Despite an apparent drop in momentum recently, the United States and the world are on a clear path to move to one set of global accounting standards. In fact, the only common theme we’ve seen in comments about the Securities and Exchange Commission’s plan to adopt International Financial Reporting Standards is that everyone believes we should have one set of standards.
The rest of the world has already decided it won’t be U.S. Generally Accepted Accounting Principles, that’s all. The big disagreement is how to achieve a single set of standards.
The proposed SEC roadmap contemplates a continued convergence path through 2011, while the International Accounting Standards Board and the U.S. Financial Accounting Standards Board continue to address accounting issues: financial statement presentation, financial instruments, leases, revenue recognition, and the like. In 2011, a decision would be made as to whether to mandate IFRS beginning in 2014, or to continue converging.
The roadmap also contemplates that certain companies could adopt IFRS beginning as early as this year. But since the decision to adopt IFRS won’t be made until 2011, companies have absolutely no incentive to consider this option based on the current proposal—especially when one of the milestones for the SEC’s decision in 2011 is for the SEC to review those companies that have adopted early.
Think about that: You won’t know whether the United States will move to IFRS until 2011, and you will guarantee SEC scrutiny if you early-adopt. It’s almost negligence if a company does consider early adoption under those circumstances.
Current SEC Chair Mary Schapiro has stated that she is not tied to the previous chair’s agenda of adopting IFRS. (Although, remember that four other commissioners also voted to publish the roadmap.) Schapiro has also implied that the SEC is too preoccupied with the current financial crisis to be focused on the movement to IFRS. Well, hasn’t the current global economic crisis highlighted, quite clearly, the need for one set of high-quality accounting standards? Can we not pursue both goals simultaneously?
Recently I asked an SEC staffer I know how things are going. He indicated that since the G-20 summit of April 2 is now receding, so is the craziness around the agency. Nothing demonstrates the importance of globalization these days than a G-20 meeting being the pace setter for priorities at the SEC (and many other U.S. agencies, I suspect). The declaration that came out of that April meeting noted that the G-20 countries have “committed to moving to one set of high-quality global accounting standards.” They also promised to report their progress at their next meeting, currently slated for October.
Since the United States is the only country that does not have a formal implementation plan for IFRS, I think we will, at a minimum, need to have the final roadmap in advance of that meeting. I just can’t picture President Obama showing up at that meeting and saying “Yeah, I know everyone else in the world is either using or moving to IFRS; we got the comments in April and have just sat on them.”
Just Do It
I believe that continued convergence is a pipe dream. While we have two separate boards with different governance voting separately on recommendations, we will never be completely converged. Supporting this dynamic is inefficient. Even with the convergence projects that have resulted in final standards, we are not completely converged. FASB requires a simple majority of its five board members to pass a standard. IASB requires nine votes from its 14 board members to pass a standard. Hence, when FASB approved a new standard for business mergers, IASB couldn’t muster a similar majority and had to issue a standard with a few more alternatives included to win the necessary support. Now, I do believe the IASB standard is more reflective of the real world, since it offers two methods to account for goodwill rather than GAAP’s one. But let’s not delude ourselves: these allegedly converged standards aren’t the same.
With the current agenda of convergence areas to be completed by 2011, IFRS and GAAP will certainly be closer than they are today. But isn’t having two different boards debate these issues inefficient? Companies, investors, and auditors all have to keep pace with what is happening with both sets of standards, as well; that’s difficult. Some of these convergence projects, if they do get completed on time (I remain skeptical), are contemplating huge changes. For example, some have estimated that the cost and time of implementing the current proposal for financial statement presentation will far outweigh any cost of adopting IFRS as a whole!
If we want to continue to have a seat at the table in international standard setting, we need to set a date already and begin planning for the ultimate move to IFRS.
We’ve also heard much noise about how adoption of IFRS would mean using a “lesser” set of standards. I’m quite familiar with both sets of standards, so I beg to differ. The SEC held a roundtable last summer about how both sets of standards held up under the current credit crisis. The conclusion: IFRS held up better, as basically it forces more special-purpose entities to be included on the balance sheet. (FASB recently caught up with IFRS by issuing two new standards to accomplish the same.)
I think Sir David Tweedie summed this point up best in a recent interview. He sees adopting IFRS as a choice between the benefits of greater professional judgment that come with principle-based accounting, and the over-reliance on complex guidance associated with GAAP. His words: “I don’t think you have to use a search engine to do accounting … The profession is about making a call, not about looking up page 17,493 to see what the answer is.”
I agree. IFRS allows a company to use professional judgment, and perhaps reflect transactions based on the economics of the transaction, not on what the rules dictate. Why wouldn’t that be an improvement? I have also seen studies of Europe’s adoption of IFRS, which found that additional disclosures caused annual reports to increase on average 50 percent. (Some more than doubled.)
Is more disclosure a bad thing? I like to use a personal analogy here. This is the principles versus rules debate that we hear so often.
I have five teenaged children. If I told them that they needed to be home at 11:00 p.m. on a Friday, that would be a rule. If I told them to be home at a “reasonable hour,” that would be a principle. All five would likely interpret that “principle” a little differently, but would provide me with robust disclosure about why the time they came home was reasonable. I could make the determination about whether the argument made sense. And if they were pushing the envelope, I might make decisions about whether I should trust other judgments they have made.
If we want to continue to have a seat at the table in international standard setting, we need to set a date already and begin planning for the ultimate move to IFRS. We cannot continue to be so arrogant as to assume U.S. GAAP is superior. If it were, why has the rest of world decide to pass it by?
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