Can you trust the numbers? Accounting standards
exist to give investors confidence in the figures,
but can you trust the standards? While a global economy
demands unified standards, can such a thing really exist?
Facing tough questioning from Brunswick’s
Andrew Garfield, the Chairman of the
International Accounting Standards Board, Sir David Tweedie, believes so
Andrew Garfield: How much of a challenge do the rising nations of Asia and Latin America pose to the Western view of published accounts as a “true and fair” measure of a business, given their different cultural values and attitudes regarding transparency, disclosure and obligations to stakeholders, particularly financial investors?
David Tweedie: There’s no one view of accounting across Asia and Latin America, but neither is there across Western Europe, and there is support for International Financial Reporting Standards (IFRS) in all of these regions. This support exists because, in many cases, these economies have suffered a lack of confidence in their reporting regimes. Asia, in particular, had its own financial crisis in the 1990s, as did Argentina and Brazil. Adopting IFRS, with their investor focus and transparency, helps remove the risk associated with investing in these countries.
Can we really bridge the cultural gulf that exists between Europe and the US, and how problematic will it be if European and US bodies cannot agree a unified standard? Would it be better for them to go their separate ways than settle for a compromise that pleases no one?
I just don’t buy the argument that the US should account for the same transaction differently from the rest of the world. The financial crisis blew that argument away. The fallout from Lehman Brothers affected world markets because equity and debt markets are so tightly coupled. Combining global markets and regional accounting standards invites regulatory shopping, as seen with the “Lehman Repo 105” problem [the accounting device that helped Lehman Brothers conceal its high leverage]. That is why the last three G20 communiqués have called for the International Accounting Standards Board (IASB) and the United States’ Financial Accounting Standards Board (FASB) to complete convergence by 2011, and for the world to embrace global standards.
We are on track to complete this work by 2011 – the date when the US will decide on domestic use of IFRS. The Securities and Exchange Commission (SEC) has long supported IFRS, and I remain optimistic that the US will sign up to them in the near future.
It seems the US has stepped back from “fair value accounting,” where the value of assets or liabilities is based on current market price rather than original cost, while many European corporations argue such practices are only valid for short-term trading books and that they are misleading when evaluating the strength of longer-term investments or assets. Does this mean the IASB, in advocating this model, is out of step with the principal users of accounts?
The FASB has proposed a full fair value model for all financial instruments, so it is wrong to say the US has stepped back. Meanwhile, the IASB has issued IFRS 9 Financial Instruments, which applied a “mixed measurement model” for financial instruments. Basic loans with predictable cash flows would be measured at cost; anything traded, or more exotic instruments with unpredictable cash flows, would apply a market price. Most commentators support this approach, which it is estimated will reduce the use of fair value by most financial institutions.