May 14, 2012

Are We Converging, or Are We Diverging?

By Kim Lamplough, Partner, Assurance Services

Are We Converging, or Are We Diverging?

Recently, there has been plenty of news related to the potential United States conversion from US GAAP as promulgated by the Financial Accounting Standards Board (FASB) to International Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB). Unfortunately, neither has clarified either a timetable or the mechanics.

A recent AICPA IFRS update listed three articles subtitled as follows:

  • SEC’s Chief Accountant Hints at Move to IFRS
  • SEC Chairman Says US Won’t Be Rushed Into IASB Rules
  • U.S. Could Be Dropped From IASB After Governance Review

On the positive side, SEC Chief Accountant James Kroeker stated, “I’m hopeful that we’re on track to resolve an approach for whether and on what terms the United States would adopt IFRS”. Concurrently, he noted that the SEC’s decision was still a “few” months away and that they were still working through their approach. He made a point to drop last year’s term “condorsement,” which was informally spun as the key to the implementation.

Shortly thereafter, however, SEC Commissioner Mary Shapiro weighed in to say the United States wouldn’t be rushed into a possible move to a global accounting standard. That the Chairman of the SEC would put the interest of the United States first isn’t news. That the Chairman felt the need to state the obvious two days after the Chief Accountant expressed optimism made many question the commitment of the United States.

Meanwhile, International Accounting Standards Board (IASB) Chairman Hoogervorst, speaking at the Economist CFO Summit in London stated that he expected the U.S. regulators to “take a positive decision” to adopt IFRS, although he didn’t expect a “lock, stock and barrel” acceptance within the next three years.

Indeed, it does appear that patience with the United States may be running out. First, there is the threat to drop the U.S. from the IASB if we do not have a plan to ultimately join in the international standards, at least for public companies in an increasingly international financial world.European Union Commissioner Michel Barnier, in a visit to the United States, applied pressure on U.S. regulators, stating that “European patience has its limits, and we are not far from reaching that limit.”

Finally, an article in Accounting Today dated March 1, 2012 was headlined “FASB and IASB Part Ways on Leasing Standards”. The FASB and the IASB have been on a very ambitious convergence project to bring US GAAP and IFRS closer together, which would ultimately make the transition to one, high quality international standard easier. In this case, the difference isn’t on the basics of the new leasing standard, which is to record an asset for the right of use for all forms of leases, but related to the methodology of amortizing the asset. It’s unclear whether this is positive or negative (no one can compromise on even the side issues). On the positive side, the two boards are not arguing about the overriding principle, but what many would consider a more peripheral issue. On the negative side, it seems that each side is committed to getting what they deem to be perfection, and endangering the universal standards project in the process. At some point, the cost of pursuing perfection outweighs the benefits of a good solution.

Conversion has a number of issues outside of just the best accounting and disclosure. Many contracts refer to US GAAP. What happens to them if we convert? Canada solved this problem by making Canadian GAAP IFRS. With the progress of the conversion process, the likelihood of the need for wholesale changes in contracts would be low. Then, there is the sovereignty issue. What if our regulators decide that a decision of the IASB would result in inferior information to investors on U.S. exchanges (the sovereignty issue) and they want to make an exception. That position would be viewed as hypocritical by others. The United States has led the way in allowing the use of IFRS in certain circumstances, but the United States has insisted that the IFRS used must be 100% IFRS, not a national flavor of IFRS.

We do know that the conversion process is moving and can hope that it will be substantially complete in 2012. The odds are good that the SEC will have a definitive decision within the year or shortly thereafter.

One thing seems certain, despite the uncertain signals. Either we will figure out a way to get to a conversion process, or the conversion process will progress far enough (capital markets will insist upon it) that the difference between the two systems will be small enough that few will care. Then, practical considerations may take over with private companies leading the way. The AICPA has already authorized the use of IFRS by private companies. The cost of conversion for a single location manufacturing business doesn’t appear to be great, and IFRS has developed a workable SME framework that reduces some of the more onerous requirements of GAAP needed for larger, more complex entities. This could attract many middle market companies, led by subsidiaries of IFRS reporting parents.