Bob Monks lecture

My thanks to the corporate governance blog for drawing my attention to this lecture by Governance Guru Bob Monks on the past, present and future of governance. There is an accompanying paper at:

http://www.ragm.com/BlogPosts/HLSClass111009.pdf

A clash of philosophies?

The EU has deferred accepting the IASB's new standard on financial instruments (IFRS 9). According an article in the FT (see title link) this is because some EU countries (principally Germany, France and Italy) see a role for financial reporting in maintaining stability of financial systems, whereas the IASB doesn't.

This seems to be a case of the IASB being misled by its own propaganda. Although the constitution of the IASB gives it a role in wider economic matters, it steadfastly refuses to admit that its narrow focus on the presumed interests of capital providers may not provide those benefits.

In a recent lecture at the Institute of Chartered Accountants, Professor Mike Power suggested that, in relation to 'fair value', people could divided into fundamentalists and pragmatists. The fundamentalists couldn't see any alternative to fair value whereas the pragmatists' main interest was in whether accounting standards worked or not. His main point was that because of different philosophical standpoints the two groups of people couldn't understand each other's views.

In particular the 'fundamentalists' (I think he may have included the IASB staffers in this category) can't understand the objections other people have to their standards.

A useful website

The title link is to the World Gap Info website that provides access to news, commentary and the full text of International Standards without the need to register and login at www.iasb.org.uk.

New financial instruments standard

The IASB has just published a new standard as part of its project to update IAS 39 on the measurement of financial instruments. Accountancy Age (see title link) refers to this as a 'fair value' standard which is confusing as there is another ongoing project to redefine what is meant by 'fair value'. The IASB's press release about the new financial instrument standard is here. At first sight this looks like a considerable reversal of the trend towards fair value for everything but the Europeans are still suspicious that it might lead to an increase in use of fair value rather than the reverse.

Fair Value and Accounting Politics

The title link is to an article in the FT about the European reaction to the IASB's proposals on fair value accounting. The IASB proposes to reform the unsatisfactory IAS39, which classifies financial instruments into somewhat arbitrary categories. There will be the option to value items with predictable cash flows on an amortised cost basis (like a tangible fixed asset) rather than marking to market (fair value). However the EU is worried this will disadvantage European banks in comparison with US ones that account under different rules.

The moral of this situation: financial reporting is strongly influenced by politics and competition whatever the theoretical arguments may be.

Monitoring Board

In January 2009, the IASB formed a 'monitoring board' composed of representatives of international regulators. Said board has been fairly quiet but has just said that standards should be 'reliable, relevant, understandable and comparable'. This is an interesting straw in the wind because it reflects the old wording of the IASB conceptual framework, not the proposed new wording, which replaced 'reliable' with 'faithful representation'. Words matter and this was not just a cosmetic change. 'Faithful representation' was seen by some commentators as part of an ongoing trend to move towards fair values.

Another term, another financial crisis

The world seems to be a more stable place than it was a few months ago. The stock market has had a record run in the last quarter, house prices are stabilising, even the pound has stopped falling against the Euro.

Does this mean the financial crisis is over? I doubt it. The public finances are a mess and we can't see any fundamental change to them until after the election. What then? My guess is that whoever wins is going to squeeze public expenditure hard. Universities, inter alia, will be in for a thin time of it. However the size of the cuts needed to reduce borrowing to manageable levels is enormous. The alternative course of action - a rousing bout of inflation - is going to look awfully tempting to whoever wins the election. Index-linked bonds anyone?