."

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."

A libertarian alternative is zero regulation. If there were no accounting


rules and no narrative reporting requirements, companies would be
compelled to figure out on their own exactly what the market wanted,
proponents argue.

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."

Progress in that direction is being made at the travelling circus of


conferences, workshops, seminars and policy forums where corporate
reporting is discussed. But the lesson of history is that it is not worthy
words and leaden papers that force seismic change, desirable or
otherwise. It will be the next round of corporate failures.

Copyright The Financial Times Limited 2009