Corporate & Securities Law

By James Hamilton

In his first major address to the European Parliament, Gerrit Zalm, oversight chair of the IASB praised the SEC?s recent actions advancing the use of IFRS by foreign private issuers and US public companies. He also pledged that the IASB would avoid future carve-outs of IFRS. Moreover, with the global acceptance of IFRS accelerating, he proposed a new monitoring group for the IASB, which would include the SEC chair, and an increase in the size of the Board as an avenue to geographical diversity.

Chairman Zalm?s desire to avoid carve outs from international accounting standards comes against the backdrop of the problematic carve out of hedge fund accounting from IAS 39. The European Commission adopted IAS 39 with a carve out for hedge accounting. The carve out reflected criticisms by European banks that the application of IAS 39 would produce unwarranted volatility. A team of IASB members and staff have had extensive technical discussions with the European Banking Federation aimed at resolving this issue.

The global acceptance of IFRS is proceeding apace. The chair noted that more than 100 countries have agreed to require or permit the adoption of IFRS or have established timelines towards adoption. In the last year, Brazil, Canada, China, and India have all committed to formal timelines to adopt IFRS, and Japan established 2011 as its target for convergence to IFRS.

The chair is greatly encouraged that the SEC has eliminated the requirement that foreign private issuers reconcile IFRS-prepared financial statements to US GAAP. He is also buoyed by the fact that the SEC is giving serious consideration to a proposal to permit US public companies to use IFRSs. While the SEC is still in the process of considering this proposal, Chairman Zalm believes that it is reasonable to expect that US companies will be permitted to use IFRSs in the near future. In what the chair considers a major shift, even FASB is calling for the adoption of IFRS, not on the basis that it will be US GAAP under another name, but on the basis that it will remain a principles-based set of standards instead of a more rules-based system.

As the global acceptance of IFRS deepens, the IASB oversight foundation is moving towards more transparency and diversity. The foundation has improved its due process by broadcasting over the Internet all of its meetings and the meetings of its working groups; and posting on its website enhanced observer notes to enable interested parties to follow the IASB?s deliberations. The foundation is also providing a minimum of one year between the approval and the required application of new IFRS or major amendments to IFRS. The IASB overseer has also introduced feedback statements, impact assessments, and two-year post-implementation reviews.

In an effort to increase diversity, the foundation proposes to expand the IASB to 16 members. There will also be geographic minimums. Four IASB members must come from the Asia/Oceania region, with four to come from Europe. Four IASB members must come from North America, with the remaining four IASB members to be appointed from any area, subject to maintaining overall geographical balance.

Finally, the foundation will establish a Monitoring Group to end the practice of self-appointment and create a formal link to public authorities. Among other things, the Monitoring Group will review procedures for appointing IASB members, ensure adequate financing for the Board, and review the IASB?s compliance with its operating procedures. The group will be composed of the SEC chair, a European Commissioner, the chair of the Japanese Financial Services Agency, the IMF Managing Director, the chairs of the IOSCO technical and emerging markets committees, and the president of the World Bank.

Full post as published by Jim Hamilton's World of Securities Regulation on April 22, 2008 (boomark / email).