Comments on: New Guidance on Other-Than-Temporary Impairments http://www.fasri.net/index.php/2009/03/new-guidance-on-other-than-temporary-impairments/ Just another WordPress weblog Mon, 30 Jan 2012 18:54:30 -0600 http://wordpress.org/?v=2.8.5 hourly 1 By: Ray Pfeiffer http://www.fasri.net/index.php/2009/03/new-guidance-on-other-than-temporary-impairments/comment-page-1/#comment-7 Ray Pfeiffer Sun, 22 Mar 2009 01:58:12 +0000 http://fasri.remedylimited.com/?p=77#comment-7 This "race to the bottom" is EXACTLY what happened in October when European Banks and others were able to argue that the IASB's rules on reclassifications of investment securities were more restrictive than those of the FASB. As a result, such parties brought significant pressure on the IASB to change its standards to "level the playing field" for European banks vis-a-vis American banks. The result was the widely-criticized move by the IASB to relax its standards for re-classification without a public comment period. At least in this one instance, concerns such as those raised by Linsmeier and Siegel are borne out. Despite implicit pressure from investors, who strongly opposed the IASB's move, firms nevertheless lobbied strongly for lower-quality standards. This “race to the bottom” is EXACTLY what happened in October when European Banks and others were able to argue that the IASB’s rules on reclassifications of investment securities were more restrictive than those of the FASB. As a result, such parties brought significant pressure on the IASB to change its standards to “level the playing field” for European banks vis-a-vis American banks. The result was the widely-criticized move by the IASB to relax its standards for re-classification without a public comment period.

At least in this one instance, concerns such as those raised by Linsmeier and Siegel are borne out. Despite implicit pressure from investors, who strongly opposed the IASB’s move, firms nevertheless lobbied strongly for lower-quality standards.

]]> By: Robert Bloomfield http://www.fasri.net/index.php/2009/03/new-guidance-on-other-than-temporary-impairments/comment-page-1/#comment-5 Robert Bloomfield Fri, 20 Mar 2009 13:13:56 +0000 http://fasri.remedylimited.com/?p=77#comment-5 It's worth noting that the 3-2 vote was identical to that for FSP 99-20-1, with Linsmeier and Siegel dissenting, and that the nature of the dissent is similar--that this is a stopgap fix, and we should wait for a more comprehensive change that is made jointly by the IASB and FASB. I found it particularly interesting that they say the following: "Messrs. Linsmeier and Siegel believe...that risks are high that a unilateral change to the recognition and presentation of other-than-temporary impairments could create the opportunity for an “accounting arbitrage” with pressure for FASB and IASB standards to converge to the standard perceived most lenient." Which makes me wonder: is there in fact any evidence of such a "race to the bottom" in accounting standards? Such behavior would be directly contradictory to the type of reasoning Shyam Sunder uses to promote competing standards (for instance in <a href = "http://www.som.yale.edu/faculty/Sunder/Research/Accounting%20and%20Control/Published%20Articles/122.Enforced%20Standards%20versus%20Evolution/JMSMar2005.pdf" rel="nofollow"> this article </a> with Jamal and Maier). They basically argue that firms will select more rigorous standards to make investors happier. HOWEVER, that is a very different situation than what Linsmeier and Siegel are suggesting. I think they are more worried about the political pressure from the SEC and Congress (or the European Parliament), who will use one body's lax standards as a cudgel to beat down the others. ("If it is good enough for them, why isn't it good enough for you?" Again, is there any evidence for this kind of race to the bottom? It’s worth noting that the 3-2 vote was identical to that for FSP 99-20-1, with Linsmeier and Siegel dissenting, and that the nature of the dissent is similar–that this is a stopgap fix, and we should wait for a more comprehensive change that is made jointly by the IASB and FASB. I found it particularly interesting that they say the following:

“Messrs. Linsmeier and Siegel believe…that risks are high that a unilateral change to the recognition and presentation of other-than-temporary impairments could create the opportunity for an “accounting arbitrage” with pressure for FASB and IASB standards to converge to the standard perceived most lenient.”

Which makes me wonder: is there in fact any evidence of such a “race to the bottom” in accounting standards? Such behavior would be directly contradictory to the type of reasoning Shyam Sunder uses to promote competing standards (for instance in this article with Jamal and Maier). They basically argue that firms will select more rigorous standards to make investors happier.

HOWEVER, that is a very different situation than what Linsmeier and Siegel are suggesting. I think they are more worried about the political pressure from the SEC and Congress (or the European Parliament), who will use one body’s lax standards as a cudgel to beat down the others. (”If it is good enough for them, why isn’t it good enough for you?”

Again, is there any evidence for this kind of race to the bottom?

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