Convergence 2014 the tip of the iceberg.

Author:Westfall, Christopher
Position:Cover story
 
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Markets and financial reporting in 2013 could be summed up in one phrase: A work in progress.

For the markets, political and governmental institutions hold the key to the next 12 months. Specifically in the United States, how the Federal Reserve Board attempts to wind clown its thus far five-year "quantitative easing" program will have major implications for interest rates, mergers and acquisitions and corporate growth. Globally, questions remain about Europe's growth prospects and Chinese policymakers are attempting a "soft landing" for China's economy.

The state of financial reporting remains just as unsettled as global rule-makers and regulators attempt to converge standards, albeit at different paces and sometimes different tracts. In fact, work on the current major convergence projects of revenue recognition, leases, insurance contracts and financial instruments will spill over into the New Year and beyond.

For attendees of Financial Executive International's (FED 32nd annual Current Financial Reporting Issues conference (CFRI), any attempts to navigate 2014's economic and financial reporting clangers will require great skill and even greater patience.

But that does not mean there is not hope.

"Even though I am a former politician, I always like to think long term," said Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB). "And long term I am very optimistic."

An Economic Warning to Start Financial executives looking toward 2014 will face significant challenges as politics increasingly encroaches into global business and economic growth continues to remain tepid, said Rana Foroohar, Time magazine's assistant managing editor in charge of economics and business.

Foroohar kicked-off the CFRI conference with a Monday morning keynote presentation. "It's interesting that FEI was born out of the Great Depression and a significant time of economic upheaval," Foroohar said. "I think that we are at a very similar turning point in the U.S."

According to Foroohar, the largest risk to the global economy and the markets is also something that is almost completely out of the control of financial executives: Political risk. "[Among] the things that keep me up at night is not the economy, it's politics. Political risk will play a much, much larger role in the global economic environment," she said.

In the past politics played only a tangential part in the economy, especially during the period between the mid-1980s and 2008, which Foroohar described as the period of "Great Moderation."

During that time, the U.S. and global economy experienced a long stretch of decreased macroeconomic volatility, she explained. That volatility came roaring back following the 2008 financial crisis as policymakers rushed into the markers to save financial institutions.

Today, government is no longer considered a savior but "actually considered a headwind" to economic growth, Foroohar stated. The Time journalist cited recent academic research put a price on government's disruptive impact on markets. "If you strip out politics, the U.S. would have a three percent growth rather than its current two percent growth. Politics cost the U.S. two million jobs and significant economic growth," she said.

The rest of the world is not much better off. In Europe, policymakers are stepping into the economy with even more furor as they look to backstop failing economies. "What the U.S. and Europe have in common is that central bankers have become the most important economic and political factors," Foroohar added.

In China, the depth of the bad loans its banks may hold is another microeconomic and political risk that financial executives need to consider when planning in 2014.

"China is the biggest 'X factor' in the global economy. The Chinese state banks have $10 trillion in loans on the books, and 10 to 20 percent could be bad. With growth slowing, the Chinese know they need to move beyond the current model," Foroohar said.

The coming year may see an endgame for many government-driven economies as the political forces that fueled expansion through monetary policy exhaust their ability steer the global economy with stimulus.

The biggest question, said Foroohar, concluding, is "What happens when the bond bubble bursts and interest rates rise and who is going to be found swimming with no trunks when the tide of monetary policy pulls back?"

2014: Beyond Convergence

The focus of financial reporting in the U.S. and abroad in 2013 has been on the concept of "convergence," or aligning the...

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