The international accounting standard setting process isn’t working. We know
that because the combined might of the International Accounting Standards Board
and the Financial Accounting Standards Board says so. The way that they describe
the process seems so arcane, muddled and confused it is a wonder any standards
Sir David Tweedie and Robert Herz, the chairmen of the IASB and FASB
respectively, have not admitted the shortcomings of the present system for
completely altruistic reasons. Rather they want to change the system to make it
more coherent, logical and, above all, quicker. At the moment, the standard
setting process takes three years from initial idea to completion. The solution
is a fast track to meet a demanding timetable.
In another world, the standard process may be allowed to meander at the
current pace, but Tweedie and Herz can hear the sound of time’s winged chariot
drawing near. A small IASB/FASB group was tasked with providing a progress
report and developing a work plan for the completion of the February 2007
Memorandum of Understanding (MoU) to converge IFRSs and US GAAP. The progress
report updates the MoU to 2011 identifying the priority of financial reporting
improvements, the time frames for completing them and the major milestones along
The bottom line is that between now and 2011 a substantial amount of work
needs to be finished by standard setters. You could argue that three years is a
long time, but in the current standard setting process it is a blink of an eye.
Here’s the IASB/FASB current timescale for a standard: issuing a due process
document usually takes 12 months (three to prepare and ballot, six for exposure
and three more to read and summarise comments). Then major projects require two
due process documents (a discussion paper and exposure draft), so repeat process
describe above and that leaves 12 months for board deliberations. No
deliberation has yet taken less than a year.
For example, it took 18 months to take business combinations from exposure
draft to final and then the two boards didn’t converge on all major points.
The major projects in progress – liabilities, equity, revenue recognition and
financial statement presentation– have been under discussion by the boards in
one form or another for at least five years. It is clear that the issues are
many and controversial and completing them by 2011 represents a significant
While the standard setters say that the present project administration could
be improved, it won’t solve the crux of the issue. The fundamental reason why
projects take as long as they do is that the two boards – and members within
each board – sometimes don’t agree on what they are trying to fix and how to fix
These differences include diverse views over whether a project is worthwhile,
or whether the issues within a project are even worthwhile resolving. Then there
is the problem of project creep.
For example, work on financial statement presentation was expanded to include
revisions to segment disclosure because existing segment disclosures were deemed
deficient. Usually, divergent views exist about the approach to be taken. So,
for instance, some standard setters want to develop a conceptual model as the
basis for the revised standard, while others see the problem as lack of
guidance. The final source of disagreement between standard setters is known as
cross cutting – differences in views about whether and how similar issues in
active projects should be resolved consistently. If internal consistency is the
goal, then you create a standards log jam. No project can move any faster than
any other work to which it is related.
An example of this is the IASB business combination standard, which couldn’t
be issued until it had completed fair value measurements. All this leads to a
large amount of time at board meetings debating issues that have been debated
The way forward, according to the IASB group which analysed the standard
setting process and likely achievements by 2011, is simple. The solution is to
agree project objectives at the start.
This means that the boards must have a good idea of the outcome of the
project before they embark on the work. If they know where they are going, they
are much more likely to get there.
The downside is that there are no intellectual debates along the way.
Instead, standard setters work on finding the best workable solution to what had
already been agreed.
The work by IASB/FASB has already been done on articulating and identifying
projects objectives and the improvements that can be accomplished by mid-2011;
the new fast-track solution is waiting for the go-ahead from the boards – a
decision is expected in June. The danger of this new fast-track stance of the
IASB/FASB convergence programme is that it may come under fire for failing to
consult properly and may lose support if it produces unpopular or allegedly
unworkable standards. Tweedie and Herz know those risks and are prepared to take
them. In the international accounting standard setting world it seems there is
no longer any time for nice guys.
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