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Total Number of Subscribers: 467 |
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Date:29th December 2008 |
Compiled by Mr. M. Sathya Kumar |
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Happy New Year,
Global Accounting As New Year's resolutions are pondered around the globe, David
Tweedie, chairman of the International Accounting Standards Board, is
announcing his organization's resolve to push through its agenda in 2009 — including many joint projects with its American counterpart, the
Financial Accounting Standards Board. For example, next week the IASB will issue an exposure draft on
off-balance sheet consolidation focusing on the issue of "control,"
noted Tweedie at a Wednesday breakfast meeting sponsored by Pace University's
Lubin School of Business. Tweedie confirmed that the proposed standard won't
be a duplicate of American rule FIN 46(R), which currently is being reworked
by FASB to include more stringent criteria for when companies are allowed to
transfer ownership of securitized assets and liabilities. Instead, the new IASB proposal will focus efforts on making the
criteria for consolidating assets and liabilities more straightforward.
"If you have the power to call the shots, it is yours," said
Tweedie. "We don't care if you have zero percent equity, it is
yours." Expanding on the control criteria, Tweedie asserted that if a
company with an investment in an off-balance sheet vehicle is, for example,
making policy decisions about the investment or deciding what to do with
troubled assets, it must consolidate the vehicle on its balance sheet. The proposed standard will also call for preparers and auditors
to use judgment regarding vehicles that are not consolidated, since those
items must be disclosed in tabular form in the financial statements. Tweedie
noted that the related disclosures will likely cover "how much
skin" a company has invested in an off-balance sheet vehicle, what the
maximum loss could be if "all goes wrong," and which structured
vehicles currently on the balance sheet were not expected to be brought back
onto the corporate books after a bank packaged them up and sold them off to
various customers. Tweedie hopes that next year IASB and FASB jointly will tackle
the issue of reducing the number of combined impairment tests in U.S. GAAP
and IFRS to two or three tests. Such an undertaking will take two or more
years, but the chairman hopes to convince his board as well as FASB to put
the task on the agenda in January. In 2009, IASB will take a tougher stance in the face of
political pressure, said the chairman. In November, IASB was forced to skip
its due process and rush out a fair-value accounting rule that mirrored
FASB's FAS 115. That was because heads of state, including Nicolas Sarkozy
and Angela Merkel, insisted that European banks were at a disadvantage during
the credit crunch because they used IFRS. As a result, the European Union
threatened to undo international accounting standards related to the
reclassification of financial assets unless IASB issued a revised standard. IASB made the quick change, but Tweedie maintains that his
organization and FASB will move in "lock step" going forward, to
stop politicians from hijacking the standards setting process by claiming
that one region of the world has an advantage over another in terms of
accounting rules. Further, Tweedie says that IASB has suggested to its
trustees a constitutional amendment to allow a fast-track standard-setting
process for emergency situations, such as the current credit crisis. The new
fast-track scheme may be available in 2009. Also due out next year is an IASB/FASB discussion paper aimed at
defining lease contracts. For his part, Tweedie would like to see leases
always defined as liabilities. Currently, FASB uses 18 different standards
and nearly 40 staff interpretations to govern the treatment of leases.
"And nothing is on the balance sheet," remarked Tweedie. "For lease accounting to be principles based, you have to
have a core principle. Here it is: show the liability incurred by signing the
lease contract of the rights of the asset you've obtained thereby, that's
it," said Tweedie. He figures a new IFRS standard on leasing should be
able to cover the core principle, plus other information related to leases — such as how to handle options or residual guarantees — in 15 pages. The argument that principles-based rules that require
professional judgment will be hotly debated next year. Despite the complaint
that the U.S. is more litigious than other parts of the world, Tweedie said
that he had gotten support from large accounting firms regarding auditors
making judgment calls. Indeed, U.S. accounting firms often say their auditors
will be hauled into court by shareholders and clients if their judgment
regarding a principles-based standard is deemed wrong. But Tweedie maintained that he got buy-in on the professional
judgment issue from all Big Four firms last year when he sent out a mock
leasing standard "that was very short," and asked the firms if they
could audit the standard. Their general response, claims Tweedie, is that the
standard was a bit shorter than they would have liked, but ultimately, the
accountants were sure they could audit financial statements that used the
dummy principle. Also on the calendar for 2009, is IASB's slim 250-page IFRS for
small and medium businesses. The shrunken standards will be stripped of many
disclosure rules, and be a less complicated version of full IFRS, which numbers
2,500 pages. For example, smaller companies won’t see standards
related to complex derivative arrangements in the hedging section. Tweedie
estimates that businesses with 50 employees or less make up 99 percent of
companies worldwide, and that small company IFRS will cover 95 percent of the
transactions completed by those modest-size businesses. there can be no two opinions on whether carbon emissions should
be reduced, there appears however to be a continuing debate among companies
on how to appropriately account for carbon credits. "At present there is
no authoritative literature under the generally accepted accounting
principles (GAAP) in Instead, the new IASB proposal will focus efforts on making the
criteria for consolidating assets and liabilities more straightforward.
"If you have the power to call the shots, it is yours," said
Tweedie. "We don't care if you have zero percent equity, it is
yours." Expanding on the control criteria, Tweedie asserted that if a
company with an investment in an off-balance sheet vehicle is, for example,
making policy decisions about the investment or deciding what to do with
troubled assets, it must consolidate the vehicle on its balance sheet. The proposed standard will also call for preparers and auditors
to use judgment regarding vehicles that are not consolidated, since those
items must be disclosed in tabular form in the financial statements. Tweedie
noted that the related disclosures will likely cover "how much
skin" a company has invested in an off-balance sheet vehicle, what the
maximum loss could be if "all goes wrong," and which structured
vehicles currently on the balance sheet were not expected to be brought back
onto the corporate books after a bank packaged them up and sold them off to
various customers. Tweedie hopes that next year IASB and FASB jointly will tackle
the issue of reducing the number of combined impairment tests in U.S. GAAP
and IFRS to two or three tests. Such an undertaking will take two or more
years, but the chairman hopes to convince his board as well as FASB to put
the task on the agenda in January. In 2009, IASB will take a tougher stance in the face of
political pressure, said the chairman. In November, IASB was forced to skip
its due process and rush out a fair-value accounting rule that mirrored
FASB's FAS 115. That was because heads of state, including Nicolas Sarkozy
and Angela Merkel, insisted that European banks were at a disadvantage during
the credit crunch because they used IFRS. As a result, the European Union
threatened to undo international accounting standards related to the
reclassification of financial assets unless IASB issued a revised standard. IASB made the quick change, but Tweedie maintains that his
organization and FASB will move in "lock step" going forward, to
stop politicians from hijacking the standards setting process by claiming
that one region of the world has an advantage over another in terms of
accounting rules. Further, Tweedie says that IASB has suggested to its
trustees a constitutional amendment to allow a fast-track standard-setting
process for emergency situations, such as the current credit crisis. The new
fast-track scheme may be available in 2009. Also due out next year is an IASB/FASB discussion paper aimed at
defining lease contracts. For his part, Tweedie would like to see leases
always defined as liabilities. Currently, FASB uses 18 different standards
and nearly 40 staff interpretations to govern the treatment of leases.
"And nothing is on the balance sheet," remarked Tweedie. "For lease accounting to be principles based, you have to
have a core principle. Here it is: show the liability incurred by signing the
lease contract of the rights of the asset you've obtained thereby, that's
it," said Tweedie. He figures a new IFRS standard on leasing should be
able to cover the core principle, plus other information related to leases — such as how to handle options or residual guarantees — in 15 pages. The argument that principles-based rules that require
professional judgment will be hotly debated next year. Despite the complaint
that the U.S. is more litigious than other parts of the world, Tweedie said
that he had gotten support from large accounting firms regarding auditors making
judgment calls. Indeed, U.S. accounting firms often say their auditors will
be hauled into court by shareholders and clients if their judgment regarding
a principles-based standard is deemed wrong. But Tweedie maintained that he got buy-in on the professional
judgment issue from all Big Four firms last year when he sent out a mock
leasing standard "that was very short," and asked the firms if they
could audit the standard. Their general response, claims Tweedie, is that the
standard was a bit shorter than they would have liked, but ultimately, the
accountants were sure they could audit financial statements that used the
dummy principle. Also on the calendar for 2009, is IASB's slim 250-page IFRS for
small and medium businesses. The shrunken standards will be stripped of many
disclosure rules, and be a less complicated version of full IFRS, which
numbers 2,500 pages. For example, smaller companies won’t see standards related to complex derivative arrangements in the
hedging section. Tweedie estimates that businesses with 50 employees or less
make up 99 percent of companies worldwide, and that small company IFRS will
cover 95 percent of the transactions completed by those modest-size
businesses. Still, Tweedie insisted that IFRS should contain an
"absolute minimum of industry standards," and prepares should focus
on applying general principles to industry-specific issues using professional
judgment. Wrapping up the outlook for next year, Tweedie assured the
audience that the future of FASB is in tact — despite claims that the
standard setter will disappear when IFRS and U.S. GAAP are converged. FASB
will continue to thrive because ational standards setters play a vital role
in IASB's rulemaking process, noted the chairman. "They take the temperature" within countries to
identify key issues for IASB consideration, and put the issues into context,
explaining whether a concern is wide-spread or a self-interested plea, for
example. National standard-setters also keep the 14-member IASB honest.
"Fourteen people sitting in London can get it wrong and need to be
challenged," quipped Tweedie. National standards setters also, "do
a lot of the initial work for us," said the chairman, using the mining
industry standards as one example. Looking out further to 2011, Tweedie says that is the year the
convergence project with FASB will end, and hopefully the trans-Atlantic
standards will be so similar that the transition from U.S. GAAP to IFRS
"will be much easier." He also expects that the IASB of 2011 will
include four North Americans and an U.S.-based office. "U.S. GAAP does not rule the world ... like it did 10 years
ago," added Tweedie. "The markets will decide that the world does
not need two sets of standards.... But that will take a bit of time." Source
: The CFO Magazine |
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