A year from now, the International Accounting Standards Board needs to have in place an accounting standard on financial instruments it can live with. That means it has to stay broadly aligned to US GAAP. Equally importantly, the IASB’s constituents will also need to be able to live with the standard. At the moment, it appears the UK banks think the current standard, IAS39, can be beaten into shape. But not all of Europe agrees.
As one insider put it: “The French (bankers) are even more upset than the Germans, and are lobbying hard.” They do not like the idea of falling into line with IASB thinking on every last jot simply because the IASB has bigger fish to fry in attempting to converge its GAAP with the US.
And IAS39 is disliked in Europe for two main reasons. First, it requires the use of fair values for many issues that bankers like, and, secondly, it significantly restricts the use of hedge accounting.
In the middle of September 2002, the French Bank Federation published a statement entitled Loss of confidence in the financial markets and International Accounting Standards. It says IAS39 “presents serious deficiencies that run counter to the goals which have led the EU to impose the use of the standards”. The federation’s argument is that the IAS in its present state is inspired by the same theory as US GAAP, “a theory that lies at the heart of the current accounting crisis and loss of confidence in financial reporting and markets”.
Financial instruments are just one issue in this argument, although perhaps the most difficult. Abolition of the distinction between operating and finance leases, which will put everything on balance sheet, will cause difficulties in the leasing industry. And many FDs will be riled by changes to share-based payments.
There are also standards in the UK canon that will simply not exist in the international version. For the IASB, the idea of an international version of FRS5 (substance of transactions) is a non-starter. Privately, it says it is unnecessary to have a standalone standard that sends out a message that off-balance sheet financing is a no go, because the issues are covered elsewhere.
Even with all these technical accounting issues to be faced – and with such geographically widespread constituents to consider – European endorsement of international standards is a done deal. But could that deal be wrecked?
The IASB position on topics such as financial instruments may have been endorsed by the advisory body EFRAG (the European Financial Reporting Action Group), but the French banking industry is not alone in its opposition – there is widespread sympathy within the accountancy profession for its views on fair values. Busy as it is, the IASB needs to convince preparers of accounts that it understands their reservations on individual issues and is listening.
Perhaps the IASB should remember that, within the annals of accounting history, there are incidents of revolt. In the UK, SSAP16, the standard on inflation, was eventually withdrawn after its authority was repeatedly undermined, mostly because it was attacked by a firm of accountants. And, perhaps of more relevance, the old Accounting Standards Committee collapsed when preparers refused to go along with plans to capitalise and amortise goodwill instead of writing it off to reserves.
After the ASC came the ASB. But the ASB had what one critic calls “a golden card” from the DTI to sort out UK accounting standards. The ASB gained authority not only from implicit government backing, but also from a proper enforcement regime and from a more cautious approach to difficult issues than perhaps it would like to admit. It was late 1997 – seven years after it was formed – that it published a standard on goodwill. Over that time it had both built a consensus through listening and finding some subtle solutions to the problem through impairment. The IASB doesn’t have that sort of time.
The IASB was re-launched on the consensus that we need strong accounting standards. Politicians have bought into that vision, along with the accountancy profession. But as the French bankers demonstrate, there are genuine differences of opinion on technical questions. The IASB would argue that its wide constituency is reflected in the composition of its supervisory board and that it is listening. But it needs satisfactory standards in situ by 2005. It should not kid itself that they will be satisfactory for everybody.