By Dwight Cass and Joseph Neu
SEC, IASB reaffirm commitment to project but questions remain over important treasury accounting issues.
News that the International Accounting Standards Board had set aside its goal for convergence with FASB standards threw an uneasy spotlight on the long-simmering process in February. The Financial Times reported at mid-month that the IASB would no longer view convergence as “an objective in itself.” Despite a strongly worded letter the following day from the head of the IASB Foundation to the FT denying the story, the potential derailment of the convergence project gave it renewed urgency.
Or so it appeared, at least, from the Securities and Exchange Commission’s February 24 open meeting, where it unanimously reiterated its commitment to the convergence project and the goal of approving IFRS next year, in line with its original 2008 “road map.” However, before considering the issue further, the SEC directed its staff to complete a so-called work plan, the elements of which show how much uncertainty over convergence remains. The core issues include:
- Determining whether IFRS is sufficiently developed and consistent in application for use as the single set of accounting standards in the US reporting system.
- Ensuring that accounting standards are set by an independent standard-setter and for the benefit of investors.
- Gauging investor understanding and education regarding IFRS, and how it differs from US GAAP.
- Understanding whether US laws or regulations, outside of the securities laws, for example tax laws and regulatory reporting, would be affected by a change in accounting standards.
- Understanding the impact on companies, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations and litigation contingencies.
- Determining whether the people who prepare and audit financial statements are sufficiently prepared, through education and experience, to make the conversion to IFRS.
As Deloitte pointed out in its analysis of the meeting, “The first two issues focus on information that is relevant to the SEC’s determination of whether to incorporate IFRSs into the US financial reporting system; the last four focus on the when and how (timing and scope) of potential adoption.” The SEC staff is to report back on progress no later than October, which means progress on those crucial two first issues won’t be apparent for some time. However, the delay may give the FASB and IASB time to work out some compromises and come to some agreement on the second issue: Europeans want the standard setter to be more subject to government influence, not less.
NETTLESOME DIVERGENCES
Diverging approaches to a number of important issues for treasury, like hedge accounting, also need to be addressed. The FASB and IASB met a few times last month to collaborate on changes to hedge accounting as part of a joint effort to simply financial instrument accounting. One example of an outstanding issue that is important to treasury is bifurcation-by-risk. The FASB maintained a stronger adherence to the fair value accounting idea that the full value of hedge and hedged item (e.g., market, credit and other risk factors) should be determinant in looking at hedging relationships. It has thus been eroding the bifurcation-by-risk elements in FAS 133 in its utterances on hedge accounting in recent years. Little wonder then, that it is not being as quick to follow the IASB’s lead in extending the bifurcation-by-risk concept to non-financial items as well. While the IASB has already tentatively agreed to permit bifurcation-by-risk going forward, so long as it is separately identifiable and measurable for the purpose of determining hedge effectiveness, the FASB has punted the concept to its staff for further consideration.
Clearly, most treasurers will favor the bifurcation-by-risk approach to be maintained and extended, the direction the IASB is leaning. Hedging targeted risk or value components opens up additional possibilities to win hedge accounting for increasingly important commodity price hedging, for example, by, say, allowing specific targeting of moves in the futures price. But there are also elements of FASB’s rules that could be preferable to the IASB approach. As Citi’s Corporate Solutions Group recently noted, “We recommend that the IASB reconsider the hedge accounting rules for options and take an approach similar to what is allowed under US GAAP. Forcing companies to take the change in fair value of option time value through current earnings on a mark to market basis creates a considerable accounting obstacle for companies to use hedging instruments that might be appropriate for them economically.”
In any case, even assuming the work plan is executed in a timely fashion, treasury will have a fair amount of time to prepare to use the IASB standards. The SEC is considering giving companies until at least 2015 to make the switch to international accounting standards.