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Home > Blogs > Anthony Harrington > Joining hands across the water

Joining hands across the water

Finance Blogger: Anthony Harrington Anthony Harrington

In early November, the world’s two major accounting standards setting bodies, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB), publicly renewed their vows in the form of a 23-page joint statement committing both bodies to work towards the Holy Grail of accounting standards convergence.

If one asks what has prompted this public reaching out of hands across the water, part at least of the answer is that this is probably the IASB’s attempt to pick itself up, dust itself off and put its mission back on track after taking a right royal kicking from some leading politicians, not all of them French speaking.

The IASB has been through a torrid 12 months during which it has had to endure being vilified as one of the villains of the global financial crash for imposing mark-to-market accounting on banks and investment companies. As more than one skeptic has noted, the practice of marking to market (i.e. reflecting the actual value of assets in the accounts) might be wonderful when markets are steady, since it provides transparency to the users of accounts, but when markets are plunging over a cliff, mark to market is mark to mayhem.

When you link capital requirements to this mayhem you end up destroying value, which is what caused some politicians to want to take a large axe to the IASB and its beleaguered chairman, Sir David Tweedie.

However, that furor has somewhat abated, with much work being done behind the scenes on how best to apply mark to market in unusually volatile markets—a tricky conundrum since no one wants to end up with two incompatible sets of accounts, one using one set of conventions, another, drawn up in troubled times, using different conventions.

Not surprisingly, users of accounts need and expect comparability from one company to another when they read accounts, which is precisely why the IASB and FASB feel the need to work together to bring about convergence between how things are done in the US, and how they are done in the rest of the world (which is largely orientated to IASB). However, this again is not an easy task. The reason why there are discrepancies between the IASB’s reporting standards and the US standards are down, at least in part, to the activities of powerful lobbies representing various special interest groups in the US economy. They prefer their way of doing things and do not particularly relish being told by a bunch of Europeans working out of London that they need to get into line.

Something of the flavor of this comes across in FASB chairman Robert Herz’s comment, made during the press announcement of the two standard setting bodies’ “historic” agreement. Herz said: “Our joint efforts have and will continue to produce significant benefits to investors and the economy at large. We will continue our dual objectives of working toward global convergence while addressing reporting issues of critical importance to US investors and financial markets.”

In other words, and not surprisingly, the FASB has two different inputs to attend to, that of the international community speaking through the IASB, and the strenuous voices in its own back yard. There will be plenty of hard work ahead before the world finds itself singing off one single version of the accounting hymn sheet.

For QFINANCE articles that address these themes see:

Tags: fair-value accounting , FASB , IASB , standards , US
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