It looks like Plan B for accounting convergence

April 29, 2010

Full convergence of US and international accounting standards appears to be some way off, and while International Accounting Standards Board member Philippe Danjou is still aiming to achieve Plan A – meeting the G20 deadline of full convergence by mid-2011 – a compromise Plan B is clearly being prepared, John Manley writes.

Speaking to Reuters journalists at the Reuters Global Financial Regulation Summit in London, Danjou acknowledged ECB concerns that there are big differences remaining between the IASB and the USA’s Financial Accounting Standards Board. Earlier this week, the ECB said it is not optimistic about the timetable, and is concerned there will be a rush to convergence at the cost of quality. (Click here for more news from the Summit)

“Can we converge on everything?” Danjou asked. He was doubtful: “What’s good for America is not always seen as being good for the rest of the world, and vice versa… Convergence is the aim. It is a very desirable goal, but you cannot force it.

“If our stakeholders say we should take slightly different solutions, we will have to accept that,” he said. “If we can’t reach a solution, we can bridge.”

Danjou thought we should know for certain whether plan B is needed by the end of this year when the FASB has completed its consultation.

There have been calls for accounting rules to play a central role in ensuring financial stability; but Danjou gave them short shrift.

“We should aim for financial stability, but we should not put it above financial transparency,” he warned. “Accounting and prudential rules don’t have the same objective. You can’t mix them too much.”

One thorny issue still going through the European Commission’s consultation process, and clouding the prospect of full convergence, is fair value, or mark-to-market accounting, where assets and liabilities are entered on the balance sheet at their prevailing market value.

Of concern has been the mark-to-market treatment of a firm’s liabilities if its credit rating changes, an issue that mainly affects investment banking.

If a firm’s bond ratings are downgraded, the market value of its liabilities will fall, and that can be reflected with an upward adjustment in the profit and loss account. Similarly, if its credit rating is raised, it can result in a P&L loss.

                Understandably, Danjou said, there is a consensus that credit ratings should not affect the profit line; so the rules will likely change to ensure that fluctuations in the fair value of your liabilities, marked to market, will be reflected on the balance sheet, but no longer on the profit and loss account. Instead, they will be reflected in the firm’s equity.

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