Behind the scenes: US IFRS debate
By Gundi Jeffrey
29 June 2011
The US accountancy profession
is at the centre of considerable speculation concerning the
potential decision to adopt IFRS. But there are many factors to
consider and possible routes the US could take. Gundi Jeffrey
reports.
While world standard setters and
regulators urge the US to get on with adopting IFRS, some
commentators think it is no big deal if one of the world’s most
powerful nations chooses to go with the status quo.
Robert Herz, former
chairman of the US Financial Accounting Standards Board (FASB),
believes that "to truly have an international accounting standards
system, it’s important that the US be a part of it, as we do have
the largest capital market and largest nations economy in the world
– but the system also has to be suitable for the US".
Herz, who recently joined Canada’s
Accounting Standards Oversight Council to add his US perspective to
the Canadian experience, expects the Securities and Exchange
Commission (SEC) to continue to be supportive of the ultimate goal
of having a single set of high-quality international accounting
standards.
However, he notes that there are a
number of issues that still need to be addressed, including the
actual mechanisms for making the change.
On the other hand, the European
Commission (EC) has told the trustees of the IFRS Foundation –
which oversees the IASB Board – that "convergence [between US GAAP
and IFRS] cannot be a never-ending process... as it imposes cost on
EU companies that are increasingly difficult to justify, without a
firm commitment by the US to IFRS. Consequently, following the
completion of the current convergence agenda, the IASB should focus
on providing high-quality standards meeting the needs of those
jurisdictions that apply IFRS".
This view matches the argument Tweedie
recently made to the US Chamber of Congress, where he described
"the pressing need for the US to commit itself this year to a
clear, defined, and workable timetable for the incorporation and
use of IFRS, as published by the IASB".
Delaying the adoption of IFRS, imposes
"unnecessary costs and risks on US companies", says Tweedie.
He continues: "Already US-based
multinationals need to maintain multiple sets of accounting books,
filing statements prepared in accordance with US GAAP with the SEC
while reporting under IFRS or national standards for their
international subsidiaries. Their foreign competitors can use IFRS
for all purposes, even for filing with the SEC, now that the
reconciliation requirement has been removed."
Gordon Fowler, who chairs Canada’s Accounting Standards
Board (ASB) says: "Both the board and I hope that the US adopts
IFRS. We keep hearing from particular preparers in Canada that it’s
highly desirable that the US adopt IFRS because a lot of companies
in Canada benchmark themselves against US companies. If the US does
not adopt IFRS, those same preparers hope that the US at least
stays on a convergence path to eliminate major differences between
IFRS and US GAAP over time.
"If 120 countries are using IFRS, and
the US isn’t, that may just marginalise them and make them
irrelevant. Canadian companies may continue to be concerned about
lack of convergence, but the reading we get from the rest of the
world is that they don’t necessarily believe it’s important to
converge with US GAAP or for the US to adopt.
"If the US does not adopt nor continue
to converge, it isn’t the end of the world – it’s just not as
desirable as many Canadians would like it to be."
Bruce Pounder, vice-president of
accounting programmes at training provider SmartPros, agrees.
"If the SEC decided to continue to
prohibit the use of IFRS by listed companies, it’s not really a big
deal for the United States. The US will get by just fine if that
ends up being the decision. The reality of the past – different
countries having different accounting standards – actually works
better than a lot of people give it credit for."
Last October, the SEC released its
first update on the staff work plan for researching the suitability
of IFRS for the US. It notes that six major areas are under
investigation:
- how appropriate IFRS is for
the US domestic reporting system;
- whether the standard-setting
process is sufficiently independent for the benefit of
investors;
- investor understanding and
education regarding IFRS;
- how the US regulatory
environment would be affected by such a change;
- the impact on issuers;
and
- human capital
readiness.
According to the update, "many of the
staff’s efforts are currently in process and are not expected to be
completed until 2011, particularly as they relate to consideration
of the sufficient development and application of IFRS for the US
domestic reporting system and the independence of standard setting
for the benefit of investors".
Herz adds that SEC staff are looking
at "a whole host of contentious issues that could arise on moving
to IFRS". Getting the US into the IASB funding system is one of
them.
"They are looking at dealing with the
IASB funding gap as the IASB is running at significant deficits.
Furthermore, under US law, the US can’t directly pay the IASB
because it doesn’t meet some of the conditions to be a recognised
standard setter."
He also says there are legal aspects
to incorporating IFRS.
"My guess is that incorporation of
IFRS under the rubric of US GAAP would solve a lot of the legal
issues. It’s still US GAAP but it’s called IFRS."
The condorsement
option
Herz also points to the other issue of
whether you adapt IFRS fully or standard by standard, otherwise
known as ‘condorsement’.
Last December, speaking to the 2010
American Institute of Certified Public Accountant national
convention, the deputy chief accountant of the SEC Paul Beswick
floated his condorsement approach: a combination of convergence and
endorsement.
"US GAAP would continue to exist. The
IASB and the FASB would finish the major projects in their MOU
[Memorandum of Understanding]. The FASB would not begin work on any
major new projects. Rather, a new set of priorities would be
established where the FASB would work to converge existing US GAAP
to IFRS over a period of time for standards that are not on the
IASB’s agenda. This is not meant to be an MOU2, but rather would
entail making sure that, on a standard by standard basis, existing
IFRS standards are suitable for our capital markets," Beswick
said.
He believes this is a method of
incorporating a single set of standards into the US market.
"But it also acknowledges our
responsibility to the US capital markets and provides mechanisms to
ensure that the standards must be high quality prior to their
incorporation. If new standards of sufficiently high quality were
incorporated into US GAAP, the process of creating new differences
would stop. Further differences would be eliminated one by one as
new high quality global solutions are achieved," Beswick adds.
Pounder predicts a different scenario,
describing "three logical decisions" the SEC might reach this year:
mandating the use of IFRS for domestic SEC registrants; allowing
registrants to use either US GAAP or IFRS; and continuing to
prohibit the use of IFRS for domestic registrants.
For Pounder, the second option is the
most likely.
"Rather than mandate conversion or
adoption or transition to IFRS, they would be granting an option to
registrants that they do not have now, although foreign registrants
subject to the SEC’s jurisdiction and foreign private companies
have had that option for years."
Second in terms of likelihood is
option three.
"This is a very significant
possibility and well within the realm of possibility," Pounder
says.
Should this happen the US will not be
alone. Fowler agrees, saying it might be sufficient "if the US does
not adopt IFRS but continues down the convergence path, eliminating
differences over time". He says that staff at the SEC have hinted
this might be a possible solution.
Global IFRS
Paul Cherry, chair of the IFRS
Advisory Council, explains that "there is no appetite in the global
community for further projects focused on convergence with US GAAP
or with any other national standards. Convergence per se is no
longer a prime consideration for the IASB. The IASB must give top
priority on serving the needs of those who have already adopted or
are committed to adopting IFRS".
He doubts, though, that "the SEC will
rule out ever adopting IFRS although they might decide more time is
needed before making a decision to change to IFRS".
He adds: "The break point will likely
be how much additional implementation guidance is needed to satisfy
the US marketplace. I think this is the greatest obstacle facing
the US and is unique to them and explains why they might need
considerably more time to make the transition."
He also says that the use of IFRS in
the rest of world is not quite as pervasive as people believe it to
be.
"The world’s second-largest economy is
Japan. It does permit certain listed companies to use IFRS but most
Japanese listed companies must use Japanese GAAP."
Although Japan is to decide in 2012 on
whether it will adopt IFRS, Pounder says the issue is "up in the
air – Japan is not using IFRS nor has it made a commitment to do
so".
China is often included in the
countries that use IFRS, "but Chinese listed companies are required
to use Chinese GAAP. Arguably, most of Chinese GAAP is very similar
to IFRS but it isn’t IFRS", he concludes.
Although India was supposed to have
transitioned listed companies from Indian GAAP to IFRS earlier this
year, this did not happen.
"India decided to promulgate a revised
set of accounting standards, which are much closer to IFRS than
prior Indian GAAP, but many differences remain. It is these revised
accounting standards that listed companies in India are required to
apply, not IFRS. And there is no concrete adoption plan or
timetable for adopting IFRS," Pounder says.
He adds that European listed companies
are required to use IFRS within the EU, "but private companies in
almost every case continue to use national GAAP to satisfy their
financial reporting requirements – those national GAAPs show no
sign of going away".
He points out that Canada has adopted
IFRS for listed companies but "has decided that private companies
should be using a special version of Canadian GAAP designed just
for them".
"Also," he adds, "Canada is now
developing specific standards for non-profits and government
entities. So, we have all these entities that are not using IFRS in
Canada."
Finally, he points out that many IFRS
countries have adopted a local variant of IFRS rather than IFRS as
issued by the IASB. Again, he says, this contributes to the
diversity of standards in use.
To say that most of the world is using
IFRS is not accurate, according to Pounder.
"We may be going towards having fewer
differences in listed company standards among countries, but at the
same time, we are clearly seeing the emergence of different kinds
of standards for different kinds of organisation," he says.
Meanwhile the world awaits the final
verdict and according to SEC commissioner Julie Erhardt, "neither
the SEC itself, nor its staff, has yet made any decisions on this
policy
matter".