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Investors warn over convergence By Barney Jopsonin London Published: November 6 2006 02:00 | Last updated: November 6 2006 02:00 A powerful coalition of investors has warned it could withdraw its support for the convergence of US and international accounting standards amid concern the project is threatening to weaken corporate financial reporting. The International Corporate Governance Network - headed by Mark Anson, chief executive of Hermes Pensions Management - has sent a forthright letter to the International Accounting Standards Board setting out its fears. It is the first time the IASB has been confronted by such a heavyweight alliance of investors and the board is likely to be troubled by fresh signs of wavering support for its flagship convergence project. In the letter sent last week, the ICGN board sets out its concerns about a joint discussion paper on the objectives of accounting published by the IASB and its US counterpart, the Financial Accounting Standards Board. "An inappropriate model of convergence would bea significant enough problem to suggest to someICGN members that convergence on such a basisshould then be halted," the letter says. Anne Simpson, executive director of the ICGN, said the discussion paper had set off "a struggle for the soul of accounting". "Convergence must be there to raise standards," she said. "Convergence for its own sake is not of value." The ICGN represents more than 400 institutional and private investors, corporations and advisers. The IASB was shaken in May when a leak from PwC, the world's biggest accounting firm, revealed that some senior partners in the UK wanted harmonisation tobe halted. The harmonisation of global rules has long been viewed as accounting's "holy grail" and had not been seriously questionedby practitioners until this year.

The ICGN and other critics of the IASB are concerned that accounting standards are increasingly theoretical and filled with proscriptive, American-style rules. Copyright The Financial Times Limited 2009

Convergence comes into conflict with global realities Published: October 17 2005 03:00 | Last updated: October 17 2005 03:00 The International Accounting Standards Board's growing power appears to be incompatible with making friends. "We are under enormous pressure from all sides," said Tom Jones, vice-chairman of the IASB, at a conference this month. "I rarely address an audience that isn't at least 50 per cent hostile. Whatever we do, half the world wants it and half the world hates it." The IASB is confronted by hundreds of companies, accountants, investors and regulators from dozens of countries, all lobbying for standards that would suit their own - often conflicting - interests. This raises questions about the feasibility of the IASB's goal: producing one set of high-quality accounting standards that can be used across the world. "You can't have a single set of accounting standards for multiple forms of capitalism," said Martin Walker, professor of finance and accounting at Manchester University, earlier this year. "Accounting has to reflect the economic, legal and political systems in which it is operating. Until those systems are the same, you can't standardise accounting." International Financial Reporting Standards are currently used or slated for use in some 100 countries. The EU's adoption has raised the standards' profile but it has also provided hints of how harmonisation could falter. The region is effectively using a customised version of IFRS, because EU policymakers - who are

locked out of IASB decision-making - were forced to "carve out" two rules from the standard on financial instruments, IAS 39, which were unpopular with banks and regulators. One of the carve-outs is set to be reinstated but industry groups could press for more if the IASB - as many of its critics expect - tries to broaden the use of fair value measurement for assets and liabilities. Under another scenario, pressure from the European Commission would force the IASB to insert so many caveats and exceptions into its standards that the meaning of harmonisation would be stretched beyond credibility. And that is just Europe. The "big prize" of harmonisation is said to be convergence between IFRS and US accounting standards, which would allow market regulators in the US and EU to accept accounts from over the water without making companies do costly reconciliations. The Securities and Exchange Commission has said that could happen in the US, subject to certain conditions, as early as 2007 - prompting a rush to narrow differences between IFRS and US standards. One might expect this to be cheered by multinationals, which would gain from an end to reconciliations. But instead it has lost the IASB more friends in the EU, where there are concerns that convergence means caving into US ways. "The IASB listens carefully to the SEC but not so closely, it seems, to Europe," says Stig Enevoldsen, chairman of the European Financial Reporting Advisory Group, a private organisation representing accountants. Critics have linked standard-setters' perceived stubbornness over IAS 39 to a desire to stay in sync with the US. And there are separate concerns that US preferences will create pressure for change in the structure and style of IFRS. Due in large part to litigation worries, which are unlikely to disappear, the US has highly prescriptive standards: they make compliance easier, but Europeans warn they do not allow the best reflection of economic reality.

"Convergence is very much in principle a good idea. But how far should we go?" Mr Enevoldsen asks. "Should we put all our effort into convergence rather than having the best standards for Europe? I'm not sure." Copyright The Financial Times Limited 2009

Fresh accounting rules will hit profits and may damp mergers By Jennifer Hughes in London Published: January 10 2008 02:00 | Last updated: January 10 2008 02:00 Companies around the world will have to change the way acquisition costs are handled under new accounting rules - a move that will hit profits and could damp the urge for mergers. Currently, fees charged by investment bankers, lawyers and accountants are bundled into the overall cost of a takeover and go on the balance sheet as part of "goodwill" - the accounting catch-all term used to cover the difference between the price paid and the actual value of the assets. Separating the fees will force companies to book a one-off expense for each deal, denting their net income for that period. Deal fees vary, but the International Accounting Standards Board said that, on average, they work out at about 1.5 per cent. Global deal volume reached a record of more than $4,840bn last year, according to Dealogic, the data provider. About three-quarters of those deals would have been accounted for under either the IASB's international financial reporting standards or US rules. The new accounting standard will apply to companies following both systems because it is the first to be developed jointly by the IASB and the US Financial Accounting Standards Board. Companies following US GAAP will have to adopt the standard by the end of this year, while those reporting under international rules have until July 2009. "Although not 100 per cent identical, the two boards worked to reach agreement not just on concepts and principles, but also on using the

same wording," said Mary Tokar, head of international financial reporting at KPMG. The main difference is in the treatment of businesses controlled but not fully owned by the parent company. The US version will force companies to include goodwill even for the part of a business they do not fully own, while the IASB allows groups a choice. Peter Holgate, senior technical partner at PwC, said: "It is a big shame these are not exactly the same standard, but if we can get this close on one of the most difficult topics in accounting, it bodes well for the future of convergence." The IASB and FASB have a six-year-old agreement to work towards converging practices to create a single set of global rules. More than 100 countries either follow or plan to adopt the IASB's standards. Lex, Page 12 Europe eyes US model and Accountancy Column, Page 17 Copyright The Financial Times Limited 2009

US warns Europe on accounting rules By Adrian Michaels in New York and Andrew Parker in London, Financial Times Published: Feb 02, 2004 The chief US financial regulator has warned the European Union not to water down controversial accounting rules on derivatives, fearing that it could endanger global accounting convergence. Donald Nicolaisen, chief accountant at the Securities and Exchange Commission, said a European dispute over the International Accounting Standards Board's derivatives rules could jeopardise efforts to achieve convergence between US and international accounting standards. The IASB is under intense pressure from the European Commission for further concessions on its derivatives rules, known as IAS 39, because EU banks fear they could inject strong volatility into their accounts.

Mr Nicolaisen told the Financial Times: "There are legitimate issues that need to be resolved. It absolutely has to be sorted out. We do not want [the IASB's proposals] watered down." The EU's plans for listed companies to use the IASB's full set of international accounting standards from 2005 could be wrecked by the dispute over the derivatives rules, which are based on US equivalents. Brussels has to approve the IASB's rules before EU com-panies can apply them. Relations between the two are near breaking point. Last month, the Commission said that, if no common ground could be found between the IASB and the banks, the disputed sections of IAS 39 should not be applied in 2005. The SEC said last year it would consider dropping the requirement that European companies with US share listings produce accounts under US rules after 2005, which would provide cost savings. But Mr Nicolaisen said any dilution of IAS 39 could damage possibility chances of dropping the requirement.

Convergence on standards is crucial By Douglas Flint Published: November 5 2008 17:22 | Last updated: November 5 2008 17:22 There are usually two reactions to a crisis. There are those who want nothing more than to wind the clock back to calmer times. Opposing them are voices raised in support of radical reform, a clean sweep of the discredited regime and the construction of a pristine new system in which nothing bad can ever happen again. Both approaches are extreme and as a result fundamentally flawed. Nonetheless, as accountants seek to describe and to define the worst financial crisis for several generations, we are challenged by these competing views. EDITOR’S CHOICE Lex: Accounting changes - Apr-08

US body agrees accounting changes - Apr-02 IASB to consider changes to fair value rule - Mar-18 Ministers urged to ensure transparency - Mar-13 IASB warns on bank capital build-up - Feb-23 Leasing: Attempt to close a false divide - Feb-04 Neither is right, but at least there is a debate. We can talk about what success might look like because most of us are speaking the same language: accounting. And that’s what it really is: a language, defined by conventions and rules, used to define the financial picture of a business. The success of an accounting framework comes from widespread acceptance that it provides a reasonable basis to assess past performance and forecast future returns. That also requires the accounting framework to contribute to an understanding of the variability of return: risk, in other words. How much more difficult would that task be if every nation still clung to its own language for defining commerce? How much simpler would it be if everyone could understand each other perfectly? The current crisis has increased focus on what has worked well and what has not. It reinforces the need to move together to make things better and we are seeing real momentum towards achieving a shared universal language of accounting. That’s why to converge to one set of accounting standards has never been more important and the current financial market crisis is acting as a catalyst to accelerate that path. The turbulence and liquidity crises seen throughout financial markets are not restricted to one regional or national market. Neither should our accounting definitions be trapped within those borders. Unfortunately, just as great strides have been taken towards the formation of global accounting standards, some commentators look to shoot the messenger. They point to unintended consequences and asymmetric outcomes to question the accounting framework. They complain when the rules don’t change to suit their position and they claim lack of governance when changes, with which they disagree, are made quickly to respond to calls for clarification or correction.

The messenger in this case is the International Accounting Standards Board, whose mission – to form a system within which everyone can be held to the same standard – is more rather than less relevant now. Difficult market conditions inevitably inspire calls for action to relieve the symptoms of stress, presenting a challenge to distinguish between discomfort with accounting rules which are accurately describing economic value destruction and those which unnecessarily precipitate actions that serve to exaggerate economic loss. Within an independent standard setting process, it is inevitable there will be differing views. That some stakeholders feel aggrieved at the outcome of the debate is evidence of the integrity and independence of the consultation process. This is an acutely difficult time. Often, regional market structures and practices serve to polarise views. However, any international perception of a weakening in the integrity of the accounting rules would inevitably further erode confidence. It could have systemic implications if competing regulators were to seek to talk up the superiority and soundness of their own framework and, in the process, to imply criticism of others. The real risk is that variation in reporting, particularly in stressed market conditions, leads to a ‘why bother?’ attitude among users of accounts who are faced with interpreting multiple flavours of the ‘truth’. . Douglas Flint is group finance director of HSBC Copyright The Financial Times Limited 2009

US body agrees accounting changes By Jennifer Hughes in London Published: April 2 2009 15:33 | Last updated: April 2 2009 15:33

Bank stocks were boosted on Thursday by an accounting rule change that is expected to allow managers to repair balance sheets by recalculating the value of some of their most troubled assets. The Financial Accounting Standards Board voted on Thursday morning to allow banks more freedom to use their own valuation models, rather than current market prices, for assets where markets have become illiquid. A second rule change means banks will only have to recognise a part of any impairment in their profits. EDITOR’S CHOICE In depth: US banks - Dec-12 Editorial: Revising the rules - Apr-01 FT Interview: Josef Ackermann - Apr-01 Letter: Dutch securities regulator on dangers of political meddling Apr-02 Citigroup jumped 9 per cent in early trading, Wells Fargo was up almost 11 per cent and Bank of America added almost 10 per cent Some analysts have calculated that the change could allow a profits boost of up to 20 per cent in the quarterly earnings of some banks. The changes come after pressure from Congress and intense lobbying by some corners of the financial sector, including a number of large lenders. They have argued that so-called “fair value” accounting, which demands market prices where possible, has magnified the problems caused by market turmoil because the prices they have been forced to reference are from distressed sales and do not contitute a real objective market. But critics of the changes have warned they will in fact undermine investor confidence in the battered sector by reducing the transparency of banks’ balance sheets. In comments sent to FASB, the CFA Institute, the trade body for more than 80,000 analysts and fund managers, said the new rules would damage the credibility of the rulemaker and US accounting standards generally.

“Investors will not be willing to commit capital to firms that hide the economic value of their assets and liabilities,” it warned. In a letter in Thursday’s Financial Times, Dutch securities regulator chief Hans Hoogervorst calls political meddling in accounting a “dangerous development”. If accounting standard-setting was seen as a political process, “confidence in the markets will be further undermined”, he said. The rules are also being considered by the International Accounting Standards Board which had promised to work with its US counterpart. The IASB softened its own fair value rules last October under pressure from the European Union. Opponents of the political pressure fear Brussels will exert new pressure to get the IASB to follow FASB’s lead. Copyright The Financial Times Limited 2009

SEC approves US listing reform By Jeremy Grant in Washington and Jennifer Hughes in,London Published: November 16 2007 02:00 | Last updated: November 16 2007 02:00 US regulators yesterday swept aside a long-standing requirement that foreign companies with US stock market listings reconcile their financial statements prepared under International Financial Reporting Standards to US standards, marking a step towards convergence of global accounting rules. The US Securities and Exchange Commission voted unanimously to approve the change, which immediately affects the 1,100 companies with US listings and any planning to list. The move is designed to make it easier for investors to compare companies' financial statements. The SEC hopes that, together with a reform to the implementation of the Sarbanes-Oxley law, it will boost the attractiveness of the US capital markets by cutting compliance costs.

However, the decision comes amid heightening tension over the change, which is seen as a key step in the long-running process of converging US accounting standards, known as US Gaap, with IFRS, which is used, or being adopted, by more than 100 countries including European Union members, China and India. The next step is expected to be to allow US companies to choose to file under IFRS instead of Gaap - a move that the SEC says it is open to. Copyright The Financial Times Limited 2009

SEC plans for global accounting standards By Jennifer Hughes in London Published: August 27 2008 20:21 | Last updated: August 27 2008 20:21 US companies are set to switch to international accounting rules in a move that will, for the first time, see all the world’s most important listed groups reporting according to the same set of standards. The US Securities and Exchange Commission on Wednesday proposed a “roadmap” to manage the migration of US companies from its rules to the international ones. The plans are open to comment for 60 days. EDITOR’S CHOICE Lex: Accounting changes - Apr-08 In depth: Accounting standards - Apr-07 Brussels yet to sign key accounting pact - Apr-07 US body agrees accounting changes - Apr-02 Editorial: Revising the rules - Apr-01 US banks stand to benefit from rules change - Apr-01 More than 100 countries use, or are adopting, International Financial Reporting Standards, including all 27 European Union members as well as China, Japan, Canada and India. US GAAP, the accounting lingua

franca until the sudden rise of IFRS, is the last significant standard to be switched. Under the SEC’s plans, US groups are likely to adopt IFRS in 2014 providing certain conditions are met, a decision that will be taken in 2011. Some companies may be allowed to adopt IFRS sooner. Christopher Cox, SEC chairman, said more groups were reporting under IFRS than US GAAP and the number would rise as other large economies made the switch. He said US GAAP would be marginalised if the US did nothing, making it harder for international investors to consider US companies. A single set of globally understood accounting rules is expected to help cut companies’ cost of capital and better enable cross-border investment. In countries without strong accounting traditions, the rules are expected to raise the quality of reporting, helping inward investment. Wednesday’s announcement will be welcomed by many big US groups, most of which have been reluctant to push ahead without a firm date. The change is likely to result in a fee bonanza for the Big Four accounting firms and their rivals. Many companies will seek their expertise to manage a change that includes potentially significant tax effects and the need to adapt whole systems to collect different data. The SEC last year signalled its support for IFRS when it dropped the requirement for foreign groups that use IFRS to produce a reconciliation of their numbers with US GAAP. In switching to IFRS, the SEC would in effect hand over authority for accounting rules to the International Accounting Standards Board, which is based in London. Concerns have been raised about the fact that the IASB is a private sector body that sets international law. This year, trustees of IASB have proposed it be overseen by a committee of regulators including the SEC, the European Commission and the UK’s Financial Services Authority.

Copyright The Financial Times Limited 2009

International codes Published: August 28 2008 19:43 | Last updated: August 28 2008 19:43 Love and Esperanto have a new competitor. Following the announcement of a US plan to adopt the International Financial Reporting Standards, the accounting framework looks like it may become a real universal language. This is welcome, but the changeover will be difficult and US policymakers will need to stand firm in defending their decision. IFRS is a principles-based accounting framework. It eschews detail in favour of broad-brush rules. Although this means there are regional variations to IFRS, it is possible for companies working in different countries to operate according to a single accounting code. Following its adoption by the European Union, it has spread around the world. EDITOR’S CHOICE Lex: Accounting changes - Apr-08 In depth: Accounting standards - Apr-07 Brussels yet to sign key accounting pact - Apr-07 US body agrees accounting changes - Apr-02 Editorial: Revising the rules - Apr-01 US banks stand to benefit from rules change - Apr-01 The US Securities and Exchange Commission recognised the ubiquity of IFRS last year when it stopped asking foreign IFRS users to reconcile their accounts with the current US system. But, this week, the SEC has set out a timetable for a US switch to IFRS. The SEC will test the new system with a few large companies before making a decision on whether fully to adopt IFRS in 2011. The SEC is, however, very enthusiastic about IFRS. Rightly so. The standard would remove a serious barrier to operating in the US. It seems unlikely that the

SEC will not press ahead. Companies should now start preparing for IFRS; switching over will prove difficult. At the moment, US companies must comply with 25,000 pages of precise accounting regulations and guidance. IFRS is only one-tenth as long and concerns itself with sweeping principles rather than minutiae. It will take a while for companies to get used to the new code. They may ask for extra rules and guidance to help them. The SEC must refuse in order to protect the global principles-based rule-set. The real risks to full IFRS implementation are political. Even if the SEC has a final say over which IFRS rules are implemented and which are not, these proposals will give a group of foreigners a say in US regulation. This will attract fire from congressional windbags. If any of the large US companies road-testing IFRS shed any jobs during the trial period, the new foreign accounting system will be used as a scapegoat. The change may be caught up in the rising tide of populist protectionism in the US. The SEC is right to propose a switch to IFRS. It will be helpful to the US and to the rest of the world. But implementation will be tough on businesses, and will need firm resolve from policymakers. Learning a new language, even a universal one, is easier said than done. Copyright The Financial Times Limited 2009

Revising the rules Published: April 1 2009 19:30 | Last updated: April 1 2009 19:30 Neither accountants nor politicians are especially popular at the moment, but that still does not make them a good mix. A rushed rule change, due to come into effect today, has been produced by the US Financial Accounting Standards Board, under pressure from Washington. The way forward is not a series of piecemeal revisions. The change by FASB would apply to first-quarter results, which should be published over the coming weeks. Depending on how it is used, it could make a significant difference to how banks present their numbers. It would make some banks’ books look better than under the present

regime because the banks would be able to value more of their holdings using their own models rather than markets, where the markets for particular types of holdings, such as complex financial instruments, are deemed illiquid. EDITOR’S CHOICE In depth: Accounting standards - Apr-07 Brussels yet to sign key accounting pact - Apr-07 US body agrees accounting changes - Apr-02 US banks stand to benefit from rules change - Apr-01 Insight: Elusive search for harmony - Mar-26 Push for common accounting rules - Mar-24 The move is part of a worrying pattern of hasty changes in valuation rules that leave companies freer to use their own numbers rather than market prices. In October, for instance, the International Accounting Standards Board was forced by Brussels into a swift relaxation of its own standards, which were then applied immediately to third-quarter results. Marking-to-market has some clear strengths. Where there is a market to price to, then mark-to-market accounting is more useful to investors than a rule that tells them what a bank’s assets were worth some years ago or in normal economic conditions. It forces banks to confront problems rather than deny them. But no one set of rules is perfect: if the market does not function then marking-to-market cannot work either. Even so, any move towards marking to model must come with robust plans for a thorough audit of the assumptions that underpin such valuations. Instead of sensible debate, there have been skirmishes that damage the credibility of accounting rulemakers and politicians alike. The risk is of more to come. There are murmurings in Brussels about pushing the IASB to follow its US counterpart’s latest changes. Some Group of 20 leaders would like to go further: South Korea, for example, is unhappy about how currency values are treated – a point that really matters to its shipbuilders. The answer is an independent, international review of the role of accounting in the financial crisis. This would recognise the impact of

changes in how corporate activities are reported. Policymakers have generally seen the need to give serious thought to the future of financial regulation. Now they should afford accounting a similar respect. Copyright The Financial Times Limited 2009

Push for common accounting rules By Gillian Tett,George Parker andPeter Thal Larsen Published: March 24 2009 21:54 | Last updated: March 24 2009 21:54 Bankers from around the world on Tuesday urged Gordon Brown to push for a common set of accounting rules and global regulatory norms when he hosts the G20 economic summit in London next week. Mr Brown was also warned that some Asian and developing countries felt they were being patronised ahead of the summit, threatening possible tensions with Europeans and the US. EDITOR’S CHOICE UK cannot afford fresh stimulus, says King - Mar-24 Lex: World trade - Mar-24 Brussels Blog: All eyes on Prague - Jun-11 Philip Stephens: Brown learns a familiar European lesson - Mar-23 Brown seeks to build G20 consensus - Mar-23 The prime minister and Alistair Darling, chancellor, hosted a meeting with international bank chiefs at Downing Street as part of the final preparations for the G20 meeting on April 2. Mr Brown, who later left for a tour of Europe, the US and South America, supported the bankers in calling for world leaders to fight protectionism and to work towards stabilising the banking system. William Rhodes, chairman and president of Citibank, said the informal talks covered most of the areas considered important by the bankers,

including regulation, emerging markets, the risk of protectionism and accounting issues. He said: “This crisis is a chance to do a lot of things that we have all been putting off, in terms of necessary reforms.” Mr Rhodes, also first vice-chairman of the Institute of International Finance, warned the summit would be greeted with scepticism if it did not deliver specific results. He added: “The Asian countries are worried that this G20 meeting is being dominated by the Europeans and the US. Asian and emerging market countries have this feeling that the developed markets have been lecturing them for years but they don’t want to learn the lessons from their own experiences. We need a common set of accounting standards that would apply worldwide as well as global regulatory norms . . . we also think that having a global regulatory co-ordinating council is necessary.” Downing Street said there was agreement on the need for countries to use fiscal and monetary tools to stimulate the economy. Lord Turner, Financial Services Authority chairman, has outlined his proposed reforms to City regulation, which Mr Brown hopes will be a “blueprint” for regulatory convergence. Copyright The Financial Times Limited 2009 Fair value accounting rules eased By Jennifer Hughes in London Published: October 13 2008 19:04 | Last updated: October 13 2008 19:04 European banks will be able to more easily shield assets from the scrutiny of marking to market prices under emergency changes agreed by international accounting rulemakers. The changes by the International Accounting Standards Board followed intense lobbying by some European banks and a growing degree of political pressure. European companies had complained that US rules were allowing their rivals options that they did not have and the changes are designed to bring international standards into line with their US counterparts.

EDITOR’S CHOICE Lex: Accounting changes - Apr-08 In depth: Accounting standards - Apr-07 Brussels yet to sign key accounting pact - Apr-07 US body agrees accounting changes - Apr-02 Editorial: Revising the rules - Apr-01 US banks stand to benefit from rules change - Apr-01 The adjustment will allow companies to more easily shift their holdings from being marked at fair, or current market, values and instead report them at amortised cost, which means they will not have to report any further falls in market prices and any gains will be spread evenly over the lifetime of the asset. Fair value accounting, where assets are reported at their current market price, has become increasingly contentious as the credit crisis has worsened. Those against it include a number of, but not all, banks and insurers who believe that it is making their balance sheets unnecessarily weaker by forcing them to report current depressed prices that do not reflect their longer- term expectations. Those in favour, which includes most regulators and auditors, believe that using market prices reflects the current economic reality, however harsh that may be. The rule change marks a retreat by the IASB, which has defended staunchly fair value, and only came after intense political pressure. The issue has stirred up a political storm with French and Italian leaders, among others, pushing for an easing of the rules. However, Gordon Brown, UK prime minister, said in a press briefing: “Some people are looking for a get-out-of-jail-free card and an easier way of registering their financial position than is the truth.” He warned that changing the accounting was not a quick solution. He said the world had to find “a level playing field” and not just offer “a breathing space”. “It’s just a lot of money put on one side of the accounts to make things look better.”

IASB members made their distaste clear but accepted this was an extreme situation. Sir David Tweedie, chairman of the IASB, told the board it was better if the changes were made by accountants rather than politicians. The changes are accompanied by extra disclosure requirements that mean although the new rules could alter balance sheets, it should be possible to use the footnotes to find details of which assets were transferred. Copyright The Financial Times Limited 2009 Accounting experts push fair value rules By Jennifer Hughes in London Published: September 16 2008 23:03 | Last updated: September 16 2008 23:03 There will be no let-up in the use of fair market values for banks’ holdings, even in illiquid markets, according to international accounting rulemakers. The stance came in a draft paper published on Tuesday by an expert panel convened by the International Accounting Standards Board. EDITOR’S CHOICE It’s time to put the brakes on convergence - Oct-30 IASB defends clarification of fair value rules - Oct-03 Top BP accountant critical of rule-makers - Jun-11 Accountancy: Off-balance sheet accounting - Jun-04 Finance briefing: system depicts risk more accurately - Jun-01 IASB to tackle securities valuations - May-25 Although the group, consisting largely of representatives of banks and accountants, cannot mandate changes in the rules, it is likely that the guidance will set a new standard for reporting. Fair value, or marking holdings to market prices, has become the subject of heated argument as the credit crunch has forced banks and other

institutions to write down hundreds of billions in the value of their holdings. Those against the practice claim that they have been forced into paper losses based on hypothetical sales, while advocates believe the clarity it has produced has helped banks and others face up to and deal with, the crisis. “The key point is that the paper does stress that you cannot default to some ‘fundamental value’. You are required to find an estimate for the current price. That price might be thought to be irrational, exuberant or completely depressed but this makes it clear that is what you must use,” said Anthony Clifford, partner at Ernst & Young. “Much of this is no more than a restatement of best practice. But for people who were not already expert, this guidance could be helpful.” Among the paper’s recommendations is an extremely narrow definition of a “distressed” sale. Auditors have privately reported attempts by clients to widen the definition of distressed, or fire, sales. If they had succeeded, it would have allowed the asset holder to record higher prices than the last traded fire-sale price. The paper was published alongside an update from the IASB of its response to other crunch-related issues raised by the Financial Stability Forum, a group of regulators and other officials. Among the topics were proposals on “consolidation” – the accounting decision whereby holdings are put on, or kept off, the balance sheet. The IASB has produced a draft paper for consultation and will hold a series of round-table talks on the matter, beginning in London on Wednesday. It plans to produce a full proposal later this year. The draft paper is designed to clarify the existing concepts underlying the rules, which are based on determining who controls the assets, and/or assessing who holds the risks and rewards of the vehicles. “They are seeking high-level linkage of those two points and they’ve had to do it quite quickly. It will benefit from a bit more thinking,” said Ken Wild, a partner at Deloitte. Copyright The Financial Times Limited 2009

FRS gets political as SEC unfolds roadmap By Jennifer Hughes Published: January 21 2009 22:39 | Last updated: January 21 2009 22:39 Was Mary Schapiro playing to her audience, or is she really as chilly as she sounded last week on the notion of the US switching to international accounting rules? Given the importance of the US, the views of the nominee for Securities and Exchange Commission chairman on accounting topics are about more than simply which accounting system US companies should use. EDITOR’S CHOICE Lex: Accounting changes - Apr-08 In depth: Accounting standards - Apr-07 Brussels yet to sign key accounting pact - Apr-07 US body agrees accounting changes - Apr-02 Editorial: Revising the rules - Apr-01 US banks stand to benefit from rules change - Apr-01 US influence is such that the SEC’s viewpoint is likely to shape a great deal of the debate about all sorts of changes to accounting rules over the coming years, including international ones. In August, the SEC announced it would produce its “roadmap” plan for how to switch to International Financial Reporting Standards, and in November it did so. Comments are due by the middle of next month.

Last week, Ms Schapiro was asked her opinion on switching to IFRS at her nomination hearing by Senator Jack Reed. She said she would “proceed with great caution” and would not be bound by the roadmap. She also raised the cost of switching rules, for which she said she had seen estimates of $30m per US company. She could have been talking for her audience, since Senator Reed’s question was laced with his own reservations about making the switch. But she did preface her remarks with support for the notion of a single set of global standards. But so much for the SEC’s somewhat under-the-radar efforts to push the project as far as possible. It announced its roadmap plans in the dog days of summer, before the Labor Day weekend and published the plans on a Friday in November with no fanfare whatsoever. There were those who had hoped the SEC’s approach might allow the plans to get to such a stage that turning back would be too expensive or troublesome. But no such luck. Accounting in general is about to get political. There were murmurings of this last year, with US senators and European leaders asking questions about “fair value” accounting, where marking assets to current market prices has decimated banks’ balance sheets. There was also political anger way back in the early days of the credit crunch over the off-balance sheet accounting rules that had allowed many banks to hide the full extent of their activities. These issues are all still very relevant and will mean a lot more limelight for accounting. For those hoping the US will eventually convert to IFRS – a move that would seal the deal on a single set of global accounting rules – the good news is that the International Accounting Standards Board and its US counterpart have made it very clear they will only work together on rule changes. This is part of their efforts to resist attempts by politicians and interest groups to play them off against each other. To that end, they have also assembled an impressive advisory group that met for the first time this week. Members range from Jerry Corrigan, former head of the New York Fed and a senior Goldman Sachs banker,

to Lucas Papdemos of the European Central Bank and Michel Prada, former head of the French securities regulator. But in all this kerfuffle, where are the Big Four, particularly in the US? Eager to discuss the need for American companies to begin preparing for switching accounting standards – with their help, of course – they have been rather more quiet in public on how the accounting rules could be improved. Accountants are by nature cautious and, in fairness, this is also auditors’ busy season. I should also note that last year PwC did in fact make a big and controversial stand in defence of fair value. But that was an exception and public silence is the profession’s default position on too many real accounting issues. Talk to them, and they’ll tell you that politicians don’t always fully understand the ramifications of their suggestions. Now is their chance to stand up and help them. [email protected] Copyright The Financial Times Limited 2009

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NEW YORK - While global risk has become a focal point for investors, corporate malfeasance is still a hairy elephant. But if the recommendations made Thursday by the U.S. Congress' Joint Committee on Taxation after a year-long investigation of Enron's tax schemes show anything, it is that the Feds are still trying to kill the elephant with a thousand pea shooters. Taxes are what tie recent acts of corporate indignity together.

Everyone--even inanimate corporations--pays taxes, but not before

keeping

as

much

as

possible.

In recent weeks, that motivation has forced out the top two executives at Sprint (nyse: FON - news - people ) for employing tax shelters related to stock options. It has also brought attention

back

to

the

cretins

formerly

running

Tyco

International (nyse: TYC - news - people ). In fact, the Internal Revenue Service is on a stated mission this year to root out other

egregious

tax

minimizers.

It's doubtful that new schemes were hatched since the legislative and regulatory crackdown began in earnest last spring, so said Federal Reserve Chairman Alan Greenspan on Tuesday. Still, it will be years before it's known if new law was the true salve, or whether it was plain fear of jail and loss. Fear didn't stop Enron (otc: ENRNQ - news - people ). Thursday's congressional report harped on the discrepancy between Enron's financial statement income and its IRS filings. But what evidence is there that completely shunning taxes is a good thing? In 2001, General Electric (nyse: GE - news - people ) set aside $5.5 billion for taxes on $19.7 billion in pre-tax income.

And

thanks

to

excise

taxes

and

its

industry,

ExxonMobil (nyse: XOM - news - people ) reserved $9 billion, or 38%, of its $24 billion pre-tax earnings for government duty. At last check, both stocks had outpaced the S&P500 over the last

10

years.

Such performance can't be said for most technology, telecom and energy companies. In the 1990s, they grew on the backs of excessive debt financing, options-charged executives and capital-appreciation happy investors. In one way or another, each

of

these

phenomena

comes

back

to

taxes.

The treatment of interest payments as a tax deduction on corporate

income

statements

allowed

a

company

like

WorldCom (otc: WCOEQ - news - people ) to borrow tremendously for capital projects. Bond buyers were more than willing to jump in, taking a nice coupon and/or convertible shares. Could the company have even conceived or financed its projects through equity? To do so would have meant taking on investors looking for returns and, one day, dividend payments. And those dividends--a sign of real earnings--would be taxable for

Joe

Investor.

Even in President George W. Bush's plan to end the double taxation of dividends, the corporation must still pay taxes on its earnings before passing the cash on to shareholders. Despite efforts to the contrary, many of those shareholders are stock and

option-possessing

corporate

insiders.

The options culture itself came about due to the accounting advantage of options over restricted stock. Restricted stock

grants count as compensation expenses and, therefore, a hit on earnings.

Until

recently,

on

the

other

hand,

most

U.S.

corporations didn't account for the value of employee stock options. Given options--with a defined strike price--an executive can be motivated to take corporate actions to inflate revenue or earnings to sustain the shares. Such a practice is clearly against the spirit and the letter of the law. And wouldn't a company, wanting to motivate employees across the entire enterprise, be more interested in endowing true owners and not just contingencies? Could it be that the U.S., on the edge of business innovation for the past ten years, has actually fallen behind in tax reform? Sure President Bush has signed a big tax cut and is pushing another. Their effect will be heard every two years at the polls. But over the past decade, the United States has gone from having one of the lowest corporate tax rates of the 30 countries in the Organization for Economic Cooperation and Development to having the fourth highest, according to Chris Edwards, a tax

expert

at

the

Cato

Institute.

Edwards argues that an increasingly complex economy doesn't have to be matched by a similarly complex tax code. "Corporations are just the canary in the mineshaft," says Edwards, referring to the millions of tax avoidance and evasion strategies that riddle personal services jobs such as waiters and

contractors. He's not saying there should be a manhunt in every kitchen and bathroom, but the corporate crackdown is avoiding the real issue of re-examining the inconsistencies in the tax code

that

motivate

such

avoidance.

Politicians have shown that they'll advocate individual income tax cuts in an instant. But corporate tax relief is hard to come by. Maybe now is the time for corporation suffrage. After all, U.S. companies contribute roughly one-quarter of federal revenue through income tax and social insurance payments. The District of Columbia has nothing on corporate taxation without

representation.

Imagine what kind of political clout voting companies would throw to Bentonville, Ark., the headquarters of Wal-Mart (nyse: WMT - news - people ).

Urgent – we need much simpler and shorter financial statements Published: January 21 2008 02:00 | Last updated: January 21 2008 02:00 From Prof D. R. Myddelton. Sir, Jennifer Hughes reports (January 14) that the heads of the six largest accounting firms are calling for more freedom for people to use their own judgment in preparing and auditing company accounts, instead

of having to follow highly restrictive and complex regulations. The latest UK Companies Act weighs in at more than 700 A4 pages, in addition to more than 2,000 pages of accounting standards. So it is high time that the leaders of our profession paused to consider where the modern tendency to over-regulate has got us. The driver seems to have been a vain hope of achieving “comparability” between the accounts of different companies in different industries in different countries; but that is a will o’ the wisp. Far better to try to give “a true and fair view” of the financial position and performance of particular individual companies on a consistent basis over time. Unfortunately, standard-setters do not seem to listen very well. When the leaders of the six (then) largest accounting firms responded very critically to the draft “Statement of Principles” more than 10 years ago, the UK Accounting Standards Board took hardly any notice; so little, indeed, that Ernst & Young did not bother to comment in detail on the “new” proposals, but simply sent the ASB another copy of their earlier letter! And “our” standard-setters are still trying to organise a global monopoly with the Americans, whose approach to regulation is even worse than ours. We must throw off the shackles before it is too late! We need much simpler, much shorter financial statements. And we should stop pretending that annual company accounts can be anything more than a very rough interim guide to financial performance and position. The latest (2006) annual reports of three large well-respected companies – British American Tobacco, GlaxoSmithKline and Royal Dutch Shell – contain 148, 188 and 232 pages respectively. The idea that any ordinary shareholder could use them to help “make decisions” is ludicrous. D. R. Myddelton, Emeritus Professor of Finance and Accounting, Cranfield School of Management, Cranfield, Bedford MK43 0AL Copyright The Financial Times Limited 2009

Drive for clearer accounting continues By Jennifer Hughes

Published: October 5 2008 10:14 | Last updated: October 5 2008 10:14 Since pensions were first dragged onto company balance sheets in the UK almost a decade ago with large parts of the industry kicking and screaming, the hullaballoo has rarely died down. That move, by the UK Accounting Standards Board caused a furore in part because of its timing. Although many did not in principle like the light shed on scheme funding, the most immediate problem was that it came into force as the dotcom bubble burst, meaning that tumbling stock markets savaged the value of pension holdings, making deficits look even larger. EDITOR’S CHOICE European regulated funds see inflow of money - May-26 Get ready for the impact of Ucits IV - May-24 Tax threat to traded life funds - May-24 Call for levy on risk pollution - May-24 Blueprint to address the democratic deficit - May-10 Push for shareholder votes on pay - May-03 Accounting rulemakers believe that by making the funding, and how it is managed, clearly visible on the balance sheet, investors and other company stakeholders will have a clearer picture of the risks and demands of pension schemes. However, many in the industry have linked the accounting changes with the significant rise in the closure of defined benefit schemes to new entrants in recent years as companies feel they can no longer face the risk of these volatile liabilities skewing their balance sheets. In the UK, less than a sixth of DB schemes are now open to new entrants, down from half in 2003, shortly after the ASB’s rules were introduced. The more recent introduction of similar rules in the US by the Financial Accounting Standards Board in 2006 has attracted less controversy, perhaps because the switch from DB to defined contribution plans was well under way. But talk of convergence between US and international

accounting standards may heat up the debate in the US as tighter rules are put on the table for discussion. This year, the UK’s ASB came back with another suggestion that could have a dramatic effect on reported funding levels; in a paper produced in January, the board suggested changing the rate at which future liabilities are discounted – a move that will make the liabilities look bigger. The good news for scheme sponsors is that the ASB no longer sets their accounting rules; that is now down to the International Accounting Standards Board. The bad news is that Sir David Tweedie, the man blamed by newspapers for “destroying” pensions when he led the ASB in introducing the previous changes, has moved from the ASB to head its international counterpart, which is considering altering its rules on the topic. That pensions pose a volatility risk to balance sheets is not in doubt. Recent market gyrations are a case in point. According to Watson Wyatt, the actuarial consultants, the combined schemes of FTSE 100 companies had a deficit of £12bn (€15bn, $21bn) at the end of August, but by the middle of last month, that had swung to a £7bn surplus. The reason was a surge in corporate bond yields – which links directly to the ASB’s latest proposals. The future liabilities of a scheme are currently discounted to their present value using a blend of AA-corporate bond yields, which are designed to reflect the returns expected on fund assets. However, in the current crisis corporate borrowing costs have spiked sharply higher as investors have demanded higher returns for the greater risk they perceive. In spite of that rising risk, the bigger number has served to reduce scheme deficits, meaning it has worked in the opposite way to that intended, since expected fund returns have not changed and if anything given the current market, are under some threat. What the ASB has proposed is using the much lower “risk-free” rate, usually the yield on long-term government bonds. The suggestions triggered a wave of protest at the extra burden this would place on schemes as their reported deficits leapt overnight. The National Association of Pension Funds said the idea could double the liabilities reported by “young” pension schemes while Pension Capital

Strategies, a consultancy, calculated the “risk-free” rate would have raised the combined deficit of FTSE 100 schemes from £8bn to £100bn. Although the ASB no longer has the power to change the rules directly, it does have a high profile in the pensions accounting world and strong links with the IASB. The IASB’s own current review has focused on removing “corridor” accounting, which allows some smoothing of the effect of market moves. But in a second phase, it is likely to address the thorny issue of discount rates. “Given the revolution that has already been launched by pensions and accounting standard setters in their drive to reflect economic reality, it is easy enough to see more changes coming,” says Dawid Konotey-Ahulu of Redington Partners, a pensions consultancy, who warns that if anything, the credit crunch will speed up the ongoing trend towards making full market volatility transparent for investors. IASB watchers say there are criticisms of its current proposals, which include new methods for classifying schemes, but that it would be unfair to say the pensions world was speaking with one voice. “There are grumblings about how accounting has forced the closure of DB schemes, and I’m sure there will be more, but the experts don’t actually speak with one voice on this, you get some widely divergent views,” says one accounting rulemaker, who staunchly defended the central premise of transparency in what must be a warning to anyone hoping to change accounting’s current path. He adds: “It’s the job of accountancy to portray as fairly as possible the true economics of what is going on. DB pensions have always been expensive to provide and they’ve only become more so given longevity and other factors. Accounting has just made that cost more transparent.” Copyright The Financial Times Limited 2009

Non-financial reporting is set to grow in importance

By Paul Hohnen, Financial Times Published: Mar 31, 2004 From Mr Paul Hohnen. Sir, Readers over the past few days will be rightly perplexed about the significance of non-financial data to assessments of a company's performance. On the one hand, it is contended by one US academic that "non-financial measures just don't add up" (March 29). On the other, the FT reports growing market interest in non-financial data, on the part of both fund managers ("Fortis plans CSR action in Europe", March 29) and rating agencies ("Companies face an avalanche of questionnaires", March 26). They might consider three points. First, non-financial performance is difficult to measure. This is precisely why the global reporting initiative (GRI) was developed. When it was created five years ago, few companies reported non-financial performance information because it was not comparable. Now, however, more than 400 companies in some 40 countries prepare reports using the GRI guidelines. Second, the issue of "questionnaire fatigue" is probably one of the many reasons these companies use the GRI. Because GRI indicators correspond in large measure with questions from SRI (socially responsible investment) fund managers and ratings agencies, a GRIbased report can be an effective first response to incoming questionnaires. Third, as to the contention that reporting companies do not see the benefits, various studies confirm what seems intuitive: that greater transparency translates into higher market trust, with a positive impact on share price. As non-financial reporting develops further, including through software applications that will make reporting easier and of higher value to all users, many see non-financial reporting as significant in this century as financial reporting was in the last. Paul Hohnen, Strategic Development Director, Global Reporting Initiative, Amsterdam, The Netherlands

Global ambitions

By Robert Bruce Published: September 17 2008 10:51 | Last updated: September 17 2008 10:51 It has long been a peculiar feature of the UK accountancy profession that, despite being the largest in the world, it has not stepped up to become the heart of an international profession. It has a longer history, larger numbers, and greater domestic dominance than any other accountancy profession in the world. But while wielding great influence around the world, it has never translated that into a global presence. The nearest to a truly international professional body with a global reach is the ACCA, the Association of Chartered Certified Accountants. But even that organisation has a complex history of international expansion. For years, its expansion overseas was criticised for depending more on the huge income deriving from exam fees than properly building a genuine overseas presence. In recent years, however, this has changed. And one of the people who had been instrumental in this has been Allen Blewitt whose five years as ACCA chief executive came to an end at the beginning of September. A policy of international expansion, along with a loosening of the central ties of the London headquarters, has been the key. “Globalisation of the profession will continue to accelerate,” he says. “China, as a result of its one-child policy, will have an insatiable demand for accountants, for example.” The ACCA is well-placed to reap the benefits of this demand around the world, he says. “We are the only UK body to change its fundamental business model and produce a generic internationally based qualification. More than 50 per cent of our members and 70 per cent of our students are outside the UK, and our future growth will be predominantly non-UK.” In the past five years, membership has grown from 98,000 to 122,000 and student numbers from 220,000 to 325,000. “So we have a great resilience,” he says. This has not always been the case. There was a period when, as overseas sections of the ACCA grew, they came to resent the control

exerted from the London headquarters. “We have tried to change the fundamental relationships with the marketplace,” says Mr Blewitt. “It is now more of a partnership.” This has been a cultural change for the ACCA – which has tended to represent the Middle England to which it appealed last century when it set up a model to allow people of ordinary means to earn a living while qualifying as accountants. There have been two sides to this cultural legacy. “This organisation used to have a chip on its shoulder,” he says. “We have gone past that now. We have moved it to where it should be. We have put the paranoia behind us.” Mr Blewitt admits that “it left us with a legacy of being a challenger brand. ACCA took a long time to see itself as a successful mainstream brand. “ACCA needs to move and it needs to recognise that it has to move from a centralised to a regional model,” he says. “Multinationals do this. Professional bodies haven’t really tried this before.” He contrasts this with other UK bodies, particularly the ICAEW, the institute of chartered accountants in England and Wales, the largest in the land. “The ICAEW has always gone for senior people overseas, but that was never likely to create a beachhead. The ACCA has gone for the mass market.” This recognition, often forged with great difficulty, has probably now given the ACCA the international edge. “If you take our global membership as a whole, a sixth of those people moved from one country to another in 2007,” he says, “so it is a truly mobile qualification.” He sees the growth as inexorable. “For example, the level of ambition amongst young accountants in eastern Europe and Russia is scary”, he says. It is clever positioning. The partnership model with developing nations works both ways. “Educationally, they have to satisfy IFAC [the global body representing accounting bodies around the world] regulations, and mostly they can’t. And they have trouble with regulatory issues and practice monitoring”, he says. “We are here to help developing nations. We do the education, the regulatory structure for continuing professional development and practice monitoring. The philosophy is now partnership and that is the antidote to any post-colonial kickback. We have learned our lessons and adapted our strategy.”

Mr Blewitt says that when he arrived at the ACCA from Australia five years ago, “the profession was still in the end of the post-Enron maelstrom. The profession was quite badly battered. So we needed to build the reputation of the profession generally”. The profession is now in better shape and Mr Blewitt has been a part of that process. He suggests that the profession’s showing during the credit crunch has shown how things have changed. “Hopefully, we are now on the way out of the trough of the credit crunch,” he says, “and I think that the attacks on the profession were mere flea bites and mostly from bankers who don’t like the mark-to-market of fair value. The principle is right. It was a classic case of self-interest from the banks. They just don’t like it. It was blatant self-serving.” The profession is stronger and more resilient these days. And the breezy Australian ways of Mr Blewitt have made a difference, particularly to the cultural changes at the ACCA. Copyright The Financial Times Limited 2009

Regulating the regulators By Robert Bruce Published: September 17 2008 10:51 | Last updated: September 17 2008 10:51 Accountants are in the midst of a period of consultation which is of enormous importance to the task of building a common financial reporting language around the world. One of the greatest successes of recent times has been the International Accounting Standards Board. Over the past eight years, the IASB has provided the impetus and the tools to create a set of accounting standards which are, increasingly, the world standard. From the initial allconsuming task of ensuring that all listed companies across the European Union implemented International Financial Reporting Standards, (IFRS), by 2005 the work of the IASB has acted as the springboard for more than 100 countries around the world to follow suit.

Even the proudest and largest of the world’s financial markets, the US, has in recent weeks announced a road map towards accepting IFRS as the primary means of financial reporting. What has been even more remarkable is that the IASB is a small privately run organisation based in London. The speed of the acceptance of IFRS around the world has astonished everyone involved. This is where the question of governance comes in. It is the age-old question of who regulates the regulators. And that leads to the question of how the independence of mind and action which has been the hallmark of the IASB can be safeguarded. It is a paradox. The more successful the independent IASB proves to be, the more other organisations seek to hedge it about with restrictions. Hence, the current proposals from the IASB’s trustees to enhance the public accountability. For the chairman of the trustees, Gerrit Zalm, who was previously deputy prime minister and finance minister of the Netherlands, it was a question of finding “a way of keeping standardsetting independent and free of outside influence but making ourselves more accountable”. A discussion document that the trustees have issued, which is open for comment until 20 September, points out that the objective is to keep the IASB independent, “appropriately protected from particular national, sectoral or special interest pleading” while at the same time recognising “the need to demonstrate the organisation’s public accountability”. Mr Zalm says: “The IASB is a very open body and has won international awards for its openness. But it has no formal links with, for example, the European Parliament or organisations in the US.” The foundation that governs the IASB intends to create a monitoring group made up of representatives of public authorities, such as the chairman of the World Bank, the chairman of the Securities and Exchange Commission in the US and the chairmen of both the emerging markets committee and the technical committee of IOSCO, the securities markets regulator. The proposals also suggest increasing the members of the IASB to 16 and clarifying the geographical diversity of members. By linking the IASB to a monitoring group of senior members of bodies that are themselves accountable to public authorities, the trustees hope

to create an accountability link that would satisfy critics while maintaining the crucial element of independence. The monitoring group would have no responsibilities for the setting of standards but would review the effectiveness of the trustees in, for example, appointing members of the IASB, reviewing the IASB’s strategy, its operating procedures and its financing arrangements. To retain the IASB’s independence of mind in setting accounting standards it would maintain the trustees’ distinction between considering the IASB’s agenda, while not determining it. “The important thing is that the monitoring group is to monitor, not to set policy and not to set standards,” says Will Rainey, global director of IFRS services at Ernst & Young. For him, it is all a question of objectives. “We want to get to one set of globally accepted accounting standards,” he says. “If that means demonstrating your governance is part of that, then we have to go with it.” There are both advantages and disadvantages to the proposals. The members of the proposed monitoring group could provide valuable insights into where capital markets around the world are going wrong. But they could also start to itch to have more influence over the IASB. “We want IFRS consistency around the world,” says Mr Rainey, “and the fact that we have four regulators sitting on the monitoring group is really good. To have IOSCO there, for example, is very important. Renegade regulators around the world try to impose their own interpretations of IFRS that are contrary to the spirit of IFRS. Having IOSCO there would help drive global consistency. They would see what is going on and they have a vested interest in the success of IFRS.” But Robert Hodgkinson, technical executive director at the Institute of Chartered Accountants in England and Wales, is dubious. “If you are talking about an international accounting language for investors and preparers, the proposed members of the monitoring group are not the most obvious guardians of the system,” he says. “Regulators have objectives just like everyone else – like not getting the blame.” He wonders how long they would sit on their hands. “They are not just going to talk about recruiting trustees,” he says. “It is a bit un-exciting talking about due process. They will start to make their views known

about specific projects and if a tricky issue comes up you could imagine that they might say ‘Shouldn’t we be involved in this?’ ” Ken Wild, global leader for IFRS, at Deloitte, says: “The fear would be if the monitoring group started to interfere more widely. It could take on a role beyond its original design.” In the end, it is an emphasis on independence that the proposals for altering the IASB’s governance structure need to enshrine. “We need to keep it independent,” says Mr Zalm. “I am a former politician. I appreciate politicians, but they should not be involved in standardsetting. At the same time, we need to be responsible to other organisations. It is a balancing act.” Copyright The Financial Times Limited 2009

The US joins rest of the world By Jennifer Hughes Published: September 17 2008 10:51 | Last updated: September 17 2008 10:51 Christopher Cox, chairman of the US Securities and Exchange Commission, is not known for fanciful language. But, last month, he described international accounting standards as a “revolutionary development” in the business world. The comments were part of his presentation of the “road map” for US companies to switch from US Generally Accepted Accounting Principles to International Financial Reporting Standards – a long-awaited development by US and international accountants alike. More than 100 countries use, or are adopting, IFRS and the US was the only remaining significant holdout. If the road map is followed, by 2014 the world’s biggest economies will all be following the same accounting

rules – a massive achievement and deserving of the revolutionary tag given that the system only came to prominence this decade. “An international language of disclosure and transparency is a goal worth pursuing on behalf of investors,” said Mr Cox. The SEC has taken its time in drawing up the road map, which has several stages and a number of conditions to be met before final approval for the switch is granted. But for the companies who will make the change, there was something like relief that the news was finally out there – because now their work officially begins. The biggest companies have already begun preparing for the switchover. “You need to start now,” says Bob Laux, director of technical accounting and reporting at Microsoft. The software giant is already looking into how different accounting rules will affect its results and what systems changes will be needed to produce the necessary data. “We have meetings on this almost every day and, at nearly every one, there’s at least one case of ‘Oh I didn’t think of that’,” he adds. Danita Ostling, an audit partner in the US, agrees. “It’s about so much more than an accounting exercise – that’s what I say over and over again. You need to think about the big picture right now – what are the most significant effects that conversion will have on your business?” The most far-reaching of these is likely to be the switch in mentality from the detailed, rules-based approach that US GAAP has developed to the broader principles-based system of IFRS, where the standard-setters have deliberately avoided going down that route. “The biggest difference is the volume of guidance the US has for almost every bit of accounting literature. It is probably the reason that they want to move to IFRS rather than going for a long-term gradual convergence – they’d face an enormous challenge getting rid of the detail,” says one close observer of the SEC’s deliberations. US GAAP, including guidance, staff interpretations, other official literature and the rules themselves, comes to about 25,000 pages. IFRS – albeit a much younger system – is about 2,500 pages long.

Joel Osnoss, a partner at Deloitte, says the switch in mentality was one of the biggest issues. “We’re helping clients adjust to understanding the economics behind each transaction and not get so wedded to rules.” A number of individual standards will need close examination on how to apply them. “Revenue recognition is one that we’re still trying to get our arms around,” says Sam Ranzilla, audit partner at KPMG. “US GAAP is overloaded with guidance on this and you might argue that, currently, IFRS is a little bit short on the same,” said Mr Ranzilla. The cultural change to relying more on judgment than detailed rules is one that many accounting experts welcome, but they warn that it will not be an easy shift. “It will require changes from us in the way we research and come to conclusions on guidance – and how we document how we arrive at that judgment,” says Mr Laux. “It is a change too for auditors in how they judge what we’ve done, and also a change in the way the way the regulator works.” The US regulatory system also presents its own wrinkles in the form of Sarbanes-Oxley, the corporate governance reforms brought in in the wake of the scandals at Enron and WorldCom. The rules include section 404, which requires companies and their auditors to document the adequacy of their internal controls over financial reporting. “That makes it a little more tricky,” says Alex Finn, a partner at PwC, who believes it might prove an unexpected help, too. “Having to have all your controls in place can force companies to take a more strategic approach to the whole project.” For the larger companies which have begun the preparations, the strategic approach can be particularly important. IFRS allows companies to choose certain options on how to report previous periods when they convert to it, but not to change those choices after that. “Once it’s there, you can’t go back and change it,” says Mr Osnoss, who warns that US companies with overseas subsidiaries need to be particularly careful.

“There are situations where decisions are being made on how to account for something under IFRS at subsidiary level that will be difficult to unwind later at the company level.” This year, the Big Four accounting firms and their rivals have been busy gearing up for IFRS, developing websites and producing webcasts, client briefings and papers on what needs to be done. There was some relief at the fact the SEC timetable is finally published. But they, and their clients, know that the real hard work is just about to begin. Copyright The Financial Times Limited 2009

Enough already - why corporate reporting so seldom enlightens By Barney Jopson Published: April 10 2007 03:00 | Last updated: April 10 2007 03:00 His opening words are always the same. "Dear Doris and Bertie," writes Warren Buffett, the second richest man in the world. It is his annual report to shareholders and the iconic boss of Berkshire Hathaway imagines he is penning a down-home letter to just two of them. They're a smart duo, Mr Buffett tells the Financial Times - and they happen to be his sisters. "They've got practically all their money in Berkshire Hathaway, so they're interested. And they don't want to be talked down to. "I pretend they've gone away for a year and want to know what's happened. They want to hear what I'm worried about and what I'm pleased about," he says. "Then when I'm through I take their names off the top and put: 'To the shareholders of Berkshire Hathaway'." The result is a frank and folksy report, which is lapped up each year by the retail investor groupies who flock to see Mr Buffett at Berkshire's annual shareholder jamboree in Omaha, Nebraska.

To many institutional investors, too, his report is a laudable example of clear corporate communication. But, they lament, Mr Buffett is often in a minority of one. That he stands out for talking straight is testimony to the fact something is wrong with the information flows that sustain markets. Financial statements and annual reports are becoming longer, but less useful. The latest tome from HSBC, the UK-based bank, runs to 454 pages and is so heavy the bank says the Royal Mail has had to limit the number of copies postmen deliver each day. But size, say many, is not translating into clarity. The notion of greater transparency as an unequivocal good is being debunked as it becomes clear that excessive disclosure can be counter-productive: when information is unfamiliar or irrelevant, too technical or too promotional, the essentials get lost. Sir Michael Rake, outgoing global head of KPMG, the accounting firm, and incoming chairman of BT, the telecommunications group, has described the corporate reporting model as"broken". Roel Campos, a commissioner at the Securities and Exchange Commission, the US financial watchdog, says: "Investors are clearly not receiving through current financial statements what they need. There is not even a consensus as to how to define the problem." There are myriad views on what exactly is wrong - but there is a growing consensus that corporate reporting has reached a crossroads and radical thoughts are emerging about how to set it on a new path. Company executives worn down by red tape blame regulators for mandating reams of disclosure to "protect" shareholders without consulting investors about what they would like. Regulators, meanwhile, wonder just how committed companies are to telling the truth. Shareholders say both could do better. Anne Simpson, executive director of the International Corporate Governance Network, which represents an assortment of big-name investors, has said a "struggle for the soul" of corporate reporting is under way. At a catastrophic level, murky and misleading communication creates the conditions in which costly corporate scandals, such as the collapse of Enron, can gestate. Less dramatically, but just as importantly, investors need accurately to gauge corporate success and judge future prospects if they are to allocate funds effectively in the market. If they cannot, their

returns will suffer. Economic growth could be harmed, too, if capital is not channelled to the most deserving outlets. Symptoms of what is wrong with regulated reporting are manifold. Perhaps the most striking is that the most prized communication between companies and investors takes place outside the confines of the accounts and annual report. Share prices are more likely to move on the content of earnings press releases - which are not specifically regulated in the US or Europe - than on the accounts (which take longer to read) or annual reports (which take longer to arrive). Sir Ian Prosser, audit committee chairman at BP, the oil giant, says annual reports are in danger of becoming "compliance documents". He argues that face-to-face meetings with investors - even if they reveal nothing not already in the public domain - are much more useful. "In 40 minutes you can distil the key issues for investors," he says. "We are in danger of every word written in annual reports having to be crawled over by lawyers." Michael Mauboussin, chief investment strategist at Legg Mason Capital Management, says useful information is scattered across accounts, but adds: "Very often it is strategic discussions with companies about the size of markets and their drivers that inform us, more than the annual report." David Phillips, a partner at PwC, points to another manifestation of what is wrong with corporate reporting: the ever-present gap between the value of most companies' balance sheets and their value in the eyes of the market. If regulated reporting better expressed what companies are and what they do, that gap would be much narrower, if it existed at all. The current discontent has two origins: the first relates to accounting standards, the second to the "narrative" prose meant to flesh out the story the numbers tell. In the European Union, the International Accounting Standards Board sets rules - International Financial Reporting Standards - that came into force across the region at the start of 2005. High hopes that harmonised rules would make accounts cheaper to produce and easier to read have given way to gripes that the IASB is taking accounting into a new dimension - one that makes the theoreticians purr but bamboozles everyone else. Lord Browne, the outgoing chief executive of BP, has said: "Some would argue that [IASB] standards neither produce a record of the

accountability of management nor a measure of the changes in the economic value of assets and liabilities. I would agree with them. What IFRS actually does is make our results more difficult to understand." A lightning rod for criticism has been the IASB's fondness for "fair value" accounting, whereby assets and liabilities are reported at an everchanging market value. The IASB says that reflects economic reality better than the alternative: historic cost. But critics say it makes earnings volatile - and can be misleading when fair values are derived from mathematical models. BP, for example, has had to start reporting the ups and downs of "embedded derivatives", theoretical instruments that have arisen from the price clauses that exist in its run-of-the-mill commercial contracts. The writers of US accounting rules - at the Financial Accounting Standards Board - are getting similar flak, which is not surprising given that it and the IASB are working to bring their respective standards closer together. US accounting kerfuffles tend tobe episodic - sparked by proposed changes to pensions, leasing or stock option accounting - whereas morephilosophical European investorsplace their worries in the contextof grand polemics on shareholder rights. But there is a shared anxiety about the complexity of accounts,on which Christopher Cox, the SEC chairman, has declared "all-out war". Carrying its own prescriptions for change is a group of London-based analysts from the likes of UBS, Barclays Global Investors, Citigroup andJPMorgan Cazenove who have assembled in the Corporate Reporting Users' Forum (Cruf). They want to estimate the worth of companies, they say, so standards should give them the following "valuation toolkit": a price/earnings ratio (the IASB is suspicious of a single figure); a balance sheet that reflects the capital invested in a business, not its fair value; a profit-and-loss statement that shows the return generated from the capital invested; and a cash-flow statement that highlights what is driving that flow. Crispin Southgate, a consultant who is a Cruf member and former credit analyst at Merrill Lynch, says: "This is a bunch of people paid to disagree. So when we agree as individuals, it suggests someone should take notice. And when we agree with the companies, all the more reason."

The problem with narrative reporting is one of empty words rather than baffling numbers. In an effort to comply with broadly defined regulations while looking socially responsible, many companies produce a strange mix of legalese and public relations puff that does little to illuminate their performance or prospects. Richard Carpenter of Radley Yeldar, a consultancy, has trawled through the annual reports of the UK's top 100 companies and concludes that a lot of corporate reporting is "awful". On an annual report from Next, the retailer, Radley Yeldar said: "It lacks a decent overview of the business. If you do not know what Next does, then you would struggle to be much the wiser after reading the report." Mr Carpenter says: "It's annoying that companies spend so much money on it and it doesn't do what it's meant to. It should be about communicating, but companies say, 'Oh, it's legislation,' and then can't stop thinking about ticking boxes." HSBC's 2006 risk management coverage, for example, spans 83 pages and includes a cautious list of almost every possible danger. Ken Lever, finance director of Tomkins, the engineering group whose shares are part of the FTSE 100 index, jokes: "A lawyer gets hold of it and you almost end up with something saying: 'There's a risk that if you don't sell anything you don't get any sales'." A bigger issue is a lack of Buffett-like frankness. At one point in his 2006 letter to shareholders, the Berkshire Hathaway chief says of a lossmaking derivatives operation: "The hard fact is that I have cost you a lot of money by not moving immediately to close [it] down." But Mr Lever, who has joined forces with PwC, Radley Yeldar and the Chartered Institute of Management Accountants to push for more straight talking, says there is an inevitable tendency to avoid total honesty because executives are ultimately trying to sell their businesses. "There is a focus on the good, less about the bad and nothing on the ugly," he says. In a mock annual report compiled under the banner of Report Leadership, as the grouping has been named, Mr Lever and the others promote the use of non-financial indicators measuring things such as customer satisfaction, employee morale and innovation. They also show how to write a narrative that weaves together strategy, an explanation of

a company's competitive position and an analysis of how its markets are evolving. "What level of investment do you need to maintain your margin? What's your pricing power? How are you going to be affected by low-cost competition? How will you pass on input cost increases? These are the things investors are interested in," says Mr Lever. Yet the most recent onslaught of capital markets regulation - inspired by the Enron collapse and symbolised by America's 2002 Sarbanes-Oxley Act - did not focus on corporate reporting. "Perhaps one of the big 'takeaways' from Enron should have been to ask: is the reporting model flawed?" saysMr Phillips at PwC. "Instead, they tried to fix the systems and controls." Another problem is that most investors lack the time or inclination as individuals to become immersed in often desiccated debates on reporting. "Most investors have day jobs. They aren't in a position to get deeply involved in theological arguments," says Peter Montagnon, director of investment affairs at the Association of British Insurers. "The problem is not that they don't know what they want. It is the ability of both sides to engage in dialogue at a level that satisfies everyone. You get three accountants talking about something and it very quickly gets very technical." Only as the sense of disquiet turned critical in the past 18 months did big institutions begin to designate point people on reporting and organise themselves to speak out. Now, beyond the remedies of Cruf and the Report Leadership grouping, more profound thoughts are emerging on how to shift corporate reporting to a different track. Extra regulation is not among them - not least since the UK botched its attempt to legislate for narrative reporting in 2005 by over-engineering a set of criteria that scared companies and led to a last-minute order to scrap it from Gordon Brown, chancellor of the exchequer. One idea is to take a leaf out of the private equity book. Buy-out houses such as Blackstone and Kohlberg Kravis Roberts, which have snapped up a growing list of big public companies, are exploiting what they see as a gap between the market value of a business and its intrinsic value. Given the buzz around private equity, it is worth asking whether public company reporting could be built around the analytical techniques of the

buy-out houses. That would mean an unswerving focus on one number cash flow, the only thing private equity groups can use to pay off the debt they take on. As an old accounting adage has it: "Cash is fact and everything else is opinion." A libertarian alternative is zero regulation. If there were no accounting rules and no narrative reporting requirements, companies would be compelled to figure out on their own exactly what the market wanted, proponents argue. James Turley, chairman and chief executive of Ernst & Young, the accounting firm, says that could lead to chaos. But he says there will be no single, neat solution either. Corporate reporting is likely to go plural in numbers, words and timing - because investors are heterogenous and inclined to take different perspectives. "When you say 'investors want . . . ' do you mean institutional investors, long-term retail investors, day traders or hedge funds?" Mr Turley asks. "I think it's going to take a multi-disciplinary process to figure out what is really needed." Progress in that direction is being made at the travelling circus of conferences, workshops, seminars and policy forums where corporate reporting is discussed. But the lesson of history is that it is not worthy words and leaden papers that force seismic change, desirable or otherwise. It will be the next round of corporate failures. Copyright The Financial Times Limited 2009