Colleen Cunningham
Colleen Cunningham
IFRS in the U.S.

Will U.S. ever be converged completely?

June 3, 2010
by Colleen Cunningham

The United States and the world are on a clear path to move to one set of global accounting standards. In fact, the one common theme we’ve seen in comments about the U.S. Securities and Exchange Commission’s (SEC) proposal to adopt International Financial Reporting Standards (IFRS) is that everyone believes we should have one set of standards. The original proposal was issued under the previous administration (Christopher Cox was the SEC Chair at the time).

The SEC recently held a public meeting to discuss the current roadmap proposal to move to IFRS in the US. The SEC released a preliminary plan that would require US-listed companies to report under international accounting rules no earlier than 2015. Like the previous proposal, the SEC will not make a final determination on the path to IFRS until 2011. This is consistent with the G20 request for the Financial Accounting Standard Board (FASB) and the International Accounting Standards Board (IASB) to converge accounting standards in some important areas such as financial instruments, fair value, financial statement presentation, revenue recognition, consolidations and more by June of 2011. Between now and 2011, the SEC will investigate whether international standards are sufficiently developed, consistent with the U.S. reporting system and the independence of the IASB. It will also look into whether there is sufficient education regarding IFRS for preparers, auditors, users, etc. Other issues include determining the potential impact on US laws or regulations, including tax and regulatory reporting. The impact to accounting systems, existing contractual agreements, corporate governance and more are the main areas of concern. The SEC staff will provide public progress reports on the Work Plan beginning no later than October 2010. Execution of the work plan has probably begun.

While the recent statement on the IFRS roadmap appears to have been a bit of a "non-statement" — the SEC effectively reiterated that they won't make any decision until 2011 — the game plan and the roadmap are now "owned" by the current group of SEC commissioners. This reaffirmation — issued under current SEC Chair Mary Shapiro — effectively becomes hers. This was an important step towards moving the issue forward.

The rest of the world has already decided that the set of single set of standards won’t be U.S. Generally Accepted Accounting Principles (GAAP).

So, the IASB and the FASB has “re-tripled” their effort towards convergence. Personally, 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 a “super majority” of board members to pass a standard. Hence, when FASB approved a new standard for business combinations, 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.

We see the same thing happening with Financial Instruments. Both boards have made this project a priority — but are not necessarily going to issue “converged” standards. The IASB has broken the project into three parts, the FASB plans on issuing one comprehensive standard. The FASB is also heading towards requiring more fair value requirements than the IASB.

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!

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. “I don’t think you have to use a search engine to do accounting,” he said. “The profession is about making a call, not about looking up page 17,493 to see what the answer is,” he added.

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 on the European experience of adopting IFRS in 2005, where the “heft” of annual reports increased by more than 50 percent due to additional disclosures!

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 for them. 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 GAAP is superior. If it were, why has the rest of world decided to pass it by?

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Colleen Cunningham, Global Managing Director, Resources Global Professionals, Parsippany, NJ. She will be speaking at the AICPA International Business, Accounting, Auditing and Tax Conference, June 23-24, 2010, Washington, DC.