Belated, but welcome – final reports on IFRS governance

17 February 2012

The IFRS Foundation has finally released – a little later than planned – its strategy review alongside the Monitoring Board’s review of the Foundation’s governance. It seems the delay was due to the Monitoring Board’s difficulties arriving at a consensus on its report.

The reports do not propose any radical change to IFRS governance. The current three-tier structure (the IASB being responsible for the technical quality of the standards, and the two oversight bodies ensuring independent standard setting and accountability) will continue. I think that’s sensible − it seems to be working. Some of the detail, though, points to changes of emphasis, which I think could be interesting.

Firstly it is worth stating that both reviews have involved extensive consultation, and it is clear that commentators have been listened to carefully. The process should allay the concerns of those who have been critical of IASB governance in the past – or least those whose concern is about the transparency of the governance rather than a disagreement with the technical content of the standards. This may help resolve one of the barriers to IFRS adoption cited in this summer’s US roundtables on IFRS adoption.

The review by the IFRS Foundation Trustees is very similar to the draft published in October. I was glad to see that the commitment to do more to promote consistency of IFRS interpretation across borders was widely supported; this is perhaps the biggest challenge for the IFRS community as it expands. The enhanced role of the Due Process Oversight Committee is also important for building confidence in the standard-setting process among the sceptics.

The Monitoring Board on the other hand has made a number of changes, backing off from what could have been seen as a dramatic extension of its role. Proposals that the Monitoring Board should be able to put topics directly onto the IASB agenda and should take a much greater role in appointing IASB members  have been dropped. There are caveats though: if the Monitoring Board suggests an urgent topic that the IASB rejects, the IASB will have to give the reason why. Similarly, the Monitoring Board will be closely involved in the appointment process for a new Chair. But these proposals are really just a reflection of what is already happening today.

Membership of the Monitoring Board looks like the area that probably had the most intense discussion. It will be expanded to include some emerging markets representatives, and two of the seats will be rotating – this in itself is uncontroversial, although the report admits the details of how to achieve it are not yet worked out. Membership will be restricted to capital markets authorities rather than expanded to include prudential and other regulators – a pragmatic decision, as it would be difficult to know where to stop.  More significantly, members in future will have to come from countries where IFRS is required for domestic use. One can see the tensions here – if a country   permits IFRS but few companies actually use it - is this sufficient “domestic use”? The elephant in the room is of course the US position –can one conclude that allowing use by foreign companies filing with the SEC amounts to ‘domestic’ use? On this, no doubt, there will be more!

Finally, the most disappointing part of the reviews is the lack of a concrete proposal on the future funding of the IASB. Both boards agree there should a transparent system whereby the jurisdictions using IFRS commit funds. The Monitoring Board says the Trustees are primarily responsible; the Trustees comment that they do not have the authority to mandate financing.  At the same time, the Trustees have indicated an aspiration to have a significantly expanded budget.  This is perhaps the biggest collective challenge for the two oversight bodies to resolve.

As ever let me know what you think about any of this.


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