“Bob took a bit of a beating, and we have a lot of sympathy.” That’s how a source within the International Accounting Standards Board describes the rough treatment suffered by Robert Herz, chairman of the Financial Accounting Standards Board, the American accounting standard-setter, at a congressional committee hearing in March.
In response to criticism that fair-value accounting has led to excessive write-downs, FASB rushed out new guidance on valuing assets that are not actively traded. It expects companies to use “significant judgement,” which Herz acknowledges could result in different companies reporting different values for the same type of asset. And with only a 15-day comment period (which ended on April 1st), FASB board members—used to thorough, lengthy deliberations when setting standards—were not happy about being rushed. They acknowledged, in the words of board member Leslie Seidman, that they were being asked to address problems “on a dime.”
This put the IASB in a difficult position, as demonstrated by a tempestuous board meeting held shortly after FASB announced its guidance. Committed to a “roadmap” for converging international and American standards, the IASB felt compelled to respond to the American board’s actions. “As distasteful as it is, we’ve got to recognise that there is a crisis on and we can’t totally ignore what another standard-setter is doing,” said a board member at the meeting in London. But other members, most notably James Leisenring, argued that FASB was proposing to allow companies to “ignore” the traded price of a financial instrument in favour of using internal models.
In the end, the IASB issued a “request for views” about FASB’s proposals. This rarely used document is unusually broad and asks parties what they think of the proposals, with no formal implications for what the IASB’s next steps should be. The IASB’s document is read as a thinly veiled critique of how FASB’s hand was forced by US politicians. It cautions that “attempting accelerated efforts in complex areas” can have “unintended consequences and undermine investor confidence in financial reporting.” The comment period is open until April 20th.
The IASB itself is still smarting from an episode last October when EU finance ministers threatened legislative action unless the board allowed banks to reclassify certain financial instruments. Suspending its usual due process, the IASB passed a set of amendments in a little over a week. It now promises that any further changes to standards will not be so hasty. Given the roots of the latest criticism of fair-value accounting, a source familiar with the IASB board’s thinking notes that similarly rapid action would give the “crazy” impression that “the US Congress is setting accounting policy for the rest of the world, when the US isn’t even using IFRS yet.”
Nonetheless, there is no Schadenfreude among members of the London-based standards body at the treatment of their counterparts in the US, where rebukes of the IASB’s October capitulation were particularly barbed. “It is almost impossible to divorce independent standard-setting from political pressure,” the source sighs.
With additional reporting by Sarah Johnson