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Date: 19^th April 2010	Compiled by: M Sathya Kumar
Towards common accounting standards The need for creating a supervisory body assumes relevance when one looks at tricky accounting issues that pop up frequently. The definition of an economist is someone who did not have enough personality to become an accountant. Considering the claims of the role of accounting in precipitating the credit crisis, economists and accountants could well be talking to each other to set standards. Ever since the Norwalk Agreement of 2002, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have been attempting to seamlessly issue accounting standards that are based on common principles. They may not have been entirely successful thus far but all credit to them for continuing with the task irrespective of regulatory and political hurdles. The G-20 group of most industrialised nations patronises the efforts of the IASB and the FASB. But, as in most things, political interference comes at least expected times. At a meeting of top accountants and regulators recently, the new internal market commissioner of the European Union (EU) stunned the audience by proposing to add more banks and companies on the Governing Board of the IASB and considering increases to the $6.5-million budget of the IASB. There was a clear statement that funding to the IASB would depend on the extent to which it nods in agreement to pressure from the EU. While this could have been a one-off statement which the IASB can afford to forget using the clout and muscle at its disposal, absence of political interference in any sphere cannot be merely wished away. Regulating the regulator Does a regulator need regulation? If yes, should it be political? These questions are debatable. World over, accounting standards are normally issued by committees comprising a group of people who together make up an Institute. The Institute of Chartered Accountants of India (ICAI), the Institute of Chartered Accountants of England and Wales (ICAEW) and the American Institute of Certified Public Accountants (AICPA) are cases in point. Usually, the standard-setting committees of these organisations have representations from an eclectic variety of industries. Standards are set keeping specific industry requirements in mind — the deferral of applicability of International Financial Reporting Standards (IFRS) to the small-scale sector (SME) is an example. The Public Company Accounting Oversight Board (PCAOB) was formed in the US to thwart future Enrons. But the Valukas report on Lehman Brothers proves that all the time, money and effort spent on Sarbanes Oxley were not worth it as one investment bank triggered a global crisis using the same trick that Enron used — special purpose vehicles. While the need for regulating a regulator cannot be taken as needless, it can certainly do without political pressure. A Supervisory Council with broad representation — a refined National Committee on Accounting Standards (NACAS) — could probably be a solution. Tricky accounting issues The need for creating a supervisory body immediately assumes relevance when one looks at tricky accounting issues that pop up frequently. The debate on accounting for credit-risk — recognising unpaid liabilities that are due as income — is yet to end when one more has arisen in the banking space. In a normal M&A transaction, goodwill is recognised as an intangible asset, amortised over a predefined period of time but tested for impairment annually. Goldmine for a few However, the last few years have presented a goldmine for a few acquirers — they are buying assets at a discount resulting in negative goodwill — called “Christmas Capital Gain” in the US. Both IFRS and US GAAP norms need negative goodwill to be absorbed into the income statement. Critics of these norms and votaries of the “matching concept” in accounting point out the gaps by taking the case of a US bank whose negative goodwill gains stood at 85 per cent of its operating revenue and 96 per cent of its income. This could be dismissed as a stray case — but such cases are what have created the problems in the first place. Article by Mr. Mohan R lavi, Hyderabad-based chartered accountant. The article was earlier published in one of the reputed financial daily.
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