SAICA was recently privileged to host Sir David Tweedie, chairman of the International Accounting Standards Board (IASB), and two IASB members, Warren McGregor and Bob Garnett (a member of SAICA), along with representatives of the National Standard Setters (NSSs).
Sir David has, of course, visited us previously; but this occasion was especially promising, given the added spotlight falling on the profession in the wake of the global financial meltdown. An added spin-off was the opportunity to introduce our new Executive President to members of the IASB, NSS and SAICA members, and to promote an understanding of the importance of standard setting in South Africa, and the role South Africa has played and can continue to play in influencing the IASB.
Members who attended Sir David’s presentation in Johannesburg were updated on the burning global issues facing accountants, among them demands of the G20, progress on the United States moving to IFRS, reducing complexity in accounting for financial instruments, determining fair value in illiquid markets and reducing off-balance sheet accounting.
Sir David pointed out that the application of accounting standards highlighted the impact of the financial crisis, but was not the cause of the crisis. He said that those that had been blaming accounting standards for having precipitated the current financial crisis tended to overlook the huge benefits that flowed from the application of IFRSs in more than one hundred countries across the globe. He cited the following as capital market benefits:
• The credibility of local markets to foreign investors.
• Greater cross-border investment.
• Efficient capital allocation.
• Comparability across political boundaries.
• The facilitation of global education
For companies, he pinpointed the following:
• Lower cost of capital.
• Integrated IT systems.
• Easier consolidation.
• A single set of financial statements.
• Improved access to offshore capital.
• A better understanding of the financial statements of offshore suppliers, customers and subsidiaries.
These benefits are the same reason South Africa agreed to issue IFRSs as Statements of GAAP in 2003, and the JSE requirements for companies to report in terms of IFRSs from 2005.
He stressed that the IASB had been proactive in its response to the financial crisis, beginning in April 2008 with the completion of the Financial Stability Forum (FSF) report.
The big thrust came in November 2008, when the G20 Summit served as a platform for a joint IASB/United States Financial Accounting Standards Board (FASB) approach to short-term and medium-term action plans. Following three international round table discussions, a high-level advisory group, the Financial Crisis Advisory Group (FCAG), first met in London in January 2009 (three further meetings have subsequently materialised) to thrash out the plans developed at the November G20 Summit.
The short-term plan included:
• a further enhancement of the governance of the IASC Foundation;
• IASB to enhance guidance for valuation of securities and complex, illiquid products; and
• IASB to address weaknesses in accounting for off-balance sheet vehicles.
The medium-term action plan comprised:
• key global standard setters to work towards creating a single set of high-quality global financial reporting standards;
• financial institutions to provide enhanced risk disclosures in their reporting, including off-balance sheet activities;
• regulators, supervisors and standard setters to work together to ensure the consistent application and enforcement of accounting standards; and
• authorities to collect information on where convergence of regulatory practices needed accelerated progress.
Sir David advised that the urgent priorities of the IASB were to address the following areas:
• Consolidations, in particular that of special purpose vehicles.
• Fair value measurement.
• Financial instruments.
He indicated that much debate had taken place over the IASB’s intention to replace the standard on financial instruments, IAS 39, and the current aim was to develop a replacement during the course of 2009.
Another recent major global theme had been the argument that accounting standards were pro-cyclical and had helped to exacerbate the credit crisis. The argument arose from the requirement to recognise fair value losses relating to investments trading in a depressed or illiquid market. A further argument was that banks and other financial institutions had distributed an excessive amount of profits earned in the good years leaving the financial institutions exposed in lean times. It was an argument accompanied by calls to mitigate this effect by requiring banks to build up additional capital buffers in good times; buffers that could be released during economic downturns.
Sir David said that the FCAG had considered the following two possible options to achieve this:
• The adoption of so-called “dynamic provisioning”, a loan-loss methodology that attempted to anticipate the economic cycle and then provide for resultant losses as a charge against profit.
• An additional non-distributable capital reserve that would ensure that capital was retained in the business.
The FCAG recommendations will be given to the IASB and FASB early in the third quarter of 2009. Prof Wiseman Nkuhlu of South Africa represents South Africa’s views in this group.
Sir David revealed that the IASB and FASB, which were looking at loan loss provisioning, were already discussing such issues with the Basel Committee of Banking Supervisors, and that most IASB members did not support dynamic provisioning, while some supported the capital reserve concept.
Once again, Sir David emphasised the IASB’s focus on developing principle-based standards.
Sue Ludolph CA(SA) is Project Director: Accounting, SAICA.