One accounting standard for the whole world. Thanks to increasingly globalizing markets, there is certainly a need for it, but is it possible? Many different interests make it difficult for regulators to arrive at a model that everyone can work with. Disagreements between the FASB (US Financial Accounting Standards Board) and the IASB (International Accounting Standards Board) about various elements of IFRS raise doubts. Can we reach an agreement, or is one global model too ambitious?
IASB and FASB have worked hard together to close the gap between IFRS and US GAAP. This was very successful in a number of areas. Accountancy for business combinations, fair value measurement, and the Revenue Recognition project are good examples of this. Agreement on such important topics has a major positive impact on the quality and comparability of financial information around the world.
Other things went less smoothly. An important topic that sparked a lot of discussions is the Financial Instruments Project. There is a lot of disagreement about how to deal with possible losses on a loan. According to IAS 39, you only book a loss on a loan when you know that you will incur that loss. This results in an overly favorable picture of loan income, one of the pitfalls that caused the financial crisis, according to experts.
The FASB now believes it is best to consider potential losses over the life of the loan right from day one, but the IASB chooses to estimate the loss in the first 12 months, and beyond only recognize a loss over the remainder of the loan if the creditworthiness of the borrower declines. The discussion on this topic became so heated that in February 2014 the FASB decided not to continue working on IFRS 9 and the IASB continued on its own. The IASB presented its new IFRS 9 last month.
Perfect concept or practically feasible
It’s a tough discussion. Proponents of IASB indicate that, while the new model is not perfect, the IASB has developed a model that represents a good compromise between massive loan loss perfect model that turns out not to be economically feasible (only record a loss if it actually happens). Opponents say they don’t see the new model as an improvement on the old situation, but rather as a 12-month delay.
IASB opinion confusion
This week, both chairman Hoogervorst and vice-chairman Mackintosh of the IASB spoke at various events. They both conveyed very different messages.
Hoogervorst said in response to a question at a conference in Singapore that the FASB and the IASB are not going to agree. The FASB decided not to continue with IFRS 9, but the IASB had to continue, which was Hoogervorst’s message. Following his comment, it appeared that the US will continue to use its own model, in addition to the new IFRS model that will be used in more than 100 countries in the world as of January 2018.
However, IASB Vice President Mackintosh spoke in South Africa on Wednesday 13 August during the IFRS foundation conference. “A global accounting standard is not only possible but inevitable,” says Mackintosh. He said that many reports today paint a picture of an increasingly globalizing economy: global transactions, in companies located worldwide, supported by investors seeking global opportunities. “A national accounting standard nowadays only reminds us of a bygone era,” said Mackintosh, “it increases the cost, complexity and translation risk to companies and investors active in today’s global market”.
Challenge IFRS implementation
Despite Mackintosh’s positive outlook, it does not look like the FASB will transition to IFRS any time soon. The FASB is currently developing its own loan loss impairment model, which is expected to be published at the end of 2014.
What is difficult about the new IFRS 9 is in any case assessing loan loss in the first 12 months. On what do you base your judgment, and how do third parties interpret your assessment? When IFRS 9 is introduced, it will also have to be clear what the effect of the new treatment is on the statutory capital ratios.
Although IFRS 9 will not be mandatory until January 1, 2018, early implementation of the new model is not yet possible in many countries. EU countries, for example, have to wait for approval from the EU, European and national regulators.