Jan
05
2010

Worth Reading…IFRS

While many of my posts have focused on corporate governance reform and executive compensation, I thought it made sense in the new year to touch upon an issue all public U.S. companies will have to deal with sooner than later: international financial reporting standards.

A piece in the December edition of CFO magazine (IFRS: Convergence vs. Conversion, December 2009), points out that no matter what the SEC decides on mandating the switch from U.S. GAAP to IFRS, U.S. companies are going to move toward “overarching principles and away from more easily manipulated rules.” Quoting Financial Accounting Standards Board (FASB) Chair Robert Herz, the CFO article goes on to differentiate between convergence and conversion. For the most part, convergence allows some form of U.S. GAAP rules to exist in a hybrid form that is similar to IFRS. However, most of the convergence (FASB-IASB convergence project) is done on a rule by rule basis (i.e. lease accounting, fair value measurement). Conversion is the adoption of principles-based IFRS by companies using rules-based U.S. GAAP.

Since the height of the international financial crisis in late 2008, many U.S. companies (including the Big 4 accounting firms) have stopped exploring efforts to adopt IFRS for the time being. In fact, a survey of CFOs at oil and gas exploration and production companies by BDO Seidman released Tuesday found that 59 percent of respondents are “not thinking about IFRS at all” in 2010 and 33 percent intend not to do anything with IFRS until things become clearer or a changeover from U.S. GAAP is mandated. By the way, 3 percent are actively planning a transition to IFRS.

That doesn’t necessarily mean U.S. public companies shouldn’t be thinking about IFRS. The issue is among the Top Challenges for Financial Executives, according to Financial Executives International.

Here’s a sample of what I am reading on the topic of IFRS:

  • SEC: No IFRS Yet, Marie Leone, CFO.com, Dec. 9, 2009 http://www.cfo.com/article.cfm/14460972/c_14461841?f=home_todayinfinance. Key findings: The SEC’s chief accountant isn’t dropping any hints about whether the regulator favors a move to international reporting standards. SEC Chief Accountant James Kroeker said issuers will hear more from the SEC about international financial reporting standards in the near term. CFO.com took that to mean it will be early next year when the SEC will decide as promised whether to require U.S. public companies to file financial results using IFRS.
  • Abuse of Revised IFRS Standards ‘Inevitable,’ Laurie Carver, Life & Pensions magazine, Jan. 5, 2010. www.risk.net/life-and-pensions/news/1567422/abuse-revised-ifrs-standards-inevitable. Key findings: The new International Financial Reporting Standard (IFRS) 9 for financial instruments’ accounting will “inevitably lead to abuses and accounting arbitrage”, according to Jim Leisenring, a member of the International Accounting Standards Board (IASB). The new directive, approved at the end of 2009, would allow the valuation of financial products at amortised cost, rather than fair value, in management of businesses whose “objective…is to hold [it] to collect the contractual cash flows”, regardless of whether they sold it before term. Read the rest of this entry »

- Gary Larkin

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Nov
20
2009

Bureaucratic Roadblocks Holding Up Guidance on Fair Value, Financial Instrument Standards

Those of you who attended the Financial Executive International’s 28th annual Conference on Current Financial Reporting Issues (CFRI) in New York City on Monday and Tuesday got a glimpse of what is holding up clear guidance on accounting standards for financial instruments and fair value measurement. Those of you who didn’t have the opportunity to make it to the Marriott Marquis, you may want to read on.

It was evident during Monday’s Financial Accounting Standards Board/International Accounting Standards Board  update (featuring Robert Herz, FASB chair, Patrick Finnegan, IASB board member, Russell Golden, FASB technical director) that there is a lot more to do. That’s despite some recent actions by the IASB as well as a joint meeting between the two standard setters. It has been more than a year after the height of the financial crisis triggered by mortgage-backed securities brought down banks worldwide causing governmental bailouts, and yet still there is no clear guidance on fair value measurement of financial instruments.

While the FASB and IASB are being asked to come up with such guidance in a timely manner, the two standard setters are still trying to reconcile the many differences between existing standards. It’s the rules-based standards of FASB vs. the principles-based standards of the IASB. At the same time, a new Securities and Exchange Commission (SEC) is thinking about next steps for adopting International Financial Reporting Standards (IFRS). So it should be no surprise that both boards don’t expect to have final standards on both financial instruments and fair value measurement until late 2010.

“[SEC Chair] Mary Schapiro said, ‘I’m new, I’m not bound by the past SEC’s IFRS Roadmap,’” FASB Chair Robert Herz said at Monday’s CIFRA session. “Unfortunately, that was misinterpreted by some as pouring cold water on the whole thing. Both she and Jim Kroeker [SEC deputy chief accountant] say they are going to make clear by the end of the fall where they are going with IFRS. So I would expect an answer by 9 a.m. on Dec. 21.”

Regarding financial instruments (specifically mortgage- and asset-backed securities, collateralized debt obligations and derivatives), the IASB jumped ahead of the FASB by announcing Nov. 12 (read press release) it has approved a new standard, IFRS 9 Financial Instruments. Mandatory adoption of the standard would take effect Jan. 1, 2013, although early adoption is permitted for the 2009 year-end financial statements. The FASB expects to produce an exposure draft that addresses the classification and measurement, impairment technology and hedge accounting financial reporting requirements by the first quarter of 2010. Both boards plan to publish final standards by the fourth quarter of 2010.

In a joint statement Nov. 5 on their original memorandum of understanding, both boards wrote that they were “concerned that the difference in timetables is creating a risk that they will develop different requirements for some financial instruments. Such an outcome is inconsistent with the goal of providing investors with information that is both of high quality and comparable irrespective of whether the entity reporting is applying IFRS or US GAAP.”

On fair value, while the FASB has been looking to update FAS 157 Fair Value Measurements, the IASB published its first exposure draft on an IFRS for fair value measurement in May. In October 2009, both boards agreed in a joint meeting that their objective to ensure fair value has the same meaning in US GAAP and IFRS.

“We agreed to come together on hedging,” Russell Golden, FASB technical director, said at Monday’s session. “We are creating a joint operational panel in the next two weeks. …We plan to reconcile FAS 157 to IASB guidance.”

The IASB will continue to hold roundtables on fair value measurement in Asia, Europe and North America in conjunction with FASB, IASB plans to publish its final standard on fair value measurement and FASB will make amendments, if any, to US GAAP.

When all is said and done, urgent guidance action by the world’s two most influential accounting standard setters would have taken nearly two years to produce. In the meantime, what are all the public companies affected by such financial instruments to do.

To learn more about the specifics of FAS 157 and IFRS 9 by going to the FASB and IASB websites. To check more about CIFRA, go to the FEI blog.

- Gary Larkin

Posted by Gary Larkin at 10:43 AM | No Comments »
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Oct
02
2009

Directors Want Principles, Not More Regulations

As most of corporate America awaits new executive compensation regulations in the aftermath of the financial crisis, a group of about 100 independent directors has started a grassroots movement to head off the regulators.

Calling itself the Independent Directors Executive Compensation Project (IDEC), the directors recently held a meeting at the Kellogg School of Management at Northwestern University where they agreed on five key principles for determining executive compensation plans. They also agreed that “there are serious problems with executive compensation at publicly traded companies, independent directors should take a leadership role to do something about the problems and an ongoing effort should be undertaken to continuously define, research, develop and communicate principles and best practices.”

“Whether or not a mechanism is needed, everyone’s [independent directors] are very clear that they don’t want government overseeing executive compensation,” Pastora San Juan Cafferty, a longtime independent director and IDEC leader, told me last week. “We want principles, not regulations.”

Cafferty, who serves on the board of Waste Management Inc., Integrys Energy Group and Harris Financial, and Donald P. Delves, president of compensation consultant The Delves Group, have spearheaded the effort. They have been meeting with groups of 15-20 directors to discuss how to institute principles and have companies adopt and implement them. They also want to integrate executive compensation principles into the proxy statement.

Ideally, they are looking to create an executive compensation standards board based on the Financial Accounting Standards Board (FASB) model and develop Generally Accepted Executive Compensation Principles similar to Generally Accepted Accounting Principles (GAAP). (See The Case for an Executive Compensation Standards Board, Directors&Boards, Spring 2009)

In addition to such a standards board, IDEC wants to take a similar approach to the German Corporate Governance Code, which was adopted in 2006. That code has three levels of guidelines that include requirements that must be followed, recommendations that should be followed and suggestions that could be followed.

“Independent directors who attended these meetings have expressed interest in fostering a voluntary peer-led process that would establish and expand these principles and encourage boards to incorporate them into their practices and proxy statements,” Delves and Cafferty said in an e-mail.

As the group works on honing its principles-based compensation strategy message, Cafferty tells me they are including the work of The Conference Board (See Executive Compensation on Everyone’s Mind, Sept. 22 Governance Center Blog post), Kellogg School of Management and the Center on Executive Compensation. The group also plans on putting up a Web site soon.

“We have also talked to four leading compensation consultants,” Cafferty said. “We thought that anything that independent directors had concerns about needed to be rooted in the compensation consultant industry.” There is a major concern that this fast-growing industry has no standards, she said.

It’s interesting to look at the executive compensation pay principles that have been floated thus far. Here is a look at IDEC’s , the Center on Executive Compensation’s (an offshoot of the HR Policy Association) and The Conference Board Executive Compensation Task Force’s guiding principles:

IDEC (See Agenda Week article, Sept. 21 – registration required)
•    Accountability – Boards must account for pay-setting decisions.
•    Alignment – Executive compensation should be precisely aligned with performance.
•    Fairness – The amount paid to a given executive should be fair to the individual and, above all, the shareholders.
•    Transparency – Boards should make decisions on pay in an open and accessible manner.
•    Objectivity – There should be an effective use of incentives to motivate innovation to create wealth for shareholders.

Center on Executive Compensation
•    Aligned – Executive compensation arrangements should be aligned with the best interests of a company’s shareholders and other stakeholders.
•    Fully compliant – Executive compensation arrangements should be structured and executed in full compliance with applicable laws and regulations.
•    Independently informed and approved – Executive compensation arrangements should be approved by the board of directors’ independent and active compensation committee.
•    Appropriately Customized – Executive compensation arrangements should be appropriately customized to and aligned with the company’s culture and values, business strategy, industry and competitive and financial conditions.
•    Transparent and Accessible – The compensation committee should ensure that the company’s executive compensation program is disclosed in a clear and understandable manner.
•    Fair and reasonable – Executive compensation arrangements should be fair to the company’s shareholders and executives.

The Conference Board Task Force on Executive Compensation
•    Establish a clear link between pay, strategy and performance;
•    Provide compensation that is fair, affordable and clearly aligned with actual performance;
•    Eliminate controversial compensation practices that conflict with the notions of fairness and pay for performance unless specific justification exists;
•    Demonstrate credible board oversight of executive compensation; and
•    Foster transparency with respect to compensation practices and appropriate dialogue between boards and shareholders.

As of Sept. 21, six companies said they would adopt The Conference Board task force’s principles (AFC Enterprises Inc., AT&T Inc., Cisco Systems Inc., Hewlett-Packard Co., NASDAQ-OMX Group Inc. and Tyco International).

Worth Reading …

Here are some interesting articles on executive compensation
•    A Price to Pay: Kellogg professors debate the merits of regulating executive compensation (Kellogg School of Management, April 2009)
•    Is Executive Compensation Shaped by Public Attitudes? (Paper, Camelia M. Kuhnen, Kellogg School of Management;  Alexandra Niessen, University of Cologne (Germany), May 2009)
•    The Best Thing You’ll Read About Executive Compensation Today (The Tally Sheet, Corporate Board Member Blog, Sept. 25, 2009)

- Gary Larkin

Posted by Gary Larkin at 12:12 PM | 2 Comments »
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