Jeremy Newman’s CEO Insights

Stability accounting

Jeremy Newman — Tue, 9 Mar 2010 10:08:48 +0100

Yesterday’s Lex column referred to the emerging conflict, on which I have commented before, between the needs of banking regulators and investors in banks. Lex suggested the conflict was between regulators and accountants but I think recognised that accountants – in this case accounting standard setters – were representing the interests of investors.

Lex is quite direct – “Accounting needs to stay a true business snapshot. Regulators must find their backbone elsewhere.”

I agree.

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A modest step forward

Jeremy Newman — Fri, 26 Feb 2010 12:05:25 +0100

Earlier this week the US Securities and Exchange Commission (SEC) issued a statement confirming their support for a single-set of high quality global accounting standards. Although this fell short of explicitly stating that this will be IFRS, it did set out a basis (subject to addressing a number of issues) whereby the US could adopt IFRS in 2015 – or shortly thereafter.

The issues mentioned by the SEC all seem reasonable and include the need to ensure that “...accounting standards are set by an independent standard-setter for the benefit of investors.” and “Determining whether IFRS is sufficiently developed and consistent in application for use as the single set of accounting standards in the US...”.

Whilst it would have been good to see the SEC set a date certain for US adoption of IFRS (subject to conditions) it was probably unrealistic to expect this. However, it was good to see what I think is a positive step forward toward the adoption of IFRS in the US and a clear commitment to moving towards a single set of global accounting standards.

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A missed opportunity

Jeremy Newman — Tue, 16 Feb 2010 18:26:02 +0100

In the past several months I have done my best to support the adoption of IFRS as the accounting standard of choice – and the only one suitable to be the single high quality global accounting standard as requested by the G20. I have done so recognising that IFRS is not perfect (but what is?) but that it is the best we have and that it is pretty good. I have also recognised that changes will be needed to the governance of the IASB – not least to address concerns in the USA and the EU.

I was thus disappointed that the IASCF (the oversight body of the IASB) issued a Press Release earlier this week setting out proposed changes to the governance structure which in many respects seem to me to be too timid.

Some of the IASCF’s changes are welcome, in particular the creation of a vice chair for the IASB so that the current role of the chair can be split, but it seems to me this Press Release is seeking to give the impression that all the necessary changes are being made when in my view they are not. We need a more fundamental review which acknowledges the changes that will be required over the coming years as a number of additional, significant jurisdictions adopt IFRS, and which looks ahead to what a truly global standard setter will require. Further, I think the explanation for the reason for creating a vice chair (to “... ease the burden on the chair, and give the option of wider geographical distribution in the leadership) fails to recognise that the issue is not just one of geography or workload, but also includes the need to have someone who can handle the technical aspects of the role and someone else who can handle the diplomatic/political aspects of the role (ie a Chair and a CEO not a Chair and a Vice Chair).

It would be appropriate for the Trustees of the IASCF to state that they know more far reaching governance changes will be needed both to retain the support of existing constituents, and to gain this from those jurisdictions that are looking ahead to the adoption of IFRS. This, of course, includes the EU and the US, but extends more widely to the many other countries that either have already adopted, or will soon adopt, IFRS. While there is mention in the Press Release of a review this year for the strategy in the period post June 2011, there needs to be a clear signal that there will be a further overall review of the constitution in the near term. At the IASCF round table meeting held in London in September of last year, we called for the next review of the constitution to be accelerated to take place well before the next required date. While the current arrangements do allow for this, I would encourage the IASCF to signal that they will do just that, and that they look forward to actively engaging with the relevant bodies in the US, EU and elsewhere to secure their support for a more fundamental reconsideration of the governance model.

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We launched the ‘BDO film’ .....

Jeremy Newman — Tue, 9 Feb 2010 09:02:23 +0100

... earlier this week (you can see a copy of it here http://www.bdointernational.com/BDOGCO/website/BDOGCO/website.nsf/pages/bdo-film). I must admit I was a bit nervous about this when it was initially proposed and whilst it was being made but I am delighted with the result. It is intended for both internal and external use and I hope it conveys what BDO is and what makes us different to our key stakeholders, particularly our existing and prospective clients and all our people.

I hope you find it interesting and useful – as always any feedback gratefully received.

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The new year...

Jeremy Newman — Tue, 2 Feb 2010 08:59:25 +0100

... always provides an opportunity to look back but, more importantly, to look forward to the coming year. The general consensus is that, at least in economic terms, the coming year should be significantly better than last year – but will 2010 be much different to 2009 for the accounting profession?

Clearly, a better economic environment will provide a boost to all businesses – including accounting firms – and we will also benefit from the improving performance of our clients and what is expected to be a better market for transactions, fund raising and general corporate activity. However, it is important that we don’t forget the lessons of the last few years and that we assist our clients in avoiding some of the ‘excesses’ we have seen that have damaged so many businesses. We must remember that ‘if it looks too good to be true – it probably is’.

For the profession as a whole we will continue to see a continuation of some of the topics that have dominated 2009 – particularly the search for a single set of high quality global accounting standards. I think everyone has accepted that IFRS are the only credible global accounting standards to fill such a role but there remain issues over their adoption by certain countries – notably the USA – as well as concerns about the governance and accountability of the IASB (the body that issues IFRS). It is vital that we make progress on this in early 2010 and that the USA is persuaded to confirm that it will adopt IFRS by a specified date. There can be conditions for this acceptance (such as there being an acceptable governance structure for the IASB – but we urgently need the USA to confirm that they will, in principle, adopt IFRS. Japan has committed to the adoption of IFRS, it is already adopted in Europe and China will, I am confident, fully adopt IFRS as well. With the USA on board this will cover the world’s leading capital markets and should ensure that IFRS becomes the single, high quality global accounting standard called for by the G20 – and the accounting profession.

Increasing regulation is also likely to be a feature of 2010 – mostly for the financial services sector, but it must be possible that some of this will drift into the accounting profession. I hope not as, in general terms, I think the profession is well regulated although there are some countries that need to adopt regulatory systems similar to those in the more developed countries. Indeed, I would argue that in some aspects the accounting profession may be over-regulated but I see no chance of a lessening of regulation so there seems little point in arguing this case.

As we emerge from the global recession we may see a few more mergers between some of the smaller mid tier firms who want to increase their market share. However, I do not think these will significantly affect the market place as most of these firms act for smaller clients and few have many, if any, significant public interest clients. However, because size is seen as such an important indicator in the accounting profession I have no doubt that some firms will be regarded as moving into a market position that is not wholly appropriate. This may be an issue for BDO, and possibly one or two other networks who can credibly be regarded as an alternative choice to the Big 4 in much of the marketplace. We will have to work harder to explain how BDO is able provide a real challenge to the Big 4 for those companies that would prefer not to use the services of the Big 4 and how BDO is different from networks that may be growing their revenues through merger but who don’t have the necessary global infrastructure and support to be a credible choice for businesses that might otherwise use a Big 4 firm. In this context, I suspect that unless there is a major corporate collapse that prompts concerns over the role of the auditor, the Competition and Choice debate will rumble on but is unlikely to make any real progress – and in this regard 2010 will be much the same as previous years.

For me personally, 2010 will have many challenges – helping our member firms respond to changed economic circumstances, ensuring we maintain our investment in the network and, later this year, the launch of our new audit methodology and new audit process tool – ensuring that a ‘BDO audit is a BDO audit’ in whatever country it is delivered and whatever the nature of the client – a guarantee of a consistently delivered, high quality, robust audit.

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One of the most significant challenges we face in Japan....

Jeremy Newman — Mon, 25 Jan 2010 09:04:00 +0100

... is the overwhelming market share held by the Big 4 (actually most of it is held by three of them) which is far greater than in the USA, Europe or elsewhere.

The smallest of the Big 4 (PwC) is only about 25% of the size of the other three firms – and the next largest firm, which is a Japanese firm associated with PwC, is about 20% of the size of PwC – and thus only 5% of the size of the largest firm in Japan. And the next several firms, including BDO, are even smaller. Clearly we need to address this if we are to deliver on our brand promise to be the leading mid tier firm and a credible alternative to the Big 4 in every major economy. At present we deliver an extremely high quality service but our lack of market share makes it difficult to overcome prejudices in favour of the Big 4 – and this is a challenge faced by all the firms aside the Big 4.

It was thus slightly ironic that on the plane home I read an article published earlier this month by the American Antitrust Institute (AAI) discussing their concern that the audit market is too highly concentrated in the Big 4 firms. http://www.antitrustinstitute.org/archives/files/AAI%20Working%20Paper%2010-01_010720101109.pdf

Their analysis of the situation and whether we now have accounting firms that are ‘too large to fail’ is interesting although not new other than they link it to current concerns about banks and other financial institutions being ‘too large to fail’. Indeed, the AAI paper suggests that the US Congress should include the Big 4 in its review of the regulation of banks and other financial institutions. The paper also suggests a somewhat more radical proposal – namely that the Big 4 each be required to divest “... no less than 20% of its domestic client revenue and the professionals who are needed to service the clients that are transferred out of the firm.”

Gosh – what do I say? Now, I am well known for expressing concerns about the concentration in the audit market and the effect this has on competition and choice but even I would struggle to support such a proposal. It seems to me to totally disregard the wishes, and the interests, of clients and of the people who work at the Big 4. Clients and our people are not commodities to be ‘sold’ I am all in favour of appropriate action to correct what I regard as distortions in the marketplace, not least the banning of ‘Big 4 only’ clauses in banking and other agreements, but I think it is neither realistic nor desirable to force firms to ‘sell’ their clients and their people.

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If you want a strong argument why IFRS matters and ...

Jeremy Newman — Fri, 22 Jan 2010 08:37:49 +0100

... we need to stop it becoming a political debate you need only visit Japan, where I have spent the last week.

Japan is one of the world’s largest economies (probably now 3^rd behind the USA and China but with a smaller population than both those countries) yet seems to have been sidelined in the European ‘squabbles’ over IFRS and the ‘will they/won’t they adopt IFRS’ debate in the USA. Japan is committed to adopting IFRS so that the accounts of Japanese companies (and it has some very large multinationals) can be comparable to those of all other major companies – in Europe, the USA and globally.

It is a mature positive approach and conversion from Japanese GAAP to IFRS is a major topic of debate by all the accounting firms, and major corporates, in Japan – and was raised with me at every meeting I have had in the past few days.

They don’t understand why IFRS has become such a political issue – nor why individual countries or regions expect IFRS to be adapted to deal with their own political or regulatory issues. Why should Japan have different accounting standards because US, UK or other banking regulators want something different for their own purposes? Why can’t regulators use other powers they have to get the information they need rather than expect global accounting standards to be adapted to suit them?

Governments, regulators and accounting standard setters need to fully appreciate that we are seeking to have one single set of high quality global accounting standards – and this involves obligations to others.

I salute the Japanese.

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Humanitarian disaster in Haiti

Jeremy Newman — Tue, 19 Jan 2010 15:04:16 +0100

We will all have been affected by the news of the growing humanitarian disaster in Haiti and the desperate need for aid both to help the victims of the disaster but also to help rebuild the lives of people once their immediate needs have been met. How does one respond?

I believe that the scale of this disaster requires a global response and as a global network I believe that we have to play our part – inevitably this means by giving money to one of the various disaster appeals. Accordingly, BDO International is making a donation to the disaster appeal. We are also asking the people who work for the International Executive Office to play their part and have pledged to match everything that they donate. We are also encouraging all of our member firms to do likewise – by making a corporate donation, by encouraging fundraising from staff or both.

Being a relatively close neighbour of Haiti the British Virgin Islands is already involved in the provision of aid. The major funding drive in the BVI is being spearheaded by the Rotary Clubs of Tortola, of which the Managing Partner of our BVI firm and one of his colleagues are members. The latter is appearing on a Telethon being broadcast on local TV and radio and is an integral member of the organising committee. He is responsible for the IT and is heading up the finance function. BDO BVI and BDO International are both donating to this effort and BDO BVI’s staff are also taking a collection for this effort.

BDO Cayman Islands is also heavily involved in the activities of Rotary Clubs. A member of the Managing Partner’s club has a house (that’s still standing) which is currently acting as temporary hospital for 100 plus people and he has spoken with CNN to share information. He says scenes are far worse than many of the media stations are prepared to show on national television.

I am proud of the response of our firms and our people – it demonstrates our concern for others and the world we live in.

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“HOW TO RESTORE FINANCIAL STABILITY” is ...

Jeremy Newman — Wed, 13 Jan 2010 21:17:36 +0100

... the title of a new report from the Centre for European Reform (‘CER’) which was sponsored by BDO and launched yesterday in Brussels; there is a London launch on 2 February.

The main presentation was by Philip Smythe, the author of the report, but there were contributions from others including Peter Chidgey, a partner from BDO UK who heads up their financial services industry group.

There were some interesting views on whether there is a need to regulate hedge funds. Philip suggested not on the basis that they didn’t cause the crisis; that they were less leveraged than banks; that they had traded in CDOs; and had been allowed to fail without causing contagion to the rest of the system. He contrasted this to banks which were regulated but where these problems had arisen – and suggested the focus should be on improving regulation for banks rather than regulating hedge funds. The main argument for regulating hedge funds (which was expressed as being a ‘Brussels based view’) seemed to be that an unprecedented crisis demanded an unprecedented response and that it may be better to over-react; that we didn’t know if or how hedge funds might have contributed to the crisis; and that the only way we can know what hedge funds are doing (and address political concerns) is by regulating them. Hardly the strongest argument I have heard but if it holds sway in Brussels than I fear that we may face regulation in a variety of areas where it is not needed.

The most interesting view expressed by Philip, however, and which did seem to get widespread support is the need to ‘reverse the terms of trade between state and banks’. As Philip noted, in medieval Europe the biggest concern of the banks was that an individual sovereign (who were the banks major customers) might default on his debt (there were no female sovereigns at the time); the biggest risk now is to the state that a bank might default. This is a complete reversal of roles and there is a concern that by removing the risk of failure for banks we have weakened the incentive for them to take risk management sufficiently seriously. It was noted that Governments have ‘talked tough but acted weak’. I think this is a different way to understand the challenges we face and why there is so much legitimate political and public interest in how banks run themselves; their corporate governance; and even their remuneration policies. As with many other challenges there are no easy – or obvious – answers.

It was an interesting morning and I am glad we had the opportunity to sponsor this report.

Who are the intended beneficiaries of financial statements?

Jeremy Newman — Wed, 13 Jan 2010 16:38:03 +0100

As yesterday’s Financial Times reported http://www.ft.com/cms/s/0/ddc1a5a6-fea3-11de-91d7-00144feab49a.html the Basel Committee have made it clear that the needs of regulators and central banks are different from those of investors when it comes to how, and more particularly when, banks should make provisions for bad debts.

This should not be a surprise as it has been clear for some time that regulators would like to see some form of ‘dynamic provisioning’ which spreads the cost of bad debts over the economic cycle – rather than recognising the bad debts when the losses are foreseeable. There are many arguments for both approaches, some of which I have commented on previously, but the two approaches are different – and they meet different needs. What is disappointing is the implication that one set of accounts should be able to meet both sets of needs or, more particularly, that they must meet the needs of regulators in priority to those of investors.

It is possible to prepare financial statements that the disclose figures on more than one basis, and a reconciliation between them. This would have the advantage of total transparency with clear disclosure of the quantum of any ‘dynamic provisions’ and could be a solution to this apparent conundrum. The other possible solution is for financial statements to continue to be prepared for investors with separate information provided to regulators to meet their needs. Indeed, regulated companies already provide additional information to their regulators so one might wonder why this isn’t the most obvious solution.

It can not be right for financial statements to be prepared solely on a basis that meets the needs of regulators with investors having no right or ability to get the information that they need. Further, it can not be right that the financial statements for regulated companies should be prepared for a different audience, and thus on a potentially different basis, to the financial statements for non-regulated companies. Regulators have the power to get the information they need; they should not do so to the detriment of investors.

I continue to be surprised....

Jeremy Newman — Wed, 6 Jan 2010 09:03:51 +0100

... by the number of seemingly intelligent people who can’t accept that the losses incurred by banks – and others – were real and not merely a result of accounting standards.

Over the past few weeks there have been a number of letters to the Editor of the Financial Times suggesting that accounting rules were to blame. Now, I am not responsible for setting accounting standards, and I may not always agree with them, but I am clear that there have been real losses incurred and real cash has been lost.

I am not generally a write of letters to the Press but it seemed to me that someone should put the record straight – and I am pleased that the FT decided to publish my letter (you can read it via this link if you have not seen it http://www.ft.com/cms/s/0/ca73cb8e-f8cf-11de-beb8-00144feab49a.html?nclick_check=1 ).

I appreciate that not everyone supports ‘Mark to Market’ but surely no one can seriously believe that accounting standards can cause the havoc we have seen in financial markets and in the global economy.

It has been suggested to me that on occasion I might post a ‘guest’ blog and this is the first such contribution....

Jeremy Newman — Tue, 15 Dec 2009 07:00:00 +0100

– a comment from Andrew Maclay, a Director in the Forensic Accounting Group of BDO’s UK firm, on the OECD Recommendation for further combating bribery of foreign public officials in international business transactions. Andrew has specialised in all aspects of Forensic Accounting for the last 11 years and has worked on a large variety of disputes involving fraud and corruption investigations, contractual claims and quantifying losses and is thus well qualified to comment on this.

“Wednesday 9 December, as well as being international anti-corruption day, saw the publication of an interesting recommendation by the OECD working group on bribery. In the ten years since it was agreed, the OECD Convention on combating bribery of foreign public officials in international business transactions and the working group that supports it has become the most effective anti-corruption body outside the US. It is not easy to cajole 38 of the leading industrial nations in the world to promulgate laws banning bribery, but the OECD working group has put in place an effective process of monitoring its member states and does not shirk from publicly criticising them, for example, for a lack of bribery prosecutions.

The latest recommendation, whilst not mandating anything new, clearly recognises the evolving nature of anti-corruption law and urges member states to keep their laws and enforcement under constant review. BDO played a part, along with the other large accountancy networks, in helping the OECD understand the role of external auditors, which is not as the first line of defence against corruption. Corruption, however, is something that undermines the rule of law and contributes to poverty and so affects us all, whichever country we are based in.

The recommendation, for example, stops short of banning facilitation payments, but clearly the working group does not like them and companies are mandated to at least record them clearly in their accounts if they are paid. The working group promises Good Practice Guidance by June 2010, and companies are likely to be at risk if they do not implement some anti-corruption controls and then get investigated.

The US has long had an effective Foreign Corrupt Practices Act, but the OECD recommendation, together with evolution in national laws and practices such as the Corruption Bill and the recruitment of a team of 100 corruption investigators by the Serious Fraud Office in the UK, indicates that companies need to think seriously about their anti bribery policies, if they have not already done so. Perhaps the next big step in the world of anti-corruption is for the BRIC countries to take corruption seriously; Brazil has joined the OECD working group and Russia has applied to join – if China and India were to act as well, the field of international tendering could be seriously levelled."

Andrew Maclay

Bank-capital standards and accounting rules should be ‘decoupled’

Jeremy Newman — Mon, 14 Dec 2009 07:46:24 +0100

As reported in a recent article on the Dow Jones News Service, Robert Herz, chairman of the Financial Accounting Standards Board, has suggested that "bank-capital standards and accounting rules should be "decoupled," so that the government's determinations of whether banks are stable wouldn't necessarily be affected by accounting changes."

According to the article, the comments by Robert Herz "...were an apparent attempt to defuse a confrontation between FASB and the banking industry over "fair-value" accounting, which requires companies to peg the value of their assets to market prices."

Herz said the solution is not to alter accounting rules, but for bank regulators to exercise more flexibility in how they measure banks' capital. FASB and regulators have different missions, he said, and neither should drive the other or be subordinated to the other.

"Handcuffing regulators to GAAP or distorting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation," Herz said in prepared remarks for his recent speech. Decoupling, he said, "could enhance the ability of both the FASB and the regulators to fulfill our critical mandates. We can continue to work with independence and an unwavering dedication to market transparency; at the same time the bank regulators can utilize their authority to take whatever actions are required to keep the financial system stable and healthy."

I agree.

Many thanks to the UK’s Association of British Insurers

Jeremy Newman — Mon, 30 Nov 2009 11:02:28 +0100

In a letter in today's Financial Times, Peter Vipond, the ABI's Director of Financial Regulation, makes clear the concerns of the ABI over "the increased politicisation of the accounting standard-setting process". http://www.ft.com/cms/s/0/b8d160b8-dd4e-11de-ad60-00144feabdc0.html As Mr Vipond says "It is unhelpful that pressure from within the EU has stalled the endorsement process. This confusion helps nobody in the end."

Paul Boyle stood down as Chief Executive…

Jeremy Newman — Mon, 30 Nov 2009 07:19:08 +0100

…of the UK’s Financial Reporting Council earlier this month and last week’s Accountancy Age in the UK rightly pays tribute to him.

The editorial in Accountancy Age gives an interesting summary of Paul’s achievements but it was the final few paragraphs that most caught my attention.

“Many will ask one big question though – the audit market and whether there is a new firm to compete with the Big Four. There isn’t.

Despite much talk, many meetings, speeches, statements and outspoken intentions, the market remains dominated by the same four. Accountancy Age still believes this is a far from ideal set of circumstances for the audit market and that it would be in everybody’s interests if it was to change.”

I agree and note that this is a global, and not merely a UK, issue.

I hope that the re-branding of BDO will prompt the market place to re-evaluate BDO and encourage the market place to recognise that we have responded to the needs of the market place; and that our member firms (and the network as a whole) have the breadth, depth and quality of both people and technical resources to provide a real alternative in the market place. We are doing our best to provide the market place with the choice it both wants and needs; I hope that the market place will respond.

‘Big 4 only’ Clauses

Jeremy Newman — Wed, 25 Nov 2009 12:07:21 +0100

In my blog posting on 8 September I once again expressed the view that 'Big 4 only' clauses in bank and other financing agreements should be banned. I stated then:

'I have always been nervous about suggesting intervention in a free market but I do not believe that the outlawing of 'Big 4 only' clauses is a major intervention and, in my view, it is no different to other interventions to ensure there is adequate choice and competition in the market place.'

These are views that I have been expressing for some years, although many have questioned the prevalence of such clauses and indeed some have sought to deny their existence.

It was comforting therefore for me to read in the report published by the UK's Financial Reporting Council in October 2009 entitled 'Choice in the UK Audit Market' that reference was made to restrictions in loan covenants. The report from the FRC noted:

'..it is too early to determine how widespread such obligations are; however, the FRC continues to receive examples of banks imposing loan covenants with 'Big 4 only' clauses, including one which imposed a higher rate of interest if the borrowing company chose a non-Big 4 auditor.'

Surely there is now sufficient evidence to recognise that such clauses are a potential constraint on choice in the market place and regulators should be urged to ban them. Interestingly, I am increasingly seeing evidence that this is an issue in a significant number of countries in many continents in the world. If governments and the regulatory authorities are genuine in their wish to promote choice in the market place then they need to address this issue as a matter of urgency.

Another view on Fair Value

Jeremy Newman — Sun, 22 Nov 2009 23:40:27 +0100

I was surprised to see there was an article on fair value accounting in the November issue of Harvard Business Review – not the usual topic for an article in that august publication. So what did it say? Perhaps inevitably it will be seen by proponents on both sides of the argument as supporting their views – and to an extent it does.

What the author makes clear is that you can’t ignore the effects of impairment and that much of the argument is overshadowed by a number of “myths” about fair value accounting which he seeks to debunk. In particular he suggests the need to “unlink” accounting and capital requirements so that marking to market “would not usually have a negative impact on a bank’s regulatory capital” thereby recognising that different users of accounts have different needs. Of course regulators have always had the option to do this but to date they have not chosen to do so.

The author also suggests that companies should report earnings per share on two different bases – one calculated with fair value accounting and one without noting that “... politicians and business executives must recognize that there is no single best way to value the assets of financial institutions.” Companies have always had the option to disclose their earnings on more than one basis but I am not aware of any that have chosen to do so.

So a disappointing article that ‘sits on the fence’ and doesn’t provide us with any real insights and suggests solutions that are available at present but which have not been used by anyone – not what I have come to expect from HBR.

IFRS - What now?

Jeremy Newman — Sat, 14 Nov 2009 19:09:38 +0100

The decision by the European Commission to delay the adoption of IFRS 9 is a major concern and, in my view, a mistake.

Whilst the new rules may not be perfect (but then what is?) they are a significant improvement and they provide greater clarity in determining which assets should be shown at 'fair value' and which at 'amortised cost'. Assets which give an unpredictable return, and whose value is thus potentially volatile, are to be valued at 'fair value' whilst those which give a predictable cash flow are to be valued at 'amortised cost'. There will always be the situation where these rules are harsh (and not just situations where 'fair value' has to be applied) but it is impossible to create rules that can aniticipate every sitaution.

By delaying adoption, and possibly in due course deciding not to adopt IFRS 9 at all, the European Commission has made clear that the setting of accounting standards is a political decision. Hopefully this is just a delay and the EU will adopt the new accounting stanadrd in the new year. In the meantime we have to cope with the uncomfortable position of European companies having a different set of accounting rules to those in all other countries that have adopted IFRS.

In my view this will disadvantage all European companies. According to the Financial Times on Friday "Analysts say some French, German and Italian banks...would be hit disproportionately by the changes...But the decision... to delay... has angered other banks in the region who fear they will be put at a disadvantage to international peers."

Accounting standards are not designed to deliver competitive advantage to some and competitive disadvantage to others - they are intended to enable companies to account for matters in a consistent way that gives a true and fair view of their underlying performance.

Let us hope that the European Commission sees sense - and does so quickly.

What is the role of accounting standards?

Jeremy Newman — Fri, 13 Nov 2009 08:45:03 +0100

The IASB has now issued the much anticipated IFRS 9 – dealing with on the classification and measurement of financial assets. Publication of the IFRS represents the completion of the first part of a three-part project to replace IAS 39 Financial Instruments: Recognition and Measurement with a new standard - IFRS 9 Financial Instruments. In layman’s terms this is the revised standard designed to address concerns over the use of fair value.

According to the IASB:
“The new standard enhances the ability of investors and other users of financial information to understand the accounting of financial assets and reduces complexity – an objective endorsed by the Group of 20 leaders (G20) and other stakeholders internationally. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortised cost or fair value, replacing the many different rules in IAS 39.... IFRS 9 improves comparability and makes financial statements easier to understand for investors and other users... The IASB has received broad support for its approach. This became evident during the unprecedented global scale of consultation and outreach activity it undertook in order to refine proposals contained within the exposure draft published in July 2009....”

On the face of it this seems great – a new, easier to understand standard that reflects wide engagement with stakeholders and has broad support. If only!

Even before the standard was published concerns were being expressed. Perhaps inevitably these were lead by the French. An article in The Wall Street Journal dated 6 November was headlined “Paris Mounts the Barricades Against Global Standards” and set out the concerns of French minister Christine Lagarde. It stated that Ms Lagarde “…plans to lobby other G-20 finance ministers meeting in Scotland on Friday to accept greater political control of the standard-setting process. Behind the scenes, France appears determined to block the European Union's adoption of a new accounting standard for financial instruments. If it succeeds, the goal of global accounting convergence will face a serious setback.” The article went on to state that “Paris's real objection is to the IASB itself, which it believes is too focused on investor interests and not sufficiently accountable to politicians. Never mind that the G-20 in Pittsburgh specifically endorsed the independence of standard-setters. Never mind the G-20 also endorsed efforts by the IASB to improve its accountability by establishing a monitoring board and consulting more widely with stakeholders such as regulators. Ms. Lagarde's objective is a greater role for national governments.”

And then in the Financial Times earlier this week http://www.ft.com/cms/s/0/8c1efebc-ce4f-11de-a1ea-00144feabdc0.html there was an article which opened with the statement that “Brussels has warned that a radical overhaul of rules on how banks value their assets could lead to greater volatility in their accounts, undermining broader financial stability.”

Of course we live in a world where there is volatility in the financial markets; where financiers have developed ever more esoteric financial instruments whose value can fluctuate significantly even on a daily basis. So it is surely inevitable that the accounts of banks, and others, that hold and trade these financial instruments should reflect this volatility. Apparently not.

Once upon a time the role of accounting standards was clear – they were designed to ensure that accounts were prepared on a consistent basis and that they showed a true and fair view of the performance and financial position of a company. They were not political. They were not designed to eliminate volatility where volatility was appropriate. Now it seems they have a broader purpose – they need to satisfy politicians and they need to present smooth results so that they don’t undermine financial stability. Apparently it no longer matters whether they ensure accounts are prepared on a consistent basis or whether they reflect a true and fair view. What shareholders are supposed to make of this is unclear – but apparently they are no longer the primary beneficiary of the accounts of the companies in which they invest. There is now a ‘higher purpose’ to accounts; they are now to be political instruments designed to achieve things they were not designed for. Ah well.

“Who’s afraid of Fair Value accounting?”...

Jeremy Newman — Mon, 26 Oct 2009 07:01:41 +0100

... is a blog post written by a group of financial professionals http://scepticalmarketobserver.blogspot.com/2009/10/whos-afraid-of-fair-value-accounting.html and is well worth reading – the cartoon at the start of the article is quite amusing. It sets out the arguments for Fair Value and gently debunks some myths about the difficulty in valuing illiquid assets. As the article states:

“Some financial institutions, including banks, argue that there is no liquid market for some of their assets – so a useful current value can’t be determined.

But is that really so? Consider residential real estate. It’s not a liquid market. Each home is unique and there are often years between transactions in a specific property. Yet most home owners still have a pretty good idea of the current value of their house, based on a variety of indications, e.g. recent prices of similar properties, replacement cost, realtor advice, etc. They certainly wouldn’t use historical cost. Historical cost is a sunk cost – the money originally paid for the house is gone – irrelevant, the same way that the historical cost of Nortel shares in a portfolio is irrelevant in determining someone’s net worth.

A financial institution has access to much better valuation methods than a homeowner has. The problem is not that some financial instruments can’t be valued. The problem is that the institution may not like the numbers that emerge.”

Well worth reading.