Oops! Two cheers for the IASB

In my post of April 3, 2009 How the FASB aids and abets obfuscation by wonky zombie banks”, I dumped on both the Financial Accounting Standards Board and on the International Accounting Standards Board for a second relaxation of mark-to-market valuation and accounting rules since the start of the crisis.  I was wrong in including the IASB in the second installment of this roll call of members of the IAHS (the International Accounting Hall of Shame).  The IASB did, in a statement on October 2, 2008, follow the lead of the FASB  by allowing banks greater freedom to reclassify financial securities between the three categories of “held for trading”, ”available for sale” and “held to maturity”.  However, it did not follow the FASB in the second surrender to the lobbyists of the zombie banks.

In fact, the IASB on March 20, 2009 published a request for comments (to be submitted by April 20, 2009) on the two mark-to-market-dismembering proposals of the FASB (Proposed FSP No. FAS 157-e Determining Whether a Market is Not Active and a Transaction is Not Distressed and Proposed FSP No. FAS 115-a, FAS 124-a, and EITF 99-20-b Recognition and Presentation of Other-Than-Temporary Impairments).  

Then, on April 2, 2009 the Trustees of the International Accounting Standards Committee Foundation, following a review of  the IASB’s response to the financial crisis, made the following statement(I have underlined the bits that amount to a clear repudiation of the FASB’s hurried surrender to the vested interests of Wall-Street-holed-below-the-water-line).

“At their November 2008 and April 2009 meetings, the G20 highlighted the need for convergence of accounting standards. The Trustees have welcomed the IASB’s commitment to achieve (with the US Financial Accounting Standards Board) globally accepted and high quality accounting standards. At the same time, the Trustees believe that even in moments of crisis, the standard-setter should follow an agreed due process, which enables interested parties to comment, even if on an accelerated basis. This is a clear message that the Trustees received from interested parties during the first part of the Constitution Review. International stakeholders also expressed this view at public round tables in the fourth quarter of 2008 held to discuss issues emanating from the financial crisis.

While the Trustees acknowledged the desire to achieve commonly accepted positions between US GAAP and IFRSs, they also urged the IASB to avoid piecemeal approaches that would undermine the ability to address broader issues related to accounting for financial instruments raised by the crisis. This was also the view expressed most frequently at the IASB’s public round tables.

Sir David Tweedie, Chairman of the IASB, reported to the Trustees that at their joint meeting last week the IASB and FASB agreed to undertake an accelerated project to replace their existing financial instruments standards (IAS 39 Financial Instruments, in the case of the IASB) with a common standard that would address issues arising from the financial crisis in a comprehensive manner. Though the IASB is consulting on FASB amendments related to impairments and fair value measurement, the Trustees supported the IASB’s desire to prioritise the comprehensive project rather than making further piecemeal adjustments. This project should result in a proposal being published within six months. The Trustees welcome this timetable and will monitor progress closely….”.

Commenting on the announcement, Gerrit Zalm, Chairman of the Trustees of the IASC Foundation said: “The Trustees unanimously support the IASB’s initiating a thorough and urgent re-examination of financial instruments accounting. It is far better to undertake a fundamental re-assessment than adopting a piecemeal approach to a standard that is widely recognised as being outdated. The Trustees will support the IASB’s work and monitor its progress as the IASB completes this work whilst respecting due process.”

The FASB thus received a double kick in the baubles from the IASB, one as regards procedure (“…respecting due process.”) and one as regards substance (“..comprehensive.. rather  than …piecemeal”).  Following this indictment by its peers, it ought to be clear even to the most blinkered captive accountant, that the FASB is damaged goods – a standard setter captured by those who are supposed to be constrained by the standards it sets – the SEC of the accounting standards world.  Perhaps a comprehensive overhaul of its leadership and institutional structure will suffice to restore both the reality and the perception of backbone and integrity.  I doubt it.  Best to scrap the organisation and create a new body, structured to be less amenable to capture by the vested interests its standard-setting activities are intended to keep in check.

But as regards the IASB, apologies and two cheers, at least until six months from now, when the results of the deep thought processes currently under way are scheduled to be revealed to an early anticipating world. Until then, we will have to see through a glass, darkly.

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website