November 2009

EY Point of View
Our perspective on issues of concern

The path toward a single global

accounting standard
EY Point of View
About this EY Point
of View
Welcome to EY Point of View (POV).
These documents express our view
on current public policy and regulatory
matters of importance to our
stakeholders, our profession and the
capital markets. POVs are a means
to help EY deliver a seamless and
consistent message across our
organization. In this edition we focus
on the path toward a single global
accounting standard.

Ernst & Young believes there should be a single set of high quality global accounting
standards. Convergence, particularly in the area of accounting for financial instruments,
is an important step towards this goal. However, convergence alone is not sufficient. All
countries, including the US, should ultimately commit to adopt International Financial
Reporting Standards (IFRS).

Context
For more than a decade, regulators, standard-setters and policymakers have supported
convergence toward a single set of high quality global accounting standards. The global
financial crisis has underscored the interconnectedness of our markets and the need for the
world to coalesce on a set of common standards. For this reason, the G20 leaders have
repeatedly called for standard setters to work together towards a single set of high quality global
accounting standards.1 A single set of standards would benefit cross-border investors, crossborder business and global markets.
The importance of convergence is particularly acute with respect to financial instruments.
Divergent financial instrument standards have allowed political and industry influence to play
one standard against the other, creating what some have characterized as a race to the bottom.
This has threatened to undermine the independence of the standard setters. Some European
political leaders are questioning whether Europe should remain committed to the IASB. The
continued US delay in committing to IFRS is also increasing pressure on the IASB.
In a recent letter commenting on the IAS 39 Exposure Draft relating to the classification and
measurement of financial instruments, Ernst & Young strongly emphasized the need for the
IASB and the FASB to work together to develop a common way forward on accounting for
financial instruments and offered a proposed model for doing so. Since issuing its Exposure
Draft, the IASB has made a number of changes to the proposed standard as a result of
extensive stakeholder outreach and comment. We support the revised standard and have urged
the European Commission to endorse it.
With the intense public focus on accounting standards, and on financial instruments accounting
in particular, this continued commitment to convergence is an essential step toward the goal of a
single global accounting standard.

1
We call on our international accounting
bodies to redouble their efforts to achieve a
single set of high quality, global accounting
standards within the context of their
independent standard setting process, and
complete their convergence project by June
2011. G20 Leaders Statement from
Pittsburgh Summit.

Key talking points

The financial crisis has demonstrated the importance of a converged approach on
financial instruments accounting.
Accounting for financial instruments has been an area of increased focus since the start of the
financial crisis. The valuation of complex financial instruments in distressed markets has
challenged existing standards and triggered much public debate. The IASB and FASB have both
undertaken reviews of their standards for financial instruments accounting but are moving at a
very different pace and have come up with dissimilar proposals.

The path toward a single global accounting standard

These differences are partly due to conflicting demands of various stakeholders, including
securities and prudential regulators, analysts, banks and other financial statement preparers in
both Europe and the US.

Contact
Global Public Policy
Beth Brooke

+1 202 327 8050

Felice Friedman

+1 202 327 6253

Americas
Les Brorsen

+1 202 327 5968

EMEIA
Jeremy Jennings

+32 2 774 9672

Far East
Sung Nam Kim

+82 2 3787 6520

Japan
Yuichi Mochinaga +81 3 3503 1100
Oceania
Tony Smith

+61 2 9248 4125

We recognize that retaining a common approach is difficult, particularly in the current

environment. It requires balancing the views of multiple stakeholders through proper due
process, while retaining independence and a focus on the purpose of financial reporting. Our
IAS 39 comment letter set out a proposed way forward, demonstrating that there is common
ground between the IASB and the FASB. It also showed that different stakeholder needs can be
balanced in arriving at a broadly acceptable approach to accounting for financial instruments. In
this respect, we are encouraged that the IASB and the FASB are beginning to work in a more
coordinated manner to align their approaches. We were pleased to see the Boards Joint
Statement of 5 November 2009 describing their plan for completing major projects by June 2011
and affirming that they are redoubling their efforts to achieve a single set of high quality
standards. This could help to alleviate pressure on both Boards from constituents calling for
a level playing field and reduce the standard-lowering arbitrage that has taken place on this
important topic.
We are encouraged by the G20 support for convergence and the adoption of a single
set of high quality, global accounting standards.
The G20 has recognized the importance of all countries converging toward a single set of high
quality global accounting standards. Convergence is an important step towards the goal of a
single global standard. At the same time, if convergence continues indefinitely, a single set of
standards will never be achieved. Endless convergence is not realistic, politically viable, or
effective for the cross-border activities of todays investors and companies.
Ernst & Young has long supported the global adoption of IFRS as issued by the IASB. Among
other things, a single set of global standards will enhance comparability of financial reporting for
investors. It will also protect standard setting from local political and industry influence, which
can play one standard setter against the other, risking a race to the bottom. IFRS, as issued by
the IASB, can meet these objectives, particularly as the IASB continues its efforts to enhance its
governance, standard setting processes and stakeholder engagement. In this respect, the
recent creation of a Monitoring Board, consisting of representatives of the major capital markets,
provides an important mechanism to help achieve greater transparency, political accountability
and legitimacy for the IASB. The Monitoring Board comprises representatives of the European
2
Commission, the US SEC, the Japanese FSA and the International Organization of Securities
Commissions (IOSCO). The Basel Committee is a formal observer. The creation of the
Monitoring Board increases the accountability of the IASB while at the same time helping to
preserve its independence. For accounting standards to be credible and globally accepted, the
standard setting process must be independent that is, free from political interference and
underpinned by appropriate due process that gives all stakeholders an opportunity to provide
input.
We believe the US should set a date to adopt IFRS. Until it makes this commitment,
the pressure on the IASB to lower the priority placed on convergence with US
standards will continue to build, making the goal of a single set of standards less
attainable.

2
The European Commission agreed in
principle to the creation of the Monitoring
Board but has not yet signed the constitutive
document.

One of the key pressures faced by the IASB is the potential conflict between the stated goal of
convergence with the FASB and the demands of many in Europe for the IASB to see their needs
as a priority. This pressure has intensified because the US has yet to commit to adopt IFRS. To
make progress and to retain the current path toward convergence the US needs to make a
commitment to IFRS as soon as possible. Until such a commitment is made, pressure on the
IASB will continue to lower the priority it places on convergence with the US and the
convergence agenda will suffer, thus increasing the obstacles for the US to make the move to
IFRS.

EY Point of View November 2009

The path toward a single global accounting standard

Points of debate
More information
For a copy of the EY Comment Letter
to IASB on Exposure Draft on
Financial instruments: Classification
and measurement click here.
For a copy of the EY Comment Letter
to the European Commission
supporting endorsement, click here.
For a copy of the EY Overview on
G20 Pittsburgh Summit click here.

Ernst & Young supports the global adoption of IFRS, but what about auditing and ethical
(including independence) standards?
The European Commission is currently considering whether to require the use of International
Standards of Auditing (ISAs) in EU member states. This would be an important step, increasing
the momentum towards the global adoption of ISAs. EY already bases its global audit
methodology on ISAs, and in our view global audit standards are an important counterpart to
global accounting standards. Global audit standards would enhance audit quality and investor
confidence on a global level. Investors would gain a clearer understanding of the nature of audit
work undertaken and the rigor involved regardless of where the audit is performed.
Ethical standards, including, importantly, auditor independence standards, are the foundation of
investor confidence in high quality audits. We believe that global consistency in independence
requirements, for example, the IFAC ethics standards, would enhance investor confidence and
reduce complexities around these important requirements.
To eliminate or minimize impediments to global capital markets and promote audit quality, global
harmonization should also be sought in other key areas such as privacy law and corporate
governance.
Doesnt the financial crisis demonstrate the need for financial reporting to support
financial stability?
No, it is not the purpose of financial reporting to support financial stability. The primary objective
of external financial reporting is to provide relevant and accurate information for investors and
creditors to use in their decision-making processes. These users are considered to be general
purpose users of listed company financial reports. In other words, they are not in a position to
command the financial information they require for their decisions and must rely on whatever
information is provided to them in the financial reports.
The primary objective of prudential oversight is to foster safety and soundness and financial
stability. Prudential regulators have the authority and means to obtain information from financial
institutions on a real-time basis. Thus, they are not considered to be general purpose users of
listed company financial reports. Moreover, prudential regulators have supervisory tools to
enable them to carry out their oversight responsibilities.
It should be remembered that financial reporting standards are designed for all reporting entities,
not just for financial institutions. While general purpose accounting standards should not be
used as a supervisory tool, prudential regulators should engage with and provide input to
accounting standard setters on key financial institution reporting issues, which the financial crisis
has made particularly challenging.

EY Point of View November 2009