If we took a theoretical date of 2013 — and it is theoretical — for the United States to adopt IFRS, plus a year to get ready, as Europe more or less had, that puts us at 2011. Combined with the number of countries that are adopting in 2011, it really became clear that people didn’t want us constantly producing standards in 2012 or 2013.
If we want to get the all-singing, all-dancing standard, we could spend another couple of years. But if we want the 80 percent standard, this will make one heck of a difference. All the bells and whistles can be done afterward.
What will we likely see, for example, with regard to financial statement presentation?
That will make quite a big difference, because U.S. accounts and international accounts will look the same. There will be new features the analysts will love, such as reconciliation from the cash- flow statement to the income statement, showing the effects of fair value changes. We are talking about this to CFOs today around the world, and some of them are quite excited about that. They said this will answer a lot of questions that are asked by analysts.
How will that project help soothe existing fears about the volatility that fair value introduces into financial statements?
We should separate items such as financing, investing, operating in the income statement, and we should show the assets involved clearly in the balance sheet.
We should also relate…the income statement to the cash-flow statement. So you can see what is cash, what is simply accruals, and what is valuations. That would have shown most of Enron’s income was fair value, and FAS 157 would have shown you most of that was their models. That’s why IASB is doing [its own version] of FAS 157.
Aren’t there some differences between FASB and IASB’s definition of fair value, particularly in terms of financial instruments?
Our financial instruments standard is not so different–it’s just phrased differently.
We have perhaps been unfairly accused of having more fair value than FASB because the old IASC–and we never bothered correcting it–scattered the term “fair value” around the standards. We’ve got to go back to our standards and take out the term fair value when we don’t mean it.
The only part where fair value comes in a bit more in IFRS is we allow the revaluations of properties. And that is quite useful, because it shows the financial strength of the organization. When you think about building companies and land banks–they could be holding a field for 30 years which is rocketing in value, and suddenly they sell it, and in comes the profit in year 30. An asset stripper who is wise could take over that company for much less and just sell off the fields.
What do you say to the criticism of FAS 157 and the idea that fair-value accounting in general exacerbated the subprime woes of the banks?
Basically, the standards didn’t fail.