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December 14, 2008

IASB feature: Trial by fire

The final few months of 2008 have seen the IASB thrust into the spotlight as the strength of IFRS has been tested by the financial crisis. However, reflecting on the year as a whole, deputy chair Tom Jones tells Carolyn Canham it has been a time for laying the groundwork for the next big push in the standard-setting agenda.

Tom Jones, deputy chair, IASB Many jurisdictions, including some of the world’s largest, are due to adopt IFRS or converge it with local standards between 2011 and 2014. And the International Accounting Standards Board (IASB) wants to be ready.

IASB deputy chair Tom Jones calls the period between now and 2011 the “next big push” and notes there have been many critics of the tight programme and huge amount of work.

“People say, ‘you cannot do all that and have proper due process’, but you can,” he argues. “You obviously have to set priorities and with the right priorities, you can get things done high quality, quite quickly. That’s the objective.”

The past year has been a time for laying the groundwork for the run up to 2011.

One such accomplishment that particularly pleases Jones is the work on the private entities standard.

He says that if the IASB manages to simplify three or four more issues in January, it will be a terrific standard. Issues that remain to be simplified include pensions, depreciation, amortisation and financial instruments. The name is also still in contention.

Another accomplishment Jones is happy with is the slow but steady progress on insurance accounting.

“Insurance accounting around the world is broken,” he explains. “The vast majority of people have no clue how insurance companies account and they all account differently everywhere in the world. I think the industry needs better, more common standards.

“We are making some progress. There is a lot of interest on the project and not everybody is supportive but overall many people welcome that we are addressing the issue.”

Other progress has been on more intractable problems such as consolidation. Jones explains that while he thinks IFRS 7 is “pretty good”, the financial crisis has shown it is not good enough.

“There are two issues,” he explains. “One is we need to tinker around with consolidation and derecognition and some of the sensitivity stuff in our standards. But, more importantly, we need to bring US and international standards together because even when the standards have the exact same objective, if the words are different we get picked apart.”

New IFRS and major projects due to be completed 2009-2011

Changing faces

Another incentive for meeting the 2011 deadline is the significant changes that will occur to the IASB board during the next few years. All original board members will be gone by 2012.

“We don’t want these major standards to be finalised when half the board is brand new and hasn’t had any knowledge of the process, because they have got to vote and you can’t abstain, that is a ‘no’ vote,” Jones says. “So that is one more reason that we really need to get a lot of these things done and finished before we have a new board.”

He adds that it is appropriate there will be an entirely new board following the completion of these major projects, as the standard setter’s focus will change.

“The work in the first 10 years has been basically getting the standards into some kind of shape so they can be used, and also to attract major economies,” Jones explains.

“I think in a sense we will have achieved that in spades because every major economy will be there.

“The job of the gang in the next 10 years will be to consolidate that. They won’t be bringing major new economies onto the standards because they are already there. But they will really need to clean up, simplify, make it easier and it is a different kind of process, so it may call for a slightly different kind of crew.”

While 2008 has seen no board member changes, there has been shifts in the IASB’s senior staff.

Senior director positions were restructured following the resignation of technical director Liz Hickey, who moved back to New Zealand.

The restructure included moving former research director Wayne Upton to the newly-created position of director of international activities, which includes liaising with the major jurisdictions that are moving to IFRS.

“We thought we had to pay more senior attention to countries like China, India and many others who are moving,” Jones says.

He adds that changes within the staff are good because it means new ideas, youthful enthusiasm and change.

“This is not an industry where you want 20- or 30-year seniority in setting standards. Standard setting is a job to be done for a few years and then to move on. And I am a firm believer in that,” he says.

Pressures arising

Jones says the past year has been a trial by fire for international standards. The past few months have also been something of a trial by fire for the board itself in terms of its response to pressures arising from the financial crisis.

One issue that has come to the fore has been the balance between the IASB’s independence and accountability.

On one hand, political leaders have been pressuring the board to make hasty amendments to standards in response to the crisis; while other stakeholders have loudly insisted the IASB stick to its due process and remain free from political pressure.

Jones says it is a very fine balance, adding that what people understand by independence is different from place to place, so “there’s always room for a bit of pushing and shoving”.

“Clearly accounting standards cannot be set in any other way than by an independent board. Standards set by people with an axe to grind, or set with political objectives in mind, don’t work because investors would not believe in the results they produce,” he says.

The IASB almost always finds itself in middle ground, with stakeholders making conflicting demands.

“Nothing we do has 100 percent support. If preparers like it, you can bet it is not what users want. If users love it, the preparers are going to object and the auditors are going to say ‘we can’t audit that’ and the regulators will also have an opinion.

“So at the end of the day, independence is the wisdom to not ignore real life, but also not to be blown away by someone who says ‘this entire crisis is caused by fair value’.”

Although the fair value debate may not be over, there could be some positive outcomes already. The IASB’s rush to pass reclassification amendments to IAS 39 and IFRS 7 cemented its future commitment to stick to due process. Yet the board has also recognised political concerns that an accelerated due process may be needed for urgent matters. The IASB’s oversight body, the International Accounting Standards Committee Foundation, is currently seeking comments on this as part of its constitution review.

“Most countries absolutely understand that you can’t have standards for accounting written by politicians because it would never, ever, in a million years work. So maybe we are all a bit wiser,” Jones adds.

The IASB works closely with standard setters and regulators the world over, but its relationships with some attract more attention than others. The US is one particular focus due to the challenges associated with bringing the world’s largest economy towards IFRS.

The US is in a transitional stage not only in accounting, but also in politics, with a new administration taking office in January. Key appointments still to be made include the chair and chief accountant of the Securities and Exchange Commission (SEC). The men currently in those positions, Christopher Cox and Conrad Hewitt respectively, have been IFRS advocates.

The train is moving

2008 IASB board membersJones says that changes in government and within the SEC will likely not have significant effect on the push to IFRS because it is driven by markets.

“The train is moving and it probably does not make such a big difference who is in charge or who is making the decision. I think you are going to find that it is driven by markets and the US is going to continue moving,” he says.

Jones adds that the IASB’s relationship with the US Financial Accounting Standards Board is very good.

“They are very co-operative, they share our objectives, we get on quite well on the whole,” he says.

He describes the board’s relationship with the EC as a “multi-faceted kind of relationship” and notes the relationship has become more complex due to the greater role of the European Parliament.

“Now we talk with the Commission and the Parliament and the Ecofin and the [European Financial Reporting Advisory Group – EFRAG],” he adds.

Jones says it is a little unfortunate the IASB and the Commission did not understand each other better in the past, which led to issues such as the carve-out in IAS 39.

“It is being used by very few companies, but it exists and that does detract from the decision Europe made to use IFRS because they wanted to use international standards. It gives an excuse for countries to say ‘if Europe can carve out, we can carve out’,” Jones explains.

“There are some unfortunate things from history, but I would say the relationship has improved.”

The landscape in Europe is set to change again with a move towards a larger and better-funded EFRAG. Jones welcomes this move.

“We have always felt it was better for Europe to have a more unified voice and we support the coming together of the national standard setters and EFRAG,” he says.

While the financial crisis may have proven a valuable test for the IASB and its standards, Jones is looking forward to seeing the end of it.

Looking towards 2009, his first wish is that the economic crisis begins to ease as it is “keeping everybody’s attention”.

“It is much deeper than we would have predicted a few months ago and it is very hard for people to focus on changes down the road when they are dealing with the fire right outside the door,” he notes.

“On the other hand, despite all the doom and gloom, these things eventually pass, the question is ‘how quickly?’. I think we have to hope that 2009 sees a bottom to that and the start of an improvement.”

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