The need for a global response to the credit crisis, a global problem, is evident and has been emphasised by world leaders. International co-operation is already well advanced in the field of accounting standard-setting. International Financial Reporting Standards (IFRSs), set by the IASB, are now used in more than 100 countries.
Most of the world’s developed and emerging economies - including nearly all of the G20 members - have made commitments to IFRSs. The IASB has been actively engaged in promoting common standards over the world and in particular in ensuring convergence among major economies. The success so far achieved should not be compromised by actions that would weaken the independence of the standard-setting process.
The role of fair value accounting in the credit crisis has received much scrutiny. The Trustees support the IASB’s efforts to establish accounting standards aimed at providing transparent and comparable financial information. To respond to the crisis, the IASB has taken urgent action to improve the application of fair value principles, where necessary, and is committed to working with the US Financial Accounting Standards Board (FASB) to ensure globally consistent solutions.
The use of fair values has received support from both banking supervisory and investor communities. Christian Noyer, President of the Banque de France, wrote in the Banque de France’s October 2008 Financial Stability Review, “In parallel, the move to mark-to-market accounting in financial reporting has fostered transparency and a more timely recognition of risk exposures, and has contributed to sharpening market discipline.”
The International Corporate Governance Network (ICGN), an association of 500 investment organisations in more than 40 countries world-wide with more than US$15 trillion under management, this week stated, “Investors generally support fair value that delivers a picture of what is actually happening. There are some challenges to address, but abandoning this approach would damage confidence in financial reporting.” In a survey of its European members, the CFA Institute, an international association of investment analysts, found that 85 per cent think that a suspension of fair value standards would further decrease confidence in the European banking system (559 respondents).
The Trustees believe that any steps taken outside the well-established and supported standard-setting process to amend fair value accounting would further undermine already scarce confidence in financial markets. Therefore, efforts to improve financial reporting should be led and completed expeditiously by the IASB in order to ensure a globally coordinated approach. The IASB has already taken a number of significant steps to improve accounting guidance based on the recommendations particularly of the Financial Stability Forum (FSF) but also of other stakeholders and commentators.
At the same time, any further IASB action needs to take proper account of the views of all stakeholders in order to develop accounting standards that provide transparent financial information to market participants. Stakeholders, particularly investors, have been very clear about this point in representations to us. Issues related to fair value accounting are complex, with consequences which need careful evaluation. They are not necessarily conducive to immediate fixes.
Thus the Trustees will continue to support the IASB’s efforts to respond to issues as rapidly as possible, while emphasising the need to take account of the views of all stakeholders and the needs of investors. In addition to work already completed, the IASB has initiated two important efforts:
- Addressing procyclicality through urgent and focussed dialogue between accounting standard-setters and prudential supervisors. Procyclicality arises from the interaction of accounting standards with the rules on capital requirements, which are also being reconsidered. Some commentators believe that fair value requirements accelerated the downturn of markets by requiring financial institutions to sell off assets to meet capital requirements, thus depressing markets further. Therefore, it is understandable that addressing the issue of procyclicality is a priority for policymakers and prudential supervisors, who are tasked with ensuring financial stability. At the same time, the primary aim of accounting standard-setters (and securities regulators) is to provide transparency and comparability of financial information for investors and participants in capital markets - an objective that should not be sacrificed.
The IASB acknowledges the clear benefit of urgent and focussed discussion between accounting standard-setters and prudential supervisors and the need for joint interaction on this issue. Last week, the IASB and the Basel Committee indicated their willingness to explore solutions expeditiously in this specific area, along with intensifying the regular dialogue between the two organisations and among those concerned within the context of the FSF (in which the IASB is a member).
- A high level advisory group to report rapidly: The IASB and the US FASB are establishing a high level advisory group that will comprise senior leaders with broad international experience with financial markets. The group will consider how improvements in financial reporting could help enhance investor confidence in financial markets.
Accountability of the IASC Foundation and the IASB
Underpinning the organisation’s approach is the view that accounting standards should be developed by an independent IASB that reaches conclusions following a transparent and open due process. An independent body of Trustees, whose appointments are approved by publicly accountable authorities, should oversee the IASB. The Trustees and the IASB are strongly committed to improvements that will enhance confidence in the standard-setting process. The organisation’s efforts have been recognised by One World Trust, an independent not-for-profit organisation, for excellence in public accountability.
Recognising that IFRSs are rapidly becoming the global standard for financial reporting and taking into account consultation with stakeholders, the Trustees have proposed that the IASC Foundation should enhance its public accountability through the creation of a link to a Monitoring Board. The Monitoring Board will comprise public authorities responsible for the adoption of accounting standards to enable a fruitful dialogue with all parties concerned. The International Organization of Securities Commissions (IOSCO) strongly supports this initiative. The construct of the Monitoring Board is now broadly agreed and should be announced formally during the next few weeks. The Trustees also wish to establish a more formal engagement with investor groups.
My fellow Trustees and I understand the extraordinary circumstances facing policymakers today. Our organisation is committed to acting in an urgent and responsible manner to help restore confidence in financial markets. Broad international adoption of IFRSs, combined with the actions described above, means that the IASB is helping to ensure a globally consistent response on financial reporting issues. We urge the G20 nations to support our efforts in a manner that reinforces the IASB’s efforts and the organisation’s independence.