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A handmaid’s tale

The memorandum of understanding (MOU) between the International Accounting Standards Board and its US counterpart, the Financial Accounting Standards Board is key to understanding why European businesses are in danger of drowning in what increasingly resembles a tide of accounting effluent.

Back in 2002, with the Norwalk Agreement, the two boards agreed to make their existing financial reporting standards fully compatible “as soon as is practicable” and to co-ordinate their future work programmes to maintain compatibility. This agreement has seen European accounting policy dictated largely by David Tweedie’s willingness to play handmaid to the US Securities and Exchange Commission.

The Norwalk Agreement, led to a 2006 MOU, a targeted list of convergence and improvement objectives for both IFRS and US GAAP. The 2006 MOU, updated in September 2008, institutionalised the US standard setter’s ‘most favoured nation’ status with the IASB.

There have been benefits, among them the lifting of the so-called US GAAP reconciliation requirement. This required US-listed businesses to reconcile their accounting in key areas to US GAAP. Ironically, having successfully removed one burden, IASB now risks imposing a second burden of excessive disclosure requirements and an oppressive workload.

With the IASB now expected to publish an exposure draft on pensions accounting at some point during the first quarter of 2010, European businesses can expect to see a substantial increase in the amount of disclosure that they are expected to make. But as IPE has already explored, far from settled is the utility of increased pension obligation disclosures.

Equally unclear is the reporting entity perspective for those disclosures; in other words, given that a pension vehicle is not a reporting entity, is it appropriate to impose disclosures - often cut and pasted by the IASB’s staff from IFRS7 - that were originally intended for banks and investment institutions? The unanswered question in this debate is whether a pension promise is a financial instrument or ‘something else’.

But more immediate than concerns about the burgeoning IFRS reporting burden are concerns about the sheer volume of literature now emerging from the IASB. And as regular followers of the pensions project will know, real concerns exist about the quality of that output.

The gear shift in workload dates back to the mid-2008 updating of the FASB-IASB MOU.
The boards, delegating authority to four Americans - one board member and one director each - agreed to rush through a programme of curtailed-project objectives in a bid to meet a possible US adoption decision in 2011. To his credit, the IASB representative on the group of four, Jim Leisenring, slammed the plans as unrealistic. For his part, David Tweedie recent told the board’s Standards Advisory Council that he expects a decision will be made “in 2011” on US adoption of IFRS.

The pain in the interim is borne by EU businesses already reporting under IFRS who now face a board that is effectively merged with the US board. From an EU perspective, the IASB has ceased from December 2009 to represent the interests of the wider world and instead is now dominated by US considerations - even though the US has yet to indicate that it will ever commit irrevocably to IFRS.

Unsurprisingly, doubts have started to take root. Having pressed the IASB to revisit the impairment of financial instruments, Europe’s politicians were largely aghast to see Tweedie tear up accounting literature endorsed into EU law and replace it with a brand new standard. It was not what he was asked to do, and the distinction appears to have eluded him.

Not only has the French government tired of the IASB and its US bias, the EU’s Accounting Regulatory Committee (ARC) has thus far refused to endorse the new standard. Tweedie has conceded that he is powerless.

Sources, close to the politics, have suggested that the German ARC delegate took the view that delaying endorsement of the new financial instruments standard, IFRS9, will bring maximum pressure to bear on the IASB. 2010 could well be the year that EU businesses take their concerns about pensions accounting to whichever politician works best for them.
 

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