IFRS on stage: Spring event highlights
Hear what industry leaders have to say about the impact of IFRS on global capital markets, its effect on financial reporting, and the overall importance of adopting the standard in the US.
- Clip 1: Donald Nicolaisen, formerly of the US Securities and Exchange Commission (SEC), on the importance of adopting IFRS and the changing face of world accounting.
I think as companies it certainly is a challenge to move to a new accounting model but at the same time there’s an awful lot of benefits to that. You extend credit — companies extend credit to others. You rely on the financial statements of others to go through the exercises that have historically occurred is a costly endeavor. At the start of doing this, I think, probably, my overriding concern was as the economies around the globe continue to grow, and particularly in certain regions at rates must faster than the US economy — a mature economy — is likely to grow in the future, it’s not in the cards for us to continue to dominate the world’s securities markets. We certainly had that position for a very long period of time where we had well over half of the world’s capital, registered capital markets, flowing through the US systems. That’s declining and is declining rapidly. I think you’ll continue to see that occur. It’s a natural occurrence. It’s not that we did anything particularly wrong as a country. It’s just that the rest of the world rightfully is enjoying growth that exceeds our own.
“There are opportunities elsewhere and I think being part of the global society is where we really want to be. If we continue down the path of saying the only acceptable accounting model is US GAAP [Generally Accepted Accounting Principles], I think we marginalize ourselves and put ourselves in a position, where, over time, if you look ahead and then look back, there would be a lot of people who would say they really missed the boat — that the US is an ‘also-player’ as opposed to a key player in this process.”
- Clip 2: IFRS Technical Leader Danita Ostling on how the absence of a common financial reporting standard has hampered the integration of capital markets.
“The effective integration of our capital markets remains hampered by legal, political and regulatory barriers as well as by the absence of a common financial reporting language. So the sometimes arcane world of accounting and financial reporting has become an important part of this high-stakes proposition and can help to support or help to undermine the efficiency of our capital markets. A thriving capital market obviously requires a high degree of investor understanding and confidence, and embracing a common set of high quality standards will contribute significantly, I believe, to this investor understanding and confidence.
“For many years, Ernst & Young has been very clear in our support for getting to this single set of high quality accounting standards that will be used by companies around the world…
“A single set of high quality globally accepted accounting standards would benefit both global capital markets and investors by simplifying comparisons among global investment opportunities without regard to where the company is located, whether it’s San Francisco or Singapore or South Africa, and it would also benefit companies themselves by eliminating duplicative and costly reporting requirements.”
- Clip 3: IFRS Leader Ken Marshall on the rules for reporting Day One P & L in IFRS.
“IS39 as it’s currently written, as 0203 was being published in the States, IS39 was being ‘quote’ improved during the improvements projects to essentially converge two GAAPs on Day 1 P & L, which seemed like a good idea at the time, especially in Europe. They’re a tad more conservative there, I’d say, with regard to the issue and use of fair value and especially when it relates to generating Day 1 gains. At least from the regulators’ perspective and certainly from the board’s perspective. So they thought it was a good idea and they essentially took the words and plopped them in IS39 — not word for word, but they certainly got the gist into the standard. Now, I would have said that we moved forward with 0203 in place, prohibiting Day 1 gain recognition for unobservable data for those transactions that relied on the use of unobservable input; we had essentially the same application of a principle, if you will, under IS39. So that was our starting point.
“There was always a little bit of controversy, though, under 39 because there were words that were missing and it’s always very peculiar because my European colleagues always get a chuckle about this. They think we’re very rules-based and then they read the rules and they ask, ‘Well, how is the rule applied?’ and we say, ‘Well, we apply it this way but we actually…we interpret it a little.’ Even though 0203 never really talked about the significance of an input — it was quite clear that in practice people would do some kind of stress-testing analysis to determine whether the Day 1 gain, the profit on Day 1 recognition, was sensitive to the unobservable input, and if there wasn’t one, we used the number of 10 percent, so if the P & L didn’t vacillate by more than 10 percent, moving that unobservable input to you know, stress levels they would chuckle and say, ‘where did you read that in IS39? Where did you read that in 0203?’ It’s not really there, but we just thought it was a good practice, right? And essentially that then, because it was being practiced in the US, became a practice by and large just by osmosis in IFRS. So that’s kind of the state of play today under IS39.”