Tension in Europe

While the U.S. continues its debate over a possible move to IFRS, eyes have been focusing on officials in Europe. Tension escalated last year when the European Union threatened carve-outs if the IASB did not make changes to fair value rules. The IASB suspended normal due process and amended the standards.

The pressure was only beginning. French and German ministers have been vocal in their concern over the direction and speed of the IASB on fair value reforms. Although the IASB has stood firm on its timetable and just announced it will issue a revised standard in November, the IASB and FASB are not in lock step on fair value reform now, in terms of both timing and direction of proposed rule changes. There is a possibility that despite calls from world leaders to establish a single set of global standards, we could end up with two different sets of rules in the area of financial instrument recognition and measurement.

While the pressure bears down from segments in Europe, the EU Commissioner for Internal Markets has not signed the memorandum of understanding between the Monitoring Board of capital market authorities and the parent organization of the IASB. The Monitoring Board, created earlier this year, was an important step in improving the governance of the international standard setter.

FASB Chairman Robert Herz told Accountancy Age recently that European "meddling" in standard setting could derail U.S. adoption of global standards. Last month, IASB Chairman Tweedie told the European Parliament that this is the "last chance in a generation for global standards – we won't get another chance." He stressed how important European backing is to the movement toward global standards.

Do you believe Europe will ultimately accept fair value revisions and back the IASB? Do you believe that the IASB and FASB will be able to come together on accounting standards for financial instruments?

- Paul Parks | www.IFRS.com

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[Joe Jefferis]

We must learn from history or we are destined to repeat it. The topic of mark to market and fair value accounting is addressed in the ACCOUNTING THEORY and PRACTICE Vol II By Roy B. Kester in the following manner:

"It may be laid down as a principle of business practice based on sound reason, that the period in which the sale is made should be given credit for it. Stock-in-trade (aka financial instruments) must be valued on the basis of its purchase or wholesale market price and according to well established practice, either at cost or market, whichever is lower. This principle has the support of conservative practice throughout the world.

The effect of valuing the stock in trade at a lower market than cost is to bring into the period's results a loss which may never be realized either because the change in the purchase market may not be reflected in the sale market, or because, if so reflected, the market may swing back before actual sale of the stock (aka financial instrument) is made. If valuation is to be at the market when that is lower than cost, consistency would seem to demand that, when the market is higher than cost at the time of preparing the balance sheet, market value should be used and the profit occasioned thereby be credited to the current period. The answer to this argument is that operation would thus be placed on a speculative basis."

These words were written in 1923 years before The Great Depression. At some point in time, "the conservative practice throughout the world" shifted and accepted speculative valuations. These 2006 acceptance of mark to market put financial statements into the realm of speculative valuations being reflected in financial statements. Executives were given credit for making "smart" purchases and not held accountable for their decisions not to sell appreciated assets.

To continue the 1923 analysis:

"In answer to various contentions, it may be stated that though good buying is an essential factor in profit-making, no refinement in logic can obscure the obvious fact that goods are bought to be sold and that no profit arises until the sale takes place. All effort before the sale, whether directed towards good buying, careful storing or display, the placing of advertising, or the selection of a sales force, will come to naught unless the sales are made. It would seem therefore, that potential profit or loss on any or all effort preliminary to the actual sale has no place in the current record."

We did not have a financial crisis in the USA until after oil commodity prices collapsed between July 2008 and September 2008. If you were betting on oil futures from 2006 through June 2008, your assets were overstated because of a oil market bubble. Lending institutions should not have extended credit based on these temporarily inflated asset values.

How did the accounting and the financial markets drift so far from reality to allow balance sheets reflect speculative valuations and permit systemic risk taking across the board (TARP).

The root cause of the financial crisis was the 1999 repeal of the Glass-Steagall Act. It was followed by the Commodity Futures Trading Modernization Act of 2000.

A single global accounting standard is a good intention. We know where the path of good intention leads. Promoting "Sustainability" as a accounting industry objective disregards the basic financial goal of measuring for profit or loss and creating real value for customers.

The AICPA lost credibility and loses the industry appearance of independence when it promotes its alignment with globalism's agenda of social goals and objectives - aka Sustainability.

True Deciders of Economic Value use Generally Accepted Accounting Principles to measure progress along the path to prosperity.

[Nick Topazio, Chartered Institute of Management Accountants]

In my opinion so long as the IASB / FASB continues to respond to calls for change even if the response is not entirely what Europe is calling for then the danger of a European standard-setter will be avoided.

Even Christine Lagarde, French Minister of Economic Affairs and one of the arch-critics of the IASB, seems to be softening her stance. Writing in the Financial Times last week she said "Further progress is also needed on accounting standards. Regulators should have their say on their ultimate purpose and ensure they do not promote volatility. Market value must be used, when relevant, in considering how a business uses its assets. But it should not be an excuse for failing to measure, assess and account."

This appears to send positive signals about the role of the IASB and the need for fair value accounting albeit with caveats. The next step is for the IASB to issue its revised guidance on financial instruments - classification and measurement and for FASB to hopefully respond positively.