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Personal Reections on Ten Years of the IASB Warren McGregor he International Accounting Standards Board (IASB) held its rst public meeting in April 2001. For the following 10 years it worked at an almost feverish pace to establish a comprehensive body of standards and, together with its oversight body, the IFRS Foundation Trustees, create an environment that would encourage national jurisdictions to replace their national standards with International Financial Reporting Standards (IFRS). It is important to bear in mind at the outset that the IASB has no power to require an entity or country to use its standards; use of the standards is entirely voluntary and, when it involves a country or region (such as the European Union [EU]) embedding them in their laws, it effectively requires the countries to forgo some of their sovereignty, something governments are generally very reluctant to do. This unique feature of standard setting at an international level magnies the political dimension of standard setting and has created more than the occasional challenge for the IASB during its rst 10 years. Notwithstanding what at times seemed to be almost insurmountable obstacles, the IASB was able to make great strides forward in its rst 10 years in pursuit of its goal of establishing a global set of high-quality accounting standards that can be used around the world. The fact that IFRS are now required or permitted in more than 120 countries is testament to the signicant progress that has already been made. In hindsight, the speed at which that change has been achieved is astonishing. This article is a personal reection on the IASB's rst 10 years. In it I endeavour to identify and discuss some of the critical events that took place on the journey. Because I had the privilege of being a member of the Board for those 10 years, and was a staff adviser on the Board of its predecessor body the International Accounting Standards Committee (IASC) for 17 years, my perspective is of one on the inside looking out. As a result, this account is, unapologetically, laced with the impact of those events on the people directly involved. T 1 Evolution from the IASC to the IASB The establishment of the IASB was the culmination of a process of change the IASC had been undergoing for The International Accounting Standard Board's rst 10 years were, in many ways, tumultuous. Established initially as a type of accounting 'think tank' with a mandate to develop high-quality accounting standards that could be adopted on a voluntary basis by countries around the world, it soon gained an international constituency that thrust it into the hurly burly of international accounting standard setting. Before it knew it, the Board was faced with not only resolving challenging technical issues but also dealing with the politics and other pressures that accompany attempts to change accounting practices in highly controversial areas. This article is a personal reection on the Board's journey from its inception in 2001 until 2011, when the last of the initial board appointees, including the author, retired from the Board. The article indenties and discusses some of the critical events that took place, including the impact of some of the events on the people directly involved. Correspondence Warren McGregor, 27 Scanlan Street, Berwick, Victoria 3806, Australia. Tel: +61 417 340 664; email: warrenmcgregor@ gmail.com doi: 10.1111/j.1835-2561.2012.00184.x Australian Accounting Review No. 62 Vol. 22 Issue 3 2012 225 Personal Reections on 10 Years of the IASB W. McGregor a number of years. The IASC was the brainchild of Henry Benson (later Lord Benson), senior partner of Cooper Brothers & Co, a forerunner rm of current day PricewaterhouseCoopers. It was established in 1973 with the objective of promoting the international harmonisation of accounting standards but soon met resistance from emerging national standard-setting bodies, something its successor was to experience many years later. Notwithstanding the IASC's objective, in the early years its role became one of developing standards for countries that either did not have a capacity to develop their own national standards or were in the formative stages of developing such a capacity. During this time the delegations involved in developing the International Accounting Standards (IAS) comprised a number of countries with developed standard-setting arrangements and a tradition of investor-oriented nancial reporting, for example, Australia, Canada, the United Kingdom (UK) and the United States (US), which willingly contributed resources to the process but showed no real interest in using the standards in their own countries. The standards often contained alternatives, the result of identifying acceptable practices (or perhaps more precisely, excluding unacceptable practice),2 and wording that was at times unclear and/or ambiguous, partly the result of drafting by a committee, the members of which had different rst languages and experience in drafting, and partly the result of some members wishing to have an inbuilt degree of latitude. I recall one member of an IASC delegation, after complaining about a proposed wording, commenting that their delegation is not too concerned 'because they will x it in the translation'. Although said in jest, this highlights the forces that were at play in the early years of international standard setting. This involved removing optional treatments and improving the drafting of existing standards, and developing new standards. The IASC's progress was closely monitored by IOSCO, with the SEC playing a key role, and culminated in 2000 in a recommendation to its regulator members that they accept the use of IAS by foreign issuers. However, the sting in the tail was that members be able to require certain disclosures in relation to the use of IAS including reconciling to local GAAP and be able to specify the use of particular alternatives or interpretations. In addition, IOSCO identied a host of further improvements that needed to be made to IAS to make them sufciently high quality. This outcome was disappointing but no great surprise to the IASC leadership. During the long developmental period there had been growing disquiet that IOSCO, led by the SEC, would keep moving the goal posts. This concern had initially been fuelled by IOSCO's reaction to the improvements resulting from the IASC's Comparability and subsequent Improvements project. The project was completed in 1993 but IOSCO demanded further improvements and new standards on a number of other topics, including intangible assets and nancial instruments. It had become clear to the IASC that it would need to do more than merely improve its standards for national securities regulators to fully support the use of IAS. The SEC, while publicly pronouncing what it expected of 'high-quality' accounting standards,3 was privately voicing its views about the elements of infrastructure it believed would be necessary to achieve global acceptance of IAS.4 As the IASC turned its attention to meeting IOSCO's demands, a new force in international standard setting began to emerge, the G4 + 1. IOSCO provides the impetus for change The G4 + 1 was a group of leading Anglo-American standard setters that began meeting on a regular basis from 1993.5 It initially saw itself as a think tank that could explore potential reforms to nancial reporting without having to deal with the day-to-day demands of a dedicated constituency. It comprised representatives of the Australian Accounting Standards Board (AASB), the Canadian Accounting Standards Board, the UK Accounting Standards Board (UK ASB) and the US Financial Accounting Standards Board. The Chairman and Secretary General of the IASC attended meetings of the Group as observers. Representatives of the New Zealand Financial Reporting Standards Board joined the Group in 1996. The G4 + 1 produced a series of discussion papers on leading edge issues, including joint ventures, leases, share-based payments and performance The transition to the IASB began in earnest in 1987 when the International Organisation of Securities Commissions (IOSCO) oated a proposal to the IASC that if it were to improve its standards, IOSCO would consider endorsing them for use by its members. The proposition was gleefully accepted by the IASC, which immediately saw the prospect of not only broadening its clientele but also possibly having the US Securities and Exchange Commission (SEC) remove the requirement for foreign issuers using IAS to reconcile to US GAAP. The US was then, and still is now, the biggest sh to be hooked in the quest for global accounting standards. Over the next 13 years the IASC embarked on an intensive program designed to improve its standards. 226 Australian Accounting Review Emergence of the G4 + 1 C 2012 CPA Australia W. McGregor reporting, which were intended to inuence the direction of nancial reporting developments both at the IASC and at a national level. As time passed, however, its activities began to have a much more signicant inuence at a political level, both domestically and internationally. As the IASC was pursuing its improvements program at the behest of IOSCO, some national standard setters were coming under increasing pressure from their constituents to cease pursuing improvements to their national standards separate from the IASC in order to avoid an unlevel playing eld that would leave corporations at a competitive disadvantage. In other words, pressure was being applied on some national standard setters to cease setting their own agendas and instead fall into line with the international agenda being set by the IASC. It was a deliberate strategy designed to slow down the national standard setters. The G4 + 1 came to be seen as a means of combating this strategy by establishing a reform agenda that could be pursued contemporaneously by its members and in turn by the IASC, in effect establishing an international standardsetting agenda. In addition, as the IASC moved closer to achieving its goal of support for its standards from national security regulators, in some countries pressure began to mount for national standards to be replaced with IAS. Members of the G4 + 1 saw this as a serious threat to the quality of nancial reporting in their countries as they viewed IAS as inferior standards at that stage of their development. They believed the IASC needed to be restructured and better resourced in order to give G4 + 1 members condence that they could both improve existing IAS and develop new high-quality standards before effectively being given responsibility for setting standards at a national level. With respect to the restructuring of the IASC they made it clear that it should be modelled on the independent expert model that was the basis of their own standard-setting arrangements. It became clear to the IASC leadership that the G4 + 1 posed a major threat to the IASC's future existence.6 The prospect of the G4 + 1 members stepping in to drive the establishment of an independent international standardsetting body was very real.7 There was tension at IASC board meetings as the European members in particular grew concerned about the growing dominance of the G4 + 1 in board debates and questioned the ultimate motives of the G4 + 1. A tangible demonstration of their concern at the time was the establishment in 1996 of the E5 + 2, a group formed under the auspices of the European Federation of Accountants (known by the French acronym FEE) and comprising the ve European members of the IASC Board - France, Germany, the Netherlands, the Nordic Federation and the UK - as well as the EC and the IASC.8 C 2012 CPA Australia Personal Reections on 10 Years of the IASB Transitioning to the IASB As the IASC leadership came to accept that it had to restructure to meet its goal of having securities regulators endorse its standards, and indeed in order to survive, the battle began in earnest over the model that should be employed. The protagonists effectively fell into two groups: the SEC and the G4 + 1, which favoured the independent expert model,9 and the continental European countries and the European Commission (EC), which favoured more of a representational model. The former model places emphasis on independence and technical expertise with a smaller number of mostly full-time board members, the latter on representation of the key constituents and broad consensus, with a larger number of mostly part-time board members. Those supporting the independent expert model won the battle, but as subsequent events perhaps demonstrate, they may have lost the war.10 The IASB's First 10 Years Getting started The inaugural members of the IASB had been handpicked by Ken Spencer, the Chairman of the Nominating Committee of the IASCF Trustees and former Chairman of the AASB, and David Tweedie, the newly appointed Chairman of the IASB and former Chairman of the UK ASB. Most of the members of the Board knew each other, having worked together on the Board of the IASC or the G4 + 1, and all had deep knowledge of nancial reporting. Assembling a group of acknowledged nancial reporting experts was of course in keeping with the standard-setting model ultimately agreed to by the IASC Board. However, Spencer and Tweedie went considerably further. They appointed a group of people they believed could work well together, had already demonstrated strong belief in the Board's mission, were by and large of like mind and were intent on reforming nancial reporting. That they had succeeded in their quest was evident at the rst (private) gathering of the Board at Streatley on Thames on the outskirts of London early in 200111 when each member responded to a request by the Chairman to explain what motivated them to join the Board. Two other things were evident from the composition of the Board: it would be perceived as being able to 'compete' with the FASB, that is, it had 'acquired credibility', and there would be no start-up time. These factors were particularly important if the IASB was to have an early impact in pursuit of its mission to establish a single set of high-quality global accounting standards, Australian Accounting Review 227 Personal Reections on 10 Years of the IASB since it had no power to force companies or countries to use its standards and, at the beginning, it had no constituency as such. In effect, it had to rely on a perception that it could produce high-quality accounting standards and it had to get some runs on the board quickly to prove that it could. So it was with a somewhat free and unencumbered spirit that the Board commenced operations in April 2001 - it was well resourced in comparison with the IASC, reform-minded, had no cumbersome constituents, and had a clear vision of the areas of nancial reporting that were in need of reform. However, that relative peace and tranquility was soon shattered by the decision of the EU to embrace IFRS in their quest to develop a deep and liquid European capital market. The EU's decision - a watershed event The EU's decision, formalised in June 2002,12 had been foreshadowed two years earlier by the EC (Commission of the European Communities 2000). Interestingly, in setting its initial agenda, the IASB had not focused on the prospect of the EU adopting its standards. Indeed we were surprised when we learned that the EU would pursue that course of action. However, once it became clear the EU would adopt its standards and, moreover, that it would require most EU listed companies to begin using them in 2005, the Board turned its attention to developing a 'stable platform' of new and revised standards by March 2003. The EU's decision was one of two watershed events to occur in the IASB's rst 10 years. With the stroke of a pen the IASB had a major constituent. Furthermore, it was the catalyst for other countries to embrace IFRS. The Australian Financial Reporting Council (the body that oversees the AASB) announced soon after the EU decision that Australia would adopt IFRS at the same time as the Europeans, on the grounds that not to do so would place Australian companies at a competitive disadvantage (Zeff 2012). The South Africans also decided to adopt IFRS for application in 2005 and Hong Kong and New Zealand soon followed suit. The IASB and the IASC Foundation Trustees were rightly pleased with this development as it provided so early in the organisation's life a solid platform for pursuing its mission of establishing a single set of high-quality global accounting standards. However, there were two practical, and to some extent worrying, consequences of the EU's decision. In the rst place, the Board's agenda would now be driven by the need to have in place an acceptable body of standards for application by the companies that would soon be using them (the 'stable platform' referred to above). This meant that some of the reforms the board members had initially been eager to pursue 228 Australian Accounting Review W. McGregor would be put on hold. As it transpired, many of those reforms were left uncompleted when all of the initial appointees had nished their terms, for example, leases, post-employment benets, performance reporting and the conceptual framework. Second, the Board was to be subjected to concerted political pressure. Political pressure When countries make the transition to IFRS inevitably there will be technical issues the IASB is called upon to address because certain accounting practices in the adopting countries are incompatible with existing IFRS. When Australia made the change, it was accounting for internally generated intangible assets and accounting for exploration and evaluation activities. In New Zealand, it was accounting for puttable shares by agricultural cooperatives. In Europe, there was a range of issues, including accounting for puttable shares, accounting for share-based payments, and two issues relating to IAS 39 Financial Instruments: Recognition and Measurement: use of the fair value option and hedge accounting. As the IASB endeavoured to deal with these issues, it was lobbied heavily by the affected entities and their supporters. The Board successfully navigated its way through these early challenges, except for the IAS 39 issues of concern to the Europeans. As often proved to be the case during the IASB's rst 10 years it was the banking industry that provided the greatest challenge. The European banks, in particular the major French banks, wished to continue using hedge accounting for certain hedges of interest rate risk, such accounting being incompatible with the hedge accounting requirements in IAS 39. The Board refused to change the standard because it would have violated one of the fundamental tenets of the standard - that derivatives should be measured at fair value with changes in fair value recognised in income; the change being proposed would, for example, have resulted in losses on hedging instruments being shown as assets in the balance sheet. I recall one of the board members at the time asking representatives of the banks if they would be prepared to lend against such an 'asset'. They were not amused. At the same time the European Central Bank (ECB) was lobbying the Board to restrict the use of the fair value option in IAS 39. The ECB was particularly concerned that banks would mark-to-market their loan books and, in good economic times, be encouraged to undertake excessive lending as their reported net assets increased. The ECB was also concerned about the seemingly anomalous impact on reported prots resulting from the effect of changes in a bank's own credit risk on the fair value of its nancial liabilities. C 2012 CPA Australia W. McGregor As the IASB stood its ground, particularly on the hedge accounting issue, the European lobbying effort was taken up by Jacques Chirac, the French President. Chirac wrote to the President of the EC, Romano Prodi, protesting the Board's failure to accede to the banks' request and questioning the wisdom of the EU's previous decision to embrace IFRS. As the deadline for completing the stable platform drew nearer, the EC and the French banks became more and more desperate. A dinner was convened in Brussels in 2004 by the EC at which the Commission expected the IASB to agree to the formation of a working party comprising representatives of the Board and the EC, which would be charged with breaking the deadlock. To the Commission's astonishment and chagrin, the IASCF Trustees and the Board refused - to do otherwise would have compromised the Board's independence and created a dangerous precedent. The atmosphere at the dinner was highly charged and the discussions at times became heated. The EC continued to press the IASB right up to the publication of the revised IAS 39, with the threat of nonEU endorsement hanging over the Board. Chairman Tweedie was targeted during this time and the attacks on him became personal.13 The Board held its nerve and the EC managed to nd a way to placate the banks and the ECB by carving out the offending provisions of IAS 39. The Board had some sympathy for the ECB's concerns but was not able to effect an amendment before IAS 39 was endorsed by the EU in 2004. It did make an amendment to restrict the use of the fair value option in 2005. However, the hedge accounting carve-out remains today and has been a source of continuing concern to the EC and the IASB.14 This episode was the rst real test of the Board's independence and helped establish its credibility as a serious standard setter. However, it came at a price. It heralded a long period of frosty relations with the EC and engendered a erce determination in the French to replace the IASB with a European standard-setting board at the earliest opportunity.15 Notwithstanding the unsatisfactory outcome with the EU over IAS 39, the completion of the stable platform of standards in 2003 ready for adoption by European, Australian and South African companies in 200516 was a major achievement. In the space of two years the Board made a range of signicant improvements to the standards it had inherited from the IASC. It paid particular heed to the advice IOSCO had earlier provided to the IASC, introduced a major new standard on share-based payments, replaced the inherited business combinations standard with a virtually new standard, developed new standards on rst time adoption of IFRS and non-current assets held for sale, and developed pro-tem standards for the insurance and extractive industries. At the time, many observers, including some with experience in standard setting, gave the IASB C 2012 CPA Australia Personal Reections on 10 Years of the IASB little hope of completing its program in the specied timeframe. Postcard from America I have observed on a number of occasions both during my time on the Board and since, that when the EU decided to adopt IFRS for use by its member states it did not appreciate fully the implications of effectively delegating law-making authority to an independent, private-sector standard-setting body. In contrast, the Americans knew only too well the inuence the IASB could ultimately have on their domestic reporting. So when the IASB decided to add a project to its initial agenda on share-based payments and held a meeting soon thereafter in Washington to engage with US constituents, it received a hostile reception. At a public meeting of the IASB's Standards Advisory Council, US Council members angrily declared that after having spent so many years debating and nally rejecting the idea, the US would never agree to expense stock options. At a private meeting with representatives of the Financial Executives Institute, the IASB's representatives were told in emphatic terms that they had spent $US70 million to defeat the FASB and would do the same again to defeat the IASB if they had to. To top it off, President Bush made a public statement to the effect that there was no need to expense stock options since they are equity transactions.17 Of course Enron collapsed and the rest is history: the FASB followed the IASB's lead and amended its standard to require stock options to be expensed. IFRS 2 was a signicant achievement for the IASB. Not only did it ll a major gap in the IASB's standards and thereby improve nancial reporting of share-based payments, but it also demonstrated that the Board had the courage to take on highly political topics and see them through. Learning Japanese Although Japan did not signal its intention to consider replacing Japanese GAAP (JGAAP) with IFRS in the IASB's early years, it took a close interest in the work of the Board from day one. The early board meetings had a large complement of Japanese observers present, taking copious notes and exhibiting particular interest in the contribution to board debates made by the Japanese board member, Tatsumi Yamada. The Japanese engaged regularly with the IASB and sought to press their arguments for incorporating key features of JGAAP into IFRS, no doubt with an eye to the possibility of Japan replacing JGAAP with IFRS, whether freely or reluctantly. Meetings were held regularly with the Accounting Standards Board of Japan Australian Accounting Review 229 Personal Reections on 10 Years of the IASB (ASBJ), the Keidenren (the Japanese industry body) and the Financial Services Authority. Although over time a range of issues was identied, those relating to business combinations and the sanctity of 'net income' were probably the most strongly debated. The Japanese objected to the proposed changes to the business combinations standard relating to the nonamortisation of goodwill and the use of 'carry over accounting' for so-called 'true mergers'. They argued that the Japanese approach, particularly their support for merger accounting, reected a cultural difference and should be allowed to continue. As for net income, the Japanese believe that because of the importance of the net income metric to investors, all items of income and expense should ultimately be recognised in net income. In other words, items initially recognised in other comprehensive income (or equity) should eventually be recycled to prot or loss. This ran counter to the strongly held view of the large majority of IASB members, who believed that items of income or expense should be recognised in comprehensive income only once. With both sides holding diametrically opposed views on these and other key issues it is not surprising that discussions between the Board and its Japanese constituents were often hostile in the early years of the Board's existence. Furthermore, the Japanese board member often found himself to be the target of his countrymen's angst. As was expected of all IASB members, Yamada voted according to what he believed would be in the best interests of improving nancial reporting, and this often ran counter to the views of his countrymen.18 Few on the IASB had an intimate knowledge of Japanese customs and this hampered relationships between the Board and Japanese constituents early in the Board's life. For example, few understood that Japan is a consensus society and that great lengths are taken to gain support for new initiatives from key constituents before they are introduced. The ASBJ's due process reected this fact. As the Board continued to engage with the Japanese, working relationships gradually improved and the level of hostility abated. Indeed, from 2007 when Japan began seriously considering moving to IFRS, it became even more actively involved with the Board and became openly supportive of its mission. Perhaps the clearest demonstration of this change of heart was the Memorandum of Understanding (MOU) entered into by the ASBJ and the IASB with the objective of converging IFRS and JGAAP. Although there has been a recent pause in the momentum towards IFRS adoption in Japan as a result of a pushback from some sections of Japanese industry, indications are that it will make the move in the not-too-distant future. Of course, as ever, the Japanese will be closely watching the Americans. 230 Australian Accounting Review W. McGregor Principles versus rules From the outset the IASB made it clear that it was not interested in developing standards containing detailed rules nor was it interested in having an interpretations body issue numerous interpretations of its standards. Accountants would be expected to exercise judgement in applying broad principles and would be able to rely on few formal interpretations.19 This principles-based standard-setting 'philosophy' contrasts with a rulesbased approach which has been a feature of US GAAP. It was not surprising that the IASB chose this approach. Its predecessor body had adopted a similar approach in developing the standards the Board inherited and a number of its members had been involved in developing principles-based standards at the IASC or in their national jurisdictions. Moreover, the Chairman was convinced it was the correct approach, having both practised under that model with emphasis placed on an overriding true and fair principle, and having set principles-based standards as Chairman of the UK ASB. He also perceived that it would be an important point of distinction with the FASB. Although there was broad support for the Board's adoption of this approach, initially there was uncertainty about what it actually implied and how it might differ from what had been done in the past. In particular, there was uncertainty about what, if any, guidance material might be included in the standards and what authority that guidance might have. Preparers were concerned that they may have had insufcient guidance to implement the standards and auditors fretted that they may have been unable to audit against them. To seek to allay their fears, a mock principles-based leasing standard containing less than 10 pages and requiring all material leases to be recognised on the balance sheet was prepared and sent to the Big 4 auditing rms with a request to advise the Board whether or not they would be able to audit against it. While all the rms felt that a little more guidance would be helpful, none informed the Board that it was unauditable. When the stable platform was rolled out, some of the new and revised standards reected a principles-based approach. The Board was anxious to see how the national standard setters charged with adopting the standards and practitioners charged with responsibility for applying them would react. The results were surprising. In Australia, the AASB chose to retain some of the guidance that had been a part of their equivalent national standards in the interests of enhancing comparability. While some practitioners supported this initiative because they viewed the guidance as helpful in applying the standards, other practitioners, particularly the large audit rms, objected because of concerns about whether the guidance material would be in conict with the principles in the standards. Corporations shared their C 2012 CPA Australia W. McGregor concern as it placed them in an invidious position when having to assert that the nancial statements were in conformity with IFRS as well as their 'Australian equivalents'. In 2006, the AASB reversed its decision and removed the guidance.20 The Australian experience was a salutary lesson to countries that subsequently adopted IFRS. Despite pushback by some practitioners, the Board stuck to its decision to employ a principlesbased approach. It was vindicated when the corporate collapses (such as Enron and WorldCom) that washed over the US in the early 2000s highlighted the deciencies of the rules-based approach that underpinned US GAAP. Trying to hook the big sh Although the Board was disappointed to lose one of its inaugural members, Bob Herz, so soon after it began operations, it was delighted that he was to become the new Chairman of the FASB. Herz, who resigned from the IASB in June 2002, had long been a strong supporter of international accounting standards and was sure to continue his support for the IASB's mission in his new role. It was not surprising therefore that when the IASB and FASB met jointly for the rst time since the IASB's formation, the Boards agreed to enter into a MOU, now known as 'The Norwalk Agreement', whereby they agreed to 'make their existing nancial reporting standards fully compatible as soon as is practicable' (IASB 2002: 1). The objective of this strategy was to converge the two sets of standards and so, in the rst instance, encourage the SEC to drop the reconciliation requirement, and ultimately support adoption of IFRS in the US. So began the convergence project with the FASB, which continues to this day. As we shall see, achieving the rst goal of removing the reconciliation requirement perhaps happened a little sooner than some expected, but achieving the second is taking considerably longer. Payback time The IASB stirred up a hornets' nest when it stuck to its guns on the controversial elements of the stable platform: IAS 39, IFRS 2 and IFRS 3. The naivety that characterised the EU's foray into IFRS use was soon replaced with a erce desire to clip the Board's wings. A similar sentiment existed in Japan. We were about to see the practical import of intense political pressure on the Board, which pressure continues unabated to this day. The IASC Foundation's inaugural constitution contained a provision that requires the Trustees to review the Constitution every ve years. The 2005 review provided just the opportunity to lobby for change, and the Trustees, perhaps reluctantly, were prepared to C 2012 CPA Australia Personal Reections on 10 Years of the IASB oblige the protagonists. Three areas were targeted: board membership, voting and due process. There was a view that the Board was too technical and hell bent on introducing more fair value into IFRS.21 The Trustees were persuaded that the Board needed to be more 'rounded', so they introduced an amendment replacing 'technical expertise' as the primary criterion for board membership with 'professional competence and practical experience'. Those appointed to the Board following this amendment typically did not have the strong technical backgrounds that characterised the original appointees, and most had little if any standardsetting experience. To what extent this change was driven by the revised criterion or by the replacement of Ken Spencer with the French Trustee, Bertrand Collomb, as Chairman of the Trustee's Nominating Committee, is open to conjecture. Under the original Constitution, exposure drafts and standards needed a simple majority to be approved. The amended Constitution required a super majority, nine out of 14 members. Conceivably, the greater number of votes required to approve a document, the more difcult it would be to introduce change, particularly if that change was controversial. As it turned out, I do not believe this change had the impact those promoting it might have expected. It is true that on occasions the higher threshold made it more difcult to resolve issues. However, the Board generally has operated in a very collegiate manner and members have worked hard to resolve issues in a timely manner. One sure way to slow down a standard setter is to extend its due process. When the Board commenced operations it replicated the process that had been followed by established national standard setters for many years. That process was set out in the original Constitution and contained a limited number of mandatory steps, such as issuance of an exposure draft of proposals, and a number of non-mandatory steps such as issuing a discussion paper on major projects, holding public hearings, and undertaking eld tests. Under pressure from constituents, the IASB's due process has been extended signicantly. The Board is now also required (i) to undertake a more formal process when adding topics to its agenda, (ii) to issue a feedback statement for every new IFRS or major amendment to an IFRS, (iii) to issue an effects analysis for every forthcoming new IFRS or major amendment to an IFRS, and (iv) to undertake post-implementation reviews, normally two years after every new IFRS or major amendment to an IFRS. In addition, the Trustees formed a Due Process Oversight Committee to monitor the Board's adherence to its due process. The Board is required to meet regularly with the Committee to review and discuss due process compliance and, in particular, to alert it to issues attracting controversy and explain how the Board is dealing with those controversies. Australian Accounting Review 231 Personal Reections on 10 Years of the IASB Removal of the US GAAP reconciliation requirement - the second watershed event At the time the IASCF Foundation Trustees were mulling over how to respond to the mounting criticism of the Board without overly hampering the Board's ability to pursue its mission, a development occurred that would ultimately lead to an impetus being given to the Board that would rival the EU decision in 2002. In April 2005, the then Chief Accountant of the SEC, Don Nicolaisen, proposed a 'roadmap' for the possible removal of the requirement for foreign private issuers to reconcile from IFRS to US GAAP.22 On 21 December 2007, the SEC embraced the Nicolaisen proposal by unanimously approving the removal of the reconciliation requirement, with the rider 'IFRS as published by the IASB' (emphasis supplied).23 Given the experience of the IASB's predecessor body, many were rightly surprised by how quickly the SEC made its decision. IASB board members and staff watched the SEC webcast from their Cannon Street ofces in London. Most board members were delighted with the decision. This decision of the SEC Commissioners was a watershed event for the IASB in its quest to have the US embrace IFRS and, ultimately, to have in place a single set of high-quality global accounting standards. By removing the reconciliation requirement the SEC effectively endorsed the use of IFRS in the US domestic capital market. Private foreign issuers could now use IFRS to raise capital in the US and US investors would be using IFRS nancial statements to make investment decisions. Moreover, it would now be very difcult, if not impossible, for the SEC to resist requests from US domestic issuers to be able to use IFRS in place of US GAAP since the SEC had already deemed IFRS nancial statements suitable for consumption by US investors. Pressure from, in particular, US multinational companies will continue to grow as more and more of their subsidiaries and overseas branches report under IFRS, and the benets of using a single set of accounting standards throughout the group for both external reporting and internal management purposes become more and more evident. Kick starting the convergence process On 27 August 2008, the SEC commissioners unanimously agreed24 to publish a rule proposal25 containing a roadmap for the potential use by US issuers of nancial statements prepared in accordance with IFRS as issued by the IASB for purposes of their lings with the SEC. The roadmap set out various milestones that, if achieved, could lead to the required use of IFRS by US issuers in 2014. The SEC undertook to make that decision in 2011. 232 Australian Accounting Review W. McGregor The IASB and FASB had reafrmed their commitment to converging IFRS and US GAAP by issuing their own roadmap early in 2006 (IASB and FASB 2006). The roadmap had a clear focus on providing the SEC with reassurance that the Boards would focus their efforts on the convergence program and, hopefully, encourage consideration of removal of the reconciliation requirement. With the issue of the concept release in 2008 the focus shifted to adoption of IFRS by US domestic companies and the Boards sought to redouble their convergence efforts. In 2009, the Boards issued an update of the 2006 MOU which reafrmed their commitment to converge their standards, and established a goal of completing the major MOU projects by 2011 (IASB and FASB 2009). The agenda was very ambitious and a number of members of both Boards were sceptical of the ability of the Boards to meet their goal. However, both Tweedie and Herz perceived the need to keep the pressure on, as the prospect of a positive SEC decision in 2011 seemed to be within grasping distance. The planets seemed to be aligned for the IASB. However, then came the global nancial crisis (GFC). Impact of the GFC In October 2008, the IASB faced a crisis of its own. During the course of a meeting of the IASCF Trustees in Beijing, the IASB leadership was informed by the EC that unless the IASB agreed to make an immediate amendment to IAS 39, that is, without due process, they would make their own amendments within a week. This threat had materialised because of the impact on European banks of falling asset prices and the prospect of them having to recognise in their third-quarter nancial statements large losses on certain nancial assets that had been classied as at fair value through prot or loss. If these assets could be reclassied to the heldto-maturity category, which reclassication was not permissible under IAS 39, the amount of the writedowns would be signicantly reduced. Under US GAAP, reclassications of nancial assets that had been similarly classied were sometimes permitted and so the argument was made to the IASB that it should similarly permit such reclassications. This was a classic case of regulatory arbitrage. The European banks could see a storm approaching and were desperately seeking a way out. They clutched at the difference between IFRS and US GAAP and claimed competitive disadvantage. All knew this was a beat up; for all intents and purposes the two sets of standards had comparable requirements. Reclassication of nancial assets out of the trading category to the hold-to-maturity category under US GAAP was permissible but only in very rare circumstances, and very few, if any, had ever occurred in practice.26 C 2012 CPA Australia W. McGregor But this was not the time to let the facts get in the way of a good story. The EC had already weathered the earlier storm over the use of IFRS by EU companies when the banks had revolted over the IAS 39 hedge accounting requirements. They perceived the implications of the pending write-downs to be so severe that failure to get the IASB to change the standard this time would force them to do more than simply amend the standard themselves. And that, in a nutshell, was the dilemma facing the IASB. Make an amendment permitting reclassications or hold its ground as it had done in 2004, risk the loss of its EU constituency and face the prospect of never achieving its ultimate goal of worldwide adoption of IFRS. As noted earlier in this paper, the French had been conducting a campaign to have the IASB replaced by a European standard setter, most likely a remodelled European Financial Reporting Advisory Group (EFRAG), ever since the 2004 events took place. This was the opportunity they had been waiting for and would no doubt have grabbed it with glee. The IASB weighed the situation facing it and with great reluctance agreed to the EC's demands; IAS 39 was amended to permit reclassications and the amendment was backdated to 1 July 2008.27 The IASB did not take the EC's threat, and the determination of the French, lightly. It reasoned that the loss of credibility it would face in making the amendments to IAS 39 was a price worth paying to keep alive the prospect of achieving its ultimate goal. The take-up of IFRS around the world to that time had been remarkable and, with Canada having recently announced its intention to move to IFRS in 2011, Japan beginning to move in the same direction, and the SEC having announced its concept release, the prospect of achieving that goal seemed very real. The GFC also impacted the IASB in more pervasive ways. As world leaders assembled from time to time under the umbrella of the G20 to discuss the causes of the crisis and to identify reforms to the nancial system to prevent future crises, the role of regulators and standard setters came under the microscope. The IASB and the FASB were repeatedly targeted in G20 communiqu s, e with recommendations referring to the need to complete specic projects related to areas of identied concern, to complete their convergence projects by 2011, and to continue to pursue the establishment of a single set of global accounting standards. This pressure added to the self-imposed pressure of the MOU and caused frenzied activity at the Boards. This period of introspection by political leaders and their regulatory bodies also brought a broader issue to the fore - the relationship between nancial stability and nancial transparency. Calls began to emerge from some quarters for the IASB's mission to be expanded to include the need to consider the effect on nancial stability as well as the needs of investors when drafting accounting standards. Specically, advocates of such C 2012 CPA Australia Personal Reections on 10 Years of the IASB a change proposed that the IASB should consider the consequences of new standards for the world's economies and nancial systems. This was a signicant concern because the two objectives could be in conict and the IASB would be in an invidious position trying to navigate its way through such conicts. This issue needed to be handled delicately. Emotions were running high at the time and the concerns of the banks and the banking regulators were getting plenty of airtime. Arguments were advanced that the current objective was not necessarily inconsistent with a nancial stability objective because, by providing transparent information to investors in the capital markets, timely information about the nancial position of nancial institutions would be made available.28 The point was also made that regulators can require additional information to be provided that supplements the IFRS nancial statements, for example, identifying additional 'provisions' within equity to cover unexpected losses.29 The IASB addressed the issue in the revision of its conceptual framework, which was published in 2010. The Board concluded that altering the objective of general purpose nancial reporting to cater for the needs of regulators and scal policy decision makers would be '. . . inconsistent with its basic mission, which is to serve the information needs of participants in capital markets' (IASB 2010: BC 1.23). But it also went on to note that '. . . providing relevant and faithfully represented nancial information can improve users' condence in the information, and thus contribute to promoting nancial stability' (IASB 2010: BC 1.23). The 10 Years Draw to a Close IFRS for SMEs As the decade drew to a close, the IASB continued to work at a frenetic pace in order to achieve the goals it had earlier set itself. One goal was the completion of IFRS for SMEs, the standard for small and mediumsized entities. The standard targeted entities that in many countries are required to le their nancial statements on the public record but do not have the same level of public accountability as publicly listed companies. The worldwide demand for a separate and 'simplied' standard for SMEs was evident from the early days of the IASB. However, a number of board members took some time to accept the argument that a separate standard containing requirements that may differ from the equivalent requirements in IFRS was appropriate for these entities and that it was the IASB's responsibility to develop such a standard. This early resistance largely dissipated when the Board developed a conceptual rationale for the standard. Indeed, as the Board developed the standard in the context of the conceptual rationale, Australian Accounting Review 233 Personal Reections on 10 Years of the IASB board members were pleased to see that a number of changes they made to the equivalent requirements in IFRS were in fact improvements to those standards, for example, the changes made to IAS 19 Employee Benets. IFRS for SMEs was a major achievement of the Board in its rst 10 years. The standard is self-contained and has been designed to meet the specic needs of the users of the nancial statements of SMEs. The worldwide take-up of the standard has been impressive since it was published in 2009, with more than 70 countries having adopted it or indicating their intention to do so in the near future (Pacter 2012). Finishing the MOU Another goal mentioned previously was completion of the major MOU projects by 2011. The 2008 MOU update had identied nine remaining major projects that were to be completed by that date. In 2010, four of those projects had been completed or were nearing completion: Fair Value Measurement, Consolidations, Derecognition, and Post-Employment Benets. However, the Boards were struggling to complete the remaining ve MOU projects: Leases, Revenue Recognition, Financial Instruments (which, courtesy of the GFC, was now focusing on impairment of nancial assets), Financial Statement Presentation, and Financial Instruments with the Characteristics of Equity (debt/equity project), and the non-MOU project on Insurance that they had decided to develop jointly. The Boards were nding it difcult to maintain momentum on these projects, partly as a result of the difculty of working together. That should not be surprising since they are separate independent boards with, to some extent, different standard-setting philosophies, have separate staff and are geographically separated. This impediment was exacerbated when the broader constituency began to voice its concerns that the Boards were proceeding too quickly on too many fronts. The general theme was that there were too many matters to absorb and respond to thoughtfully and that the quality of the nal products would suffer unless the Boards advanced on fewer fronts and slowed down. In large part these concerns were genuinely expressed, although no doubt some saw it as an opportunity to delay (perhaps indenitely) the introduction of some far reaching reforms. The reaction of constituents did not come as a surprise. The Board knew it was a demanding timetable for all concerned and was acutely aware of the desire of some sections to, opportunistically, impede the Boards' progress. In fact the IASB leadership had been considering which of the six projects might be able to be 'back burnered'. What did come as a surprise was the FASB threatening to unilaterally respond to the concerns. 234 Australian Accounting Review W. McGregor As it happened, the Boards responded jointly by suspending further work on the Financial Statement Presentation project and the debt/equity project. However, the action proved to be in vain in terms of enabling the Boards to complete the remaining four projects by 2011. Indeed it seems likely than none of them will be completed before 2013, with the revenue recognition project being the only possible exception. Although the major MOU projects were not all completed by mid-2011, most of the 11 projects identied in the 2006 MOU were completed. Of those left uncompleted, the technical development of the leases project and the revenue recognition project were all but completed by mid-2011. The same is true of the non-MOU insurance project. In addition, most of the so-called short-term MOU projects identied in earlier versions of the MOU were completed by mid-2011. The MOU was a massive undertaking. Although there is, understandably, disappointment that some important MOU projects remained uncompleted at the end of the rst 10 years, the completion within that time period of the large bulk of the MOU projects, both short-term and long-term, was a major achievement. SEC procrastination Whether it was the distraction of the GFC, the change of leadership, or something else, the SEC failed to meet its previously communicated intention of '. . . making a decision in 2011 on whether adoption of IFRs is in the public interest and would benet investors'.30 Indeed, at the time of writing this article, a decision has still not been made. The alarm bells started ringing when the new SEC Chairman, Mary Schapiro, who succeeded Christopher Cox in January 2009, stated during her conrmation hearings that, 'I will not be bound by the existing roadmap that's out for public comment', and expressed reservations about the quality of IFRS and the independence of the IASB (Reason 2009: 1). This too was a disappointing development as the rst 10 years drew to a close. However, the US had come a long way in the IASB's rst 10 years, indeed much further than most commentators dared hope in 2001. Moreover, as I noted earlier, the future direction had effectively been set in stone when the SEC removed the reconciliation requirement. The nal step will be driven by economics as the US capital market continues to shrink, and as US multinational companies pursue cost savings and seek to remove perceived competitive disadvantages. Political pressure continues unabated In 2009, in response to criticism, particularly from Europe, that there was no link between the independent C 2012 CPA Australia W. McGregor private-sector IASB and the government agencies charged with regulating the capital markets, the IFRS Foundation Trustees changed the Foundation's Constitution to cede some of its authority to a Monitoring Board comprising, in most part, securities regulators. The IASB and its Advisory Council were concerned about this development because if it was not handled carefully it could impair the Board's independence. This could be the case if the Monitoring Board was able to interfere in board appointments or was able to direct the Board in respect of its agenda or the content of its standards. This had not occurred as the rst 10 years drew to a close, but there were some worrying signs in 2011 as the Monitoring Board volunteered its view on how the Board should manage its agenda in the light of constituents' concerns referred to earlier and when it issued its proposed improvements to the IFRS Foundation's governance arrangements.31 Future Challenges for the IASB Independence An ever-present challenge for the IASB and the IFRS Foundation Trustees is to maintain the independence of the Board. Independence is the cornerstone of an accounting standard-setting arrangement. Impair it and the standard setter will lose credibility in the eyes of those who rely on the information produced by applying the standards. The IASB's rst 10 years saw it and its oversight body subjected to relentless political pressure. This resulted in a number of structural and process changes which, while not impairing the Board's independence, have in aggregate made it more difcult for the Board to introduce needed nancial reporting reforms on a timely basis. Further attempts will be made to nobble the Board. The Trustees need to be vigilant both in monitoring perceived threats to the Board's independence and in taking the necessary steps to avoid those threats having their desired effect. The Trustees also need to be mindful of the impact of any additional changes they make to the organisation's structure and the Board's due process that might further impair the Board's ability to introduce improvements to its standards on a timely basis. Servicing a worldwide constituency Standard setting is primarily about change management. Those impacted by the changes need to be given the opportunity to be involved in formulating the changes. They need to be given the opportunity to be heard and they need to believe they are an important part of the process. If constituents are given a genuine opportunity to participate in the process they will, as a general rule, C 2012 CPA Australia Personal Reections on 10 Years of the IASB accept that the changes that ultimately occur may not be to their liking. Effectively managing change is particularly important for the IASB because it does not have the power to require companies or countries to use its standards. However, it is a major challenge for the Board because it is an international body with a worldwide constituency. Engaging with its constituency in a meaningful way involves a considerable time commitment and the allocation of a signicant amount of resources. The challenge for the IASB is to strike the right balance. It needs to devote sufcient time and resources to engage with its constituents worldwide but it also needs to ensure that this does not prevent it from introducing needed nancial reporting reforms on a timely basis. Maintaining a reform agenda The initial Board was reformist. Many reforms were introduced in the rst 10 years and others are close to being nalised. Constituents are rightly calling for a period of calm. The Board needs to be wary of periods of calm becoming the norm rather than the exception. The Board's mission is to develop highquality accounting standards that require high-quality, transparent and comparable information for the users of nancial statements. There are many areas still requiring improvement, some of which the Board in its rst 10 years spent considerable time working on. Other areas will undoubtedly arise. Some would happily see the Board rest on its laurels. Attracting and retaining committed and competent board members and staff If the Board is to remain a credible body with the capacity to develop high-quality standards, it and the Trustees must be able to attract and retain competent and committed board members and staff. Standard setting is a demanding occupation, particularly at an international level. It is also a friendless one. As Chairman Tweedie often said 'If you take on this job, don't expect a salary and a round of applause'. The Board's rst Vice Chairman, Tom Jones, often said 'Every standard setter should have a dog because every person deserves to have at least one friend in the world'. The hostile environment within which the Board operates can sometimes be seen as a disincentive to potential candidates. Occasionally it claims a victim as it did when the German member of the initial Board, HansGeorg Bruns, retired from the Board prematurely.32 The dislocation involved in servicing a worldwide constituency can also be seen as a disincentive. The Board and the Trustees need to be mindful of these and other concerns in successfully managing this challenge. Australian Accounting Review 235 Personal Reections on 10 Years of the IASB Compliance The Board has often made the point that the international framework for achieving the ultimate outcome of a single set of high-quality global accounting standards that produce high-quality, transparent and comparable information worldwide is a 'four-legged stool': the IASB, preparers, auditors and securities regulators. In other words, it is a partnership with the IASB producing principles-based standards, preparers applying them as intended, auditors taking a common approach across their rms but one that is consistent with the principles in carrying out their attestation role, and regulators being consistent across jurisdictions in enforcing the standards, including resisting the temptation to develop their own interpretations. While solid progress was made on all fronts in the IASB's rst 10 years, concerns persist about the level of compliance. This is not surprising from a worldwide perspective. Countries are at different stages of development in their capacity to achieve a high level of compliance. It is reasonable therefore to see this as a longer-term aim. What is perhaps of more concern at this juncture is evidence of poor compliance by some companies and in some jurisdictions that clearly have the capacity to do better.33 Although compliance with IFRS is not the IASB's or the IFRS Foundation Trustees' responsibility it is important for them to monitor progress in this regard and actively encourage those who are responsible. The benets of IFRS adoption worldwide will not be fully realised unless an appropriate level of compliance, and by extension, comparability of IFRS nancial statements is achieved.34 Resuming the Board's original role Finally, the IASB needs to resume its role as a standalone standard-setting body sooner rather than later. Working on joint projects with the FASB has been a very important initiative in the quest to have the SEC remove the reconciliation requirement and, ultimately, have it endorse the adoption of IFRS by US domestic issuers. Many people on both sides of the Atlantic have worked hard and have achieved some important outcomes. However, the time is fast approaching to resume 'normal operations'. There are two main reasons why. In the rst place, the rest of the world is rapidly losing patience. Other countries, particularly those using IFRS, have waited patiently for the Boards to complete the MOU projects because they understand the importance of having the US join the IFRS family. However, the MOU projects have taken much longer to complete than the Boards had originally planned. In the meantime, projects of importance to other jurisdictions have been 236 Australian Accounting Review W. McGregor put on hold. In addition, many see the FASB being given a privileged position: being able to meet regularly with the IASB, and being able to develop jointly important MOU and other projects. They nd this a little galling particularly since the US has not yet embraced IFRS for its domestic issuers. Second, with the best will in the world, having two boards with their own staff jointly develop accounting standards is inefcient and inevitably leads to sub-optimal outcomes, as board members accept compromises they might otherwise not be prepared to do in order to keep the projects moving forward. It is also frustrating for all involved. Conclusion The IASB's rst 10 years have been somewhat of a roller coaster ride with both high points and low points. The IASB has faced serious challenges to its role but has managed to successfully negotiate them. It introduced meaningful and lasting reforms to the nancial reporting model and, by and large, took its constituents along with it on the journey. Above all, it kept its eye on the ball: to develop a single set of global accounting standards that can be applied around the world. The result of that dedication to the mission was the Board's greatest achievement in its rst 10 years. IFRS are now used in more than 120 countries and the quality of nancial reporting around the world has improved demonstrably. I have no doubt that this achievement exceeded the wildest dreams of the most ardent supporter when the Board began its operations in 2001, including those appointed to the original Board. Warren McGregor is an independent nancial reporting consultant. He was a member of the International Accounting Standards Board from its inception in 2001 until 2011. Notes 1 2 3 4 5 6 For a more comprehensive discussion of this process see Zeff (2012) and Camferrman and Zeff (2007). 'Acceptable' practices were often deemed to be so by virtue of them having become entrenched in practice in leading standard-setting countries; for example, the last-in, rst-out (LIFO) method of inventory valuation has become entrenched in US Generally Accepted Accounting Principles (GAAP) by virtue of prevailing tax law. See Camferrman and Zeff (2007). For further discussion of IFRS in the US, see articles by Erchinger (2012) and Street (2012) in this forum. These private utterances were made public in February 2000 when the SEC issued a concept release on International Accounting Standards (SEC 2000). For a comprehensive discussion of the G4 + 1, see Street (2005). This threat had in fact been understood by some at the IASC quite early in the life of the G4 + 1. I recall during the course of an IASC board meeting in 1994, not long after the G4 + 1 began meeting C 2012 CPA Australia W. McGregor 7 8 9 10 11 12 13 14 15 16 17 18 19 20 C regularly, the then Secretary General, David Cairns, conding in me that the G4 + 1 is the greatest threat to the IASC's future existence. His comment was particularly poignant because the IASC had previously experienced challenges to its role, which it had managed to see off (see Zeff 2012). See McGregor (1999) and FASB (1998). See Camferrman and Zeff (2007: 445-446). At a meeting of the G4 + 1 in Dublin in September 1999 the G4 + 1 met with the SEC Chief Accountant, Lynn Turner, to press its case for the independent expert model. As an indication of the tension between the IASC leadership and the G4 + 1 at the time, the Chairman of the G4 + 1, Ken Spencer, asked the IASC representatives to remove themselves from the meeting for the discussion with the SEC. The IASC Board agreed to the restructuring plan at its meeting in Venice in November 1999. The meeting was stormy with strongly held views on both sides. Elements of the IASC leadership resisted the inevitable until the end. The Board held its rst public meeting in April 2001. Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 Jul