Have written about the difficulties between the International Accounting Standards Board and the U.S. Financial Accounting Standards Board, when it comes to recognizing investment losses. Came across this 2011 Financial Times article, illustrating some dimensions of the difficulties:
Uneven writedowns exacerbate market jitters
The Greek financial crisis has caused an outbreak of sheepishness within the accounting profession. The embarrassment stems from the way that some European banks and insurers reported losses of 21 per cent on Greek government bonds, while others slashed their value by 50 per cent or so.
Given the fevered and paranoid state of investor sentiment, the inconsistency may well have exacerbated market jitters. “It makes all of us look a little foolish,” the chief executive of one leading auditor told me this week.
The uneven writedowns hit the headlines late last month when it emerged that Hans Hoogervorst, chairman of the International Accounting Standards Board, felt that some financial institutions should have reported bigger Greek sovereign debt losses in their first-half results.
The IASB sets the IFRS accounting rules used by these companies but has no power to enforce compliance. Nevertheless, in a letter to the European Securities and Markets Authority in early August, Mr Hoogervorst attacked claims that illiquidity meant there was no reliable market price for Greek government bonds.
By doing so, he was siding with those that used distressed market prices in cutting the value of their “available for sale” Greek debt by roughly half, such as Royal Bank of Scotland, the state-controlled British lender.
He was also setting himself against those that conjured up a milder 21 per cent writedown reflecting the terms of the second bail-out of the Greek state, agreed in July. These included France’s BNP Paribas and Dexia, the Franco-Belgian bank.
A non-accountant and former Dutch finance minister, Mr Hoogervorst has headed the IASB since July. His Greek intervention will have helped assuage any concerns that he might sacrifice accounting rigour on the altar of political expediency.
It also seemed designed to reassure the US, which is weighing up whether to ditch its domestic accounting rules in favour of IFRS. The Securities and Exchange Commission – due to decide on a switch this year – was already gathering examples of how the deployment of IFRS has varied around the world.
The letter is unlikely to alter US thinking on IFRS adoption. A fudged yes-and-no answer still looks probable. But it does give covering fire to IFRS experts at the big auditors, who appear to favour using market values for impaired available for sale debt, but who have not always been heeded in a highly politicised climate.
The patchiness of this centralised control offers a reminder that the biggest names in accountancy are, by and large, collections of national fiefdoms rather than integrated global businesses. It is still awkward, though. One US regulator told me it was amazing that auditors had allowed such variation.
PwC, for instance, is an auditor to France’s CNP Assurances, part of the 21 per cent club, and its domestic rival Axa, which used the market price. “We make every effort to be completely consistent,” said Ian Powell, PwC’s UK chairman.
Some of the inconsistencies seen across the profession may be fixed in the second half of 2011. But auditors are unlikely to get much help from Esma, the pan-European securities watchdog.
Its supervisory board discussed Greek sovereign debt accounting this week but it seems to lack the muscle to resolve disagreements.
And if the sovereign debt crisis worsens, then the pressure to come up with accounting answers that suit national interests is only likely to increase.
Yes, and if the sovereign debt crisis worsens, then the pressure to come up with accounting answers that suit national interests is only likely to increase.
Mr. Hoogervorst, Chair of the International Accounting Standards Board, has a Masters Degree in Modern History and a Master of Arts Degree in International Relations, majoring in international economics and Latin American studies. He has no professional accounting designation or professional accounting experience. He succeeded Sir David Tweedie, a British Chartered Accountant and member of the Accounting Hall of Fame.