Although the process is complex, there will be adoption of IFRS in the US. The only question is when.
By Ramona Dzinkowski
After attending a conference in New York in September entitled Global Financial Reporting Convergence I thought we'd find out what the 'convergence' of global accounting standards actually means in America.
Unfortunately, it didn't exactly happen that way. It appears that not only am I still confused, but now a significant number of CFOs, reporters and pundits might be as well.
First, the term 'convergence' could be misleading to the non-expert. Are accounting standards around the globe really 'converging'?
The International Accounting Standards Board (IASB), comprised of leading international thinkers on accounting theory and practice, has developed a single set of quality accounting standards called the IFRS, and countries are converting en masse to IFRS as their local generally accepted accounting principles (GAAP).
The intention of the IASB isn't to encourage hundreds of different local GAAPs to slowly morph into the IFRS, as the term 'global convergence' would imply. You either use IFRS as developed by the IASB, or you do not. So perhaps it's time to give up the term 'convergence', for a clearer way of saying that, although still evolving, the IFRS exist, and are indeed world GAAP.
Secondly, there is an underlying assumption in the US that 'convergence' means that the Financial Accounting Standards Board (FASB) is working towards moving the IFRS in the direction of US GAAP. The FASB and IASB are working together to bring the best possible insight to the IFRS through several 'convergence projects'.
However, this doesn't necessarily mean that the IFRS are eventually going to look more and more like US GAAP. FASB chairman Bob Herz is firmly behind principles-based standards, and for all intents and purposes the FASB and IASB are behaving as one board, moving towards the goal of, as Herz calls it, 'a one-GAAP world'.
Semantics aside, how is it that Australia, Canada, Japan, China and the whole of Europe have either converted or are converting to IFRS now, while the US is still focusing on the outcome of a 'convergence' process?
Some observers as well as the US regulatory community have expressed concerns that if the US adopts the IFRS as they currently sit, the convergence projects of the FASB and IASB could come to a halt, leaving the US with an IASB-only solution to some pressing issues: business combinations, conceptual framework, consolidations, earnings per share, employee benefits, fair value, income taxes, financial statement presentation, insurance contracts, joint ventures, leases, liabilities and equity, and revenue recognition.
Such a scenario could only take place if the FASB somehow immediately loses interest in developing one set of global accounting standards. Or the IASB will say, 'Now that you've adopted IFRS America, I think we'll take it from here.' The likelihood of either of those things happening is zero to none.
In defence of the US regulatory community and others who continue to emphasise a process of convergence, as opposed to immediate adoption of the IFRS as they currently exist, perhaps this is to provide an added sense of security, as they see it.
It suggests that if the IFRS are designed with US GAAP (which by the way, are still assumed by many to be a more rigorous set of standards) in mind, the interests of US investors will be better protected.
Furthermore, when it comes to adopting a set of accounting standards that were not made in America, it might be a difficult pill to swallow. As Mark Olson, chairman of the Public Company Accounting Oversight Board (PCAOB) notes with respect to US business practices and competitive strategies in general, 'We in the US are not internationalists.'
Alternatively, it could simply reflect a desire on the part of US regulators to make no sudden movements in an environment weary of regulations such as SOX 404 and AS2/AS5, particularly when they have an XBRL adoption rule in the wings for 2008. Regulating another round of internal cost increases for US preparers at this time, not to mention another likely increase in auditor fees, may not be the best regulatory strategy.
It also poses some interesting questions. What will the role of the FASB be in the future? Can we expect the two boards to just merge? How will the IASB be funded? What is the role of the SEC in terms of oversight and funding, if any, versus the International Organisation of Securities Commissions (IOSCO)?
Taking a wait-and-see approach may simply reflect the need to further understand the economic and political implications of adopting IFRS before pressing on. The US paid the costs of climbing the learning curve on SOX 404. Other nations that adopted, or are adopting, some form of internal control certification are happily benefiting from the US experience and the training in the audit community.
Perhaps it's America's turn to wait for best practices, at least until there's enough evidence to suggest that the audit community has a handle on IFRS.
Adopting the IFRS has much wider implications than simply applying a different set of accounting standards to financial reporting.
'In order to live in a world of principles-based standards, we have to get our own act together here,' Herz explains. 'That involves thinking about our system holistically, and making some changes: institutional changes, cultural changes, legal and regulatory changes.'
Whatever the reason behind the continued emphasis on a process of 'convergence' let's be clear: the train has left the station on the IFRS. Most experts and observers alike understand that the US will eventually be 'converting' to the IFRS, it's only a matter of when.
Getting on with it
Despite the reasons offered to proceed cautiously on IFRS in the US, there are also valid reasons to adopt IFRS sooner rather than later. After all, the more we delay the ability of US firms to use the IFRS, 'the more US companies are placed at a disadvantage, cost-wise,' says Tom Jones, vice-chair of the IASB.
The argument goes that international investors will gravitate towards firms whose books are comparable internationally, lowering the cost of capital.
Secondly, in order to raise capital internationally, US firms may find themselves in the position of having to report under the IFRS anyway, which would require them to keep two sets of books, compared to the one set kept by IFRS-reporting firms.
What are the implications of setting a date for adoption, such as 2011, as Canada has done?
First, it provides a hard target, without which it's unlikely that US pubic companies (particularly SMEs) are going to commit resources.
Secondly, while four years sounds like plenty of time, as the Canadians found out, in order to prepare for 2011, you have to start the conversion process now, and it's a lot more complex than it first appears.
At the end of the Global Financial Reporting Conference I leaned over to a fellow delegate on my right and asked if he could tell me what 'global financial reporting convergence' really means in the US. He said, 'The evolution of IFRS and US GAAP so that they are virtually identical.'
Thankfully, this told me that I might not be the only one who was still confused and perplexed by the 'convergence/conversion' dialogue in the US. Let's be clear. There will be the adoption of IFRS in the US, the only question is when. And the IFRS will look a whole lot different from US GAAP. The IFRS are principles-based, not rules-based, and most of the world has already recognised that the IFRS as developed by the IASB are high-quality accounting standards.
As Richard Ketchum, CEO of the New York Stock Exchange said in his opening remarks at the conference, 'Let's just get on with it.'
Ramona Dzinkowski is an economist and business journalist living in Toronto. She can be reached at rndresearch@interhop.net
