Less than three years ago, the Financial Accounting Standards Board was planning to issue a huge number of new accounting standards. At the same time, U.S. accountants and policy makers were considering how we would continue the move toward International Financial Reporting Standards. There was great momentum toward getting a lot done. To say the scope and pace of change was big and fast is an understatement.
But that was then. The state of accounting standard setting in the United States is far different now than it was just three short years ago.
All Those New Standards
Pop quiz—how many new accounting requirements have been added in 2012? Got a number in your head? Ok, read on.
Corporate accountants are constantly on edge about the pace of change—too much, too fast, too often. Every study on attitudes about accounting standards elicits the same type of concerns, just as they did a few years ago. Indeed, at that time, even I, a person who generally believes that standard setting goes too slow, expressed concern about the number of seemingly imminent new standards. New standards for revenue, leasing, financial instruments, distinguishing debt from equity, reporting financial performance, and many others seemed to be just over the horizon.
Many people, particularly those in the corporate world, continue to complain now that standard setting is moving too fast. So how many new accounting requirements has FASB issued in 2012? For most companies, zero. Through Oct. 31, there have been seven accounting standards updates in 2012, and two of those were technical corrections. Of the others, one applies to not-for-profit entities, one to healthcare entities, one to filmmakers, and one to financial institutions that have consummated a merger with support from the government. That one broadly applicable update simply allows (but does not require) a qualitative goodwill impairment analysis instead of a quantitative one in some circumstances.
So those complaining that changes are coming too fast can stop now.
And what about those really big new standards we were all preparing for just a few years ago? Well, the debt vs. equity and financial statement presentation projects are in a holding pattern; not quite dead, but FASB isn't currently working on them either because FASB and the International Accounting Standards Board decided in 2011 to focus on revenue recognition, financial instruments, and lease accounting.
That focus, however, has yet to produce any standards. We're likely to see revenue recognition early in 2013, and exposure drafts on the other two around the same time, but nothing that we will have to implement until— wait for it—2016. This is what everybody was so worried about?
The chairman of the IASB, Hans Hoogervorst, is so put off by the glacial pace of standard setting that he has vowed to reach resolutions faster in the future, lest IASB be considered ineffective. I applaud him for stating this view despite pressure in Europe to go slow on major projects. Still, ending debate and discussion without exploring viable alternatives flies in the face of the extensive process that has traditionally underpinned standard setting, and recent joint meetings have revealed that FASB believes IASB has sometimes moved too hastily.
FASB, in contrast, continues with its long-standing deliberative process and refuses to issue a standard until it is convinced that it has explored all possibilities. A reasonable process, sure, but in practice, it seems to have led to interminable delays lately.
Three years ago, FASB and IASB were supportive of one another, working together toward the goal of significantly improving accounting in areas where improvements had been elusive. The three major projects they are still actively deliberating represent areas of accounting where there is broad consensus that current standards do not measure up. Other projects that were previously on the joint agenda, but have been set aside, also cover topics greatly in need of improvement.
Unfortunately, the convergence process that was supposed to enable these improvements while harmonizing standards globally has, despite the happy-sounding press releases from the two boards, produced far less than what was originally promised. Converged standards on revenue and leases still seem likely, but agreement on financial instruments continues to elude the two boards, with IASB representative publicly criticizing FASB's decision to abandon the model that the boards had been working on together.
Meanwhile, the potential for any further convergence in areas that have been set aside or partially completed now appears very low. The convergence process as we know it is to end following the current projects, and IASB has vowed to conduct the balance of the conceptual framework project alone. Meanwhile, FASB and IASB, which were once very supportive of each other, now seem to have lost the ability to work together, and are sometimes downright antagonistic toward one another. It seems that they have forgotten than they are supposed to be on the same side.
The United States and IFRS
If convergence appears dead, then the remaining hope for achieving a common set of global standards would seem to lie with the United States adopting IFRS. Just a few years ago, the prospects of that happening in some way looked pretty good. The SEC staff was working toward a recommendation for the Commission to consider, companies were beginning preparations for a conversion, there was talk of optional use of IFRS by U.S. companies, and different methods by which the United States might move to IFRS were being explored.
Where accounting standard setters had momentum just a few years ago, there is now indecision and infighting. Changing that will require a lot of parties to re-commit to working together.
Today, there are no such discussions, and little movement. Even the “condorsement” approach floated by the SEC staff, which would have moved the United States incrementally toward IFRS, but not all the way there, seems to be on life-support, at best. With an acting chief accountant at the SEC and a change in SEC chairman seemingly likely, the chance of any significant movement before mid-2013 is low.
When I left the SEC in 2007, I predicted that we'd see U.S. companies file using IFRS in about ten years. For awhile, it looked like my predicted date was way too far out. Now, it appears that there is little chance of it happening that soon.
The Push for New Standard Setters
One organization still pushing for a U.S. move toward IFRS is the American Institute of Certified Public Accountants. The AICPA constantly trumpets the value of a common set of standards.
Apparently oblivious of the irony, the AICPA embarked on a major campaign over the past few years to convince the Financial Accounting Foundation to sponsor a separate standard-setting board to create a different set of standards for private companies. That effort didn't achieve its goal, but the FAF did create a mechanism to foster consideration of differences between accounting standards used by private and public companies.
Further complicating things, the AICPA plans to issue a non-GAAP financial reporting framework geared to “small- and medium-sized entities.” Again missing the irony, the AICPA isn't going with IASB's already existing framework geared to small- and medium-sized entities, despite its constant support for the United States to move to IFRS in general.
Perhaps we should not be at all surprised that it's so hard to reach a single set of global accounting standards when we keep coming up with new reasons to have different standards for companies here in the United States.
So Where Are We, Then?
There are good, sound, reasons for all of the changes I've talked about so far. Private companies are understandably concerned about the cost and effort needed to prepare financial statements using Generally Accepted Accounting Principles. Things did seem to be moving too fast a few years ago, and FASB understandably doesn't want to issue new standards if there's a reasonable chance that more discussion could make them even better. Convergence has proven to be a more difficult process than originally envisioned. And there are plenty of good reasons for the United States not to move to IFRS—it's expensive, the benefits are hard to pin down, the IASB is young, and, as exemplified by the difficulties in the convergence process, U.S. and non-U.S. accountants often disagree on the best answers.
The result, however, is a rather dysfunctional situation. We are so far form the “full speed ahead” spot where we were just a few years ago that it's almost humorous. Indeed, it might be, if it weren't also so disappointing. Our inability to agree, even amongst ourselves, as to the best way forward, is causing us to not move forward at all, and to even move backwards in some cases. Where accounting standard setters had momentum just a few years ago, there is now indecision and infighting. Changing that will require a lot of parties to re-commit to working together. It can be done, of course. As the saying goes, “Where there's a will, there's a way.” But at present, there doesn't seem to be much of a will. Hopefully, that changes soon.