Published: March 01, 2010
by François Masquelier, Head of Corporate Finance and Treasury, RTL Group, and Honorary Chairman, EACTThe butt of frequent criticism in recent months, fair value has been singled out by shareholders and banks alike as the perfect scapegoat for the financial crisis with which we have been confronted. But we know, of course, that the responsibility lies elsewhere, albeit shared rather than attributable to a single cause. Notwithstanding all the criticism, fair value is actually enshrined in what will be the future standard on financial instruments, the son of IAS 39. Like father like son, so they say, and this proverb might very well apply in this case too.
Despite being divided into three separate phases, this overhaul of IAS 39 in relation to financial instruments is on the right track. The International Accounting Standards Board (IASB) had planned to publish three Exposure Drafts (EDs) in the third and fourth quarters of 2009 and in the first quarter of 2010, a trilogy-type approach which does not exactly lend itself to comment on the individual or successive draft(s) due to the lack of the necessary overview. Codenamed IFRS 9, the first part was published on 12 November 2009, thus completing their first phase of reform (www.iasb.org/News/). IFRS 9 takes a unique approach to establish whether an asset is to be measured in terms of its amortised cost or its fair value, thereby replacing the various rules from IAS 39. The approach adopted by IFRS 9 centres on the manner in which the company manages its financial instruments (its overall business model) and the contractual cash flows which characterise the financial assets. Also opting for a unique method to be used for impairments, the new measure’s effective date of entry into force will be 1 January 2013, with early adoption possible from the end of 2009.
Pushed by the European Commission to react to international pressure, the IASB had no choice but to agree to undertake a reform of its most controversial accounting standard. Sir David Tweedie acknowledged that it was necessary to rework it in order to tackle this recurring problem for once and for all. Regardless of the reform implemented, the one cast-iron certainty is that it will not totally satisfy anyone and will come in for plenty of criticism, an unfortunate fact for which the IASB is fully prepared. The three phases cover classification and measurement; dynamic provisioning; and hedge accounting. The second ED is also based on the idea that the EC has sought to identify the reasons why some banks proved to be more resilient than others. Why have Spanish banks withstood the shock waves relatively well, even though their economy has been suffering serious problems, most notably in the property market? Is it simply down to the practice of ‘dynamic provisioning’? IAS 39 is an accounting monster (we prefer to compare it to a sort of hydra) consisting of nearly 300 pages. According to Philippe Danjou, a French member of the IASB, “Overhauling IAS 39 is akin to renovating the Château of Versailles”. But is this truly an appropriate comparison? Not really, as the classical spirit of this château, albeit adorned with some baroque touches, constitutes the zenith of French art and nobility, with a sun-drenched aspect that, in our humble opinion, has little in common with the IAS 39. We would, however, concur with the view that it amounts to a colossal undertaking.[[[PAGE]]]
The foundation stones of this renovation, on classification and measurement, were laid in the summer in the exposure draft (ED 14 July 2009), closed at the end of September 2009, through the 250 or so responses and comments submitted. The aim of Sir David and his acolytes was wherever possible to simplify the measures taken. The measurement of financial instruments has thus been reduced to two methods (amortised cost and fair value) and the number of classes has also been cut.
The United States appears to have opted to move towards what is known as ‘full fair value’ for all financial instruments. In doing so, the FASB is deviating from the previous model and from the IASB’s guidelines. Nevertheless, both signed the Northwalk agreements in 2004 and, as recently as 5 November 2009, reaffirmed their Memorandum of Understanding (MoU). They even voiced the idea of intensifying their efforts in order to rapidly finalise the joint projects that are on the table (target date set: June 2011) and reiterated their desire to adopt measures in line with the wishes of the G20.
But is there not cause for concern in any case? David Wright, from the European Commission DG Internal Market, has publicly expressed his concern regarding the risk of an absence of convergence between the two main global accounting standards, as neither the IASB nor the Commission intends to converge by simply aligning themselves with the new American model. The IASB also highlights the spirit of listening and consultation at the very heart of its due process, but there is cause to doubt the reality of these consultations. Listening is one thing and understanding is another, but finding a solution is trickier still when the concessions aspect and pragmatism are often notable for their absence within the IASB. In their defence, however, defining one perfect standard applicable to all is far from straightforward. It is like trying to square a circle as, whatever the board decides, some parties will be left dissatisfied. The fundamental remit and foundations of the IASB are based on the aim of meeting the needs of investors (users) by compelling the companies concerned (preparers) to employ greater transparency and care. The banks’ insistence on returning to the single historic cost method (amortised cost) does not meet investors’ requirements and is therefore impossible to envisage from the outset. After all, the aim of the IASB, like that of many parties concerned, is to bring about or at least contribute to the increased stability of the financial markets and systems.
The third tranche of the IAS 39’s renewal, which will determine the character of its successor, is scheduled for early 2010, contrary to what was initially planned. The initial discussions seem to be heading towards fair value measurement, with the resulting variations to be recorded as own capital and not solely in the profit and loss account. Nevertheless, this ED is causing considerable apprehension within the financial community. At a juncture when the USA might be taking another route, there is good reason to be fearful. Numerous treasurers are hoping that the new standard will not be too different from the initial rule and that a good part will be left to the mixed model, thus permitting greater latitude and offering improved flexibility vis-à-vis the actual and practical needs of users. We may then need to modify and adjust our hedge strategies, and it will also be necessary to adapt our information and treasury management systems (TMS) in order to meet the new requirements and supply the information required.
Like St Thomas, we will judge on the basis of the actual evidence when this third volume of the standard is actually put in place to complete this as yet still sketchy trilogy. In a recent presentation, we compared this eagerly awaited (and for good reason) third tranche to The Empire Strikes Back, from George Lucas’s celebrated Star Wars trilogy. But instead of triggering a revolution, the newly simplified IAS 39 will hopefully be accepted by many without complaint. After all, its comprehensive makeover should facilitate the recording of results and the reading of annual reports. Having already likened IAS 39 to a chateau, it may be a step too far to compare the IASB to a galactic empire, but we do hope that this trilogy will be just as exciting.
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