Speech by Mrs Lim Hwee Hua, Senior Minister of State for Finance & Transport, for The Regional Standard-Setters Meeting's Public Seminar At Mandarin Oriental Hotel, Thursday 17 July 200817 Jul 2008
Sir David Tweedie, Chairman of the International Accounting
Standards Board or IASB,
Mr Warren McGregor, Board Member of the IASB,
Ms Euleen Goh, Chairman of the Accounting Standards Council,
Distinguished Guests, Ladies and Gentlemen,
2. First, I would like to extend a warm welcome to Sir David Tweedie and Mr McGregor from IASB as well as the representatives from the various accounting standards setting authorities in the Asia region.
3. This is the second time Singapore is hosting the Regional Standard-Setters Meeting, the first being the inaugural meeting back in 2003. Back then, we were still feeling the ramifications of the Enron crisis. Over the past five years, the need for sound, robust financial reporting standards has continued to remain urgent and critical, with the uncovering of more accounting scandals. A good example of this was when Dell, the US Pc Maker had to restate its revenues for 2003 through to the first quarter of 2007, knocking more than $92m off its previously started revenues, as a result of accounts manipulation by its employees.
4. As an international financial centre, Singapore actively promotes uninhibited capital flows. Hence, we are a strong supporter of systems, institutions and measures that facilitate and reinforce these ideals, namely a well-defined regulatory framework and sound financial reporting with high quality accounting standards.
5. Specifically, we see the value of having robust financial reporting standards as they aid in the proper assessment of risks and returns, which are increasingly necessary for investment decisions and the flow of capital. This is why Singapore has based the Singapore Financial Reporting Standards (SFRS) on the International Financial Reporting Standards (or IFRS) and International Accounting Standards issued by the IASB since 2002. The IFRS is on its way to become the truly globally recognised set of accounting standards. We note that the US Securities and Futures Commission or SEC recently has removed the reconciliation requirement for companies that are preparing their financial statements based on IFRS. Opportunities that arises as a result of complying with IFRS.
Opportunities that arises as a result of complying with IFRS
6. There are many benefits to adopting IFRS. In 2006, PricewaterhouseCoopers and Ipsos MORI conducted a joint survey of 187 fund managers across Europe. The response was that the adoption of IFRS helped to improve transparency and management information, as well as enhanced the consistency of reporting between jurisdictions and sectors. In addition, 52% of the fund managers surveyed replied that they were using IFRS information to help them make investment decisions.
7. The adoption of IFRS is also good news for international businesses, as it enables them to maintain one common set of accounts, which helps to simplify operations and financial controls, making it easier for the companies to consolidate the financial statements from their subsidiaries.
Challenges with complying with IFRS
8. However the journey to ensure compliance with IFRS is one that is fraught with significant challenges. While it is beneficial to have common standards, we are increasingly convinced that allowances need to be made for differences in the legal, fiscal and cultural environment between countries. Standards set need to take into account the realities of the local environment while fairly representing the underlying business.
9. We also believe that it should certainly not be a case of the tail wagging the dog, in that accounting standards are driving business decisions, instead of supporting business decisions. Specifically, we are faced with two key challenges with regard to the application and implementation of IFRS. They are:
a) the need for simplicity; and
b) the need for reliability.
Let me elaborate.
The need for simplicity
10. We recognise that as markets develop and more exotic financial instruments are introduced, accounting standards also need to keep pace. However, while we update accounting standards for businesses that are complex in nature, we need to be mindful of the question whether it is appropriate to subject businesses that are less complex and with a vastly different shareholding structure to the same set of accounting standards. It is crucial that as we look towards global convergence to the IFRS, we must also not forget to allow for flexibility for the less developed markets in embracing the new standards.
11. In this regard, I believe that the IASB is aware that it may not be easy for all entities to comply with the full IFRS. It has thus taken constructive steps to alleviate the difficulties for some entities with its project to introduce IFRS for SMEs, which I understand is being renamed IFRS for Private Entities. We are monitoring this closely as this is particularly relevant to Singapore since it is now a legal requirement for all Singapore incorporated companies to comply with the SFRS which is modelled after the full IFRS. While this differentiated accounting standards is a step in the right direction, based on the exposure draft, there remains concerns from some quarters that the IFRS for Private Entities are still too complicated and should be further simplified. We hope that the IASB would take into account all these feedback before introducing the final set of standards.
12. Besides having simplified standards, there is also a need to guard against the danger of accounting standards becoming too technical and complex that they are only understandable to technicians. It becomes a real problem if professionals, financial analysts, fund managers and sophisticated investors find the financial statements difficult to understand. If this trend continues, this would actually go against the objective of the IASB of developing a set of high quality, understandable global accounting standards to help participants in the world's capital markets and other users make economic decisions. In this instance, it is perhaps useful to bear in mind what Charles Mingus, the famous jazz bassist and political activist once said, "Making the simple complicated is commonplace; making the complicated simple, awfully simple, that's creativity."
The need for reliability
13. Besides ensuring that the standards are understandable, facilitating comparability of accounts is also a key focus of the IASB. In order for accounts to be comparable, there needs to be consistency, both in terms of how accountants interpret and apply the standards. While this is something to aspire to, we are finding that in reality, consistency in application may be an elusive goal. This brings to mind a joke where a little girl, after hearing the story of Cinderella asked her accountant dad whether the pumpkin which turned into a golden coach should be classed as income, a long-term capital gain or a contingent liability!
14. On a serious note, standards that involve the principle of "Fair Value" are often difficult to apply consistently in an illiquid or inactive market. In the absence of an active market, the fair value of an item would be rather inconsistent, if not very subjective, depending on the models as well as the assumptions used.
15. This is perhaps best exemplified by what the market is facing now, as a result of the sub-prime crisis. In April 2008, the Bank of England in its Financial Stability Report commented that banks are finding it difficult to sell or secure funding on assets for which markets have closed. This has increased uncertainty about the banks' financial position, contributing to continued stress in money markets and tightening credit availability.
16. With market liquidity impaired, there is a n elevated risk of further price volatility as previous buyers of asset-backed securities now seek to sell the assets, while new, more risk adverse investors now require huge price discounts before taking on such exposure. On the supply side, the situation is exacerbated as some banks are now reluctant to sell at what they see as unrealistically low prices. There is also an IFRS angle, as the banks would not only realise losses upon sale but would also need to mark down retained exposures to reflect new price benchmarks. All these have led to large discounts for illiquidity and uncertainty, potentially inflating the loss estimates.
17. We thus have a vicious cycle and a downward spiral of huge write-downs, which has heightened concerns about banks' resilience, continued strains in money markets and reduced credit availability. This in turn has impeded the return of confidence and risk appetite in financial markets.
18. We are of the view that while there is a need to ensure consistency, this should not be to the exclusion of everything else. It is perhaps useful to remind ourselves that if financial statements are being scored on consistency alone, consistently right or consistently wrong would actually score the same! We believe that given financial reporting standards are supposed to be principles-based, there should be room for judgemental application and for consideration to be paid to local cultural, legal, tax and business circumstances. A good case in point would be the requirement to provide for deferred tax on investment properties. While this may be a sound practice in countries that have in place capital gain tax, it may not be appropriate in a country like Singapore that does not levy such a tax.
19. Whilst we look to share experiences and exchange ideas within our region, we would like to see IASB becoming more involved in this region as more countries embrace the IFRS. To achieve this, we would like to make the following requests to IASB. First, IFRS should maintain a principles-based approach that would allow for a certain degree of flexibility. This can be done by giving individual countries the ability to nuance the interpretations to the standards based on local conditions.
20. Secondly, IASB should also issue new accounting standards at a pace that is comfortable for all stakeholders.
21. Finally, the IASB should continue the dialogue it has with all countries, with special focus on smaller, developing and emerging economies so that they too will make the IFRS the accounting standards of choice.
22. It is in this context that events such as the Regional Standard-Setters Meeting as well as this public seminar can be very useful. I would like to take this opportunity to thank the Accounting Standards Council for organising this event and I would like to wish you all a fruitful and stimulating discussion today. Thank you.