G-20 Accounting Reform

G-20 includes accounting reform in proposed overhaul of market regulation

Mike Habib, EA Tax Relief & Tax Problem Resolution

Summary: The heads of the leading 20 world economies called on accounting standard-setters to revise fair value guidance and adopt a single, global set of global accounting rules. The leaders also agreed to regulate hedge funds, increase oversight of credit rating agencies, set up systemic risk regulators, and tighten the limits on executive pay.

The heads of state of the world’s largest economies called on accounting standard-setters to step up their work to change the guidance for valuing financial instruments in a statement issued from the G-20 summit in London on April 2, 2009. They also endorsed the adoption of a single set of global accounting standards.

Accounting standards ranked among several priorities to strengthen financial regulation, including creating national systemic risk regulator, to extend regulation to the so-called shadow banking system, including hedge funds, and to increase the oversight of credit rating agencies, according the communiqué issued by the leaders. (The more detailed declaration agreed to by the leaders was not publicly available when this article was written.)

The decision came on the same day as the FASB responded to political pressure and approved new guidance to allow banks more flexibility in valuing troubled assets. The five-member board voted unanimously for the new guidance on valuing assets, but split three-to-two on the revision to asset impairment tests. (See article immediately below.)

In November 2008, the G-20 leaders met in Washington at the height of the financial crisis to set out an agenda for financial regulatory reform. Accounting standards figured prominently among those priorities, and they continue to remain at the heart of the debate on reforming financial regulation. A key question in the debate over accounting concerns the fair value guidance used to value the toxic assets that are viewed as being at the source of the crisis.

The April 2 communiqué’s proposals closely track those presented to Congress last week by Treasury Secretary Timothy Geithner, which included the regulation of hedge funds and the creation of a systemic risk regulator in the U.S.

Speaking with reporters after the summit, President Barack Obama said the principles set out by the leaders in London on executive compensation “move us in the direction” of what he considers to be best practices and accountability on executive compensation. Obama said many companies have operated with a “CEO who selects his board, develops a cozy relationship with them, hires an executive compensation firm, and gets into the kinds of practices that have not served shareholders well because they “distort” the decision making of CEOs.” “If you get shareholders involved by which they can judge executive compensation, then you can have rewards based not on short-term performance but based on sustained effective growth, and that’s what’s embodied in these documents,” said Obama.

The president hastened to add that it did not mean that government would be micro-managing issues of executive compensation. “It doesn’t mean we want the state dictating salaries, we don’t,” said Obama. “I strongly believe in a free market system. In America, people don’t resent the rich, they want to be rich.” The communique does not specifically mention executive compensation practices.

His comments came on the same day as the House of Representatives passed legislation that would tie pay to performance at companies that have received government bailout funds under the Troubled Asset Relief Program. The Grayson-Himes Pay for Performance Act would prohibit some forms of compensation at companies accepting TARP money. It also repeals a controversial provision in the American Recovery and Reinvestment Act that exempts bonuses due under employment contracts entered into or before February 11, 2009. The Grayson-Himes bill passed by a vote of 247-171.

The G-20 leaders will meet again in the fall to assess the implementation of their decisions.

Source: WG&L Accounting & Compliance Alert Checkpoint 4/3/09

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