Financial Regulatory Forum

Global accounting body IASB shores up defences, investor focus

By Reuters Staff
February 15, 2010

By Huw Jones

LONDON, Feb 15 (Reuters) – The world’s leading accounting standards setter bolstered its defences from political pressure on Monday and reinforced its role as an independent guide to investors rather than a tool for policymakers.

The International Accounting Standards Board (IASB) sets accounting principles that are effectively law in over 100 countries but has been criticised for being aloof and slow to respond to policymaker concerns during the financial crisis.

Its rules will form the bedrock for one set of global standards by mid-2011 as called for by the G20 group of leading nations to improve transparency for investors and cut red tape for companies.

“These changes, which are aimed at enhancing public accountability, stakeholder engagement and operational effectiveness, complete the second part of the …. constitution review,” the IASB said in a statement.

Pressure on the IASB has pitted accountants — who say financial statements should be a snapshot health check on a company — against policymakers who see a financial stability role for accounting rules such as smoothing out losses at banks.

Policymakers in the EU, where IASB rules are mandatory for 8,000 companies, put heavy pressure on the IASB last year to accelerate reform of its fair value or mark-to-market rule to ease pressure on banks that have to price assets at depressed going rates.

The IASB was also criticised for being aloof and not listening enough to policymaker concerns about financial stability when it comes to drafting rules.

Industry officials welcomed the announcement to enshrine a principles-based approach to setting rules — a nod to critics in Europe who feared the board was moving towards a more prescriptive U.S. style of standard setting.

“I think the trustees have made very good and wise decisions and we strongly support that there is now a commitment to principles-based standards,” said Stig Enevoldsen, chairman of the European Financial Reporting Advisory Group, which advises the EU on accounting matters.

The IASB announced several key changes that take effect on March 1:

– The revised constitution says convergence of IASB rules with those used in the United States and elsewhere is a strategy aimed at promoting the adoption of the IASB’s rules and not an objective in itself.

This is seen as reassurance to critics who fear a race to converge at any cost will result in bad standards.

– IASB rules will be based on “clearly articulated principles”. This was emphasised after heavy pressure from Europe where IASB rules are mandatory.

– Investors are specifically identified as the target audience for financial information. This is seen as an attempt to side with accountants in the battle with policymakers who say IASB rules should play a wider role such as by aiding financial stability.

– All rule changes musht undergo due process and a new emergency procedure is introduced for accelerating reforms. Reform can only be speeded up in exceptional circumstances with approval of at least 75 percent of the IASB’s trustees.

Industry insiders say the change will help the IASB withstand political pressure for quick fixes.

– The IASB constitution is changed to allow for the appointment of two vice chairs for the board and its trustees, making it easier to have a wider geographical spread of officials as Asian countries and Canada adopt IASB rules.

The IASB will need a new chairman in 2011 and observers say it will be hard to find someone who is both a good diplomat to handle the board’s more influential role and a strong technician. Splitting roles will make finding the right people easier, industry officials said.

– There will be three-yearly public consultations on the board’s technical work as part of efforts to become more accountable. The board will also listen to a broader range of stakeholders before changing rules. (Reporting by Huw Jones, editing by Stephen Nisbet…..) ((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com))

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