Full steam ahead for financial instruments specialists

Since my previous posting, the IASB has published another two exposure drafts with a reduced comment period. My colleagues specialising in accounting for financial instruments currently have on their desks six different and important consultations. So it seems rather timely that the international advisory group set up by the IASB and the US FASB to advise them on financial reporting issues arising from the global financial crisis has just delivered its advice following six months of discussion and consultation.

The Financial Crisis Advisory Group (FCAG) comprises recognised leaders from the fields of business and government with a broad range of experience in international financial markets and an interest in the transparency of financial reporting information. Its primary mandate has been to advise the IASB and FASB about the standard-setting implications of the global financial crisis and potential changes to the global regulatory environment.

The group has also considered how improvements in financial reporting could help investor confidence in financial markets, identifying significant accounting issues that require the Boards’ attention. On fair value, the group acknowledges that there are differing views on the extent to which mark-to-market accounting may have been ‘pro-cyclical’ and accentuated the fluctuations of the market. But it concludes that, on balance, it is unlikely that accounting standards led to an understatement of the value of financial assets, and accounting rules were not the cause of the financial crisis.

The FCAG’s report is generally supportive of the actions of the two standard-setters, with strong support for a single set of high-quality global accounting standards. Noting the Boards’ efforts to look afresh at the classification and measurement of financial instruments, it urges them to reach converged solutions as their highest priority.

The financial crisis has illustrated the extent of detailed differences between IFRS and US GAAP and the risk of interested parties arbitraging between different frameworks and claiming unequal treatment. So it is clear that the IASB and the FASB should work together intensively to achieve converged solutions in the area of financial instruments.

The FCAG also voiced concern about recent regulatory pressure on the standard setters. Their view was that in order to develop standards that are unbiased and of the highest quality, and in turn to bolster market confidence in the standards they produce, the Boards must function with a high degree of independence from undue commercial and political pressures. But with this, the Boards must also demonstrate accountability through appropriate due process, including broad and significant engagement with a wide range of stakeholders and oversight conducted in the public interest.

While perhaps it is inevitable, in light of the financial crisis, that the Boards are having to issue pronouncements for comment within a relatively short time frame, two principles are important.

First, regardless of the length of comment period, the Boards must allow opportunity for input from stakeholders and must demonstrate accountability in explaining how those comments have been considered.

Secondly, although timing is short and, at least here in Europe, it is a holiday period, all of us in the financial reporting community must take the trouble to contribute.

As always, I would be interested in your thoughts, either by commenting here or by email.

Comments

[Muhammad Ali]

Dear Richard,

I totally agree with you that we all need to contribute and it would be unfair with IASB to blame for not providing enough time for consultation and having too short time frame for such complex standard.
Prepares, investors and other stakeholders should take proactive approach. I know the time is too short but at the same time appreciate the fact that IASB has greatly accelerated the project and showed its commitment towards improving the standard in shortest possible time.
Further IASB has held various webcast to disseminate or dispel misconception about the financial instruments project and we all need to appreciate their efforts and must assist them in framing the simplified standard.