Mark-to-Market Takes Precedence in Global Crisis
Accountancy Rule Makers Prioritize Fair Value in Response to G-20
Reporting on progress following the April G-20 meeting, Hans Hoogervorst, the co-chairman of the Financial Crisis Advisory Group (FCAG), warned in a Letter to G-20 Leaders of April 29, addressed to UK Prime Minister Gordon Brown, head of the G-20 nations, additional work on other issues would lead to delays.
The FCAG, which was established in January in response to the global financial crisis, is made up of 18 leading financial experts and jointly chaired by Hoogervorst, who is the chairman of the Netherlands Authority for the Financial Markets, and Harvey Goldschmid, former commissioner of USA's Securities and Exchange Commission (SEC).
The group was established by and receives staff support from the two global accounting standard setting authorities - the London-based International Accounting Standards Board (IASB) and US-based Financial Accounting Standards Board (FASB). The two boards have been for some years working on converging the US General Accepted Accounting Principles (GAAP) and International Finance Reporting Standards (IFRS).
Critical Need
In his letter to the UK Prime Minister, Hoogervorst said the group was "encouraged by the significant progress that has been made, and continues to be made, by the two boards". He said the IASB and FASB were working together on a comprehensive proposal to be released later this year which would streamline financial reporting - particularly valuation and off-balance sheet standards which were in critical need of improvement.
"We are convinced that improved standards in these areas, and also in the provisioning area, which is of particular importance to regulators, can increase transparency, preserve financial statement integrity and thus contribute to reducing the financial sector’s vulnerability to excesses of the business cycle," he said. In response to the G-20 recommendations, FCAG will focus on two projects in particular:
- Financial instruments - improving the disclosure requirements about fair value measurements and reinforce existing principles for disclosures about the liquidity risk associated with financial instruments
- Consolidation-Derecognition - tightening the requirements for consolidation and expanding disclosures to give an overall view of companies’ involvement with off balance sheet entities
Tremendous Challenge
However, the G-20 recommendation set out in Attachment II – Strengthening Transparency and Accountability of April 9, that standard-setters should make "significant progress" towards a convergence of IFRS and US GAAP for "a single set of high quality global accounting standards" has taken a step back in priority. The IASB and FASB will not be rushed into putting the date forward for a broad convergence of IFRS and US GAAP before the planned date of 2011. This means the SEC proposed road map which requires US companies to use IFRS instead of US GAAP by 2014 is unlikely to change any time soon.
Hoogervorst warned the Financial Instruments and Consolidation-Derecognition projects presented "a tremendous challenge". "The Financial Instruments Project, in particular, is very wide-ranging and complex, and issuing a comprehensive proposal by the end of 2009, as the G-20 has urged, is ambitious and challenging, requiring significant resources, coordination, and focus," he said. "The FCAG strongly believes that the two boards can only achieve what the G-20 seeks if they can completely focus on the highly complicated technical work that these projects entail. Additional work on other issues, beyond the commitments the boards have already made, will inevitably lead to delays on the projects that matter most."
Mark-to-Market...prioritized
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