Reporting convergence: Frayed but not unravelling

THE US ANNOUNCEMENT that it will continue to drag its feet over adoption of IFRS is not a great surprise, but, in the context of the wider malaise afflicting the convergence of global reporting standards, it is worth noting.

Reporting standards, like much else, will see the US go its own way. But without the US on board, a global standard cannot truly be said to be global. And the US is not the only country, although it is the largest, that is stalling on the idea of full adoption of the rules.

Since the IASB launched its convergence project ten years ago, progress has been startling. Two-thirds of the G20 are on board, and more than 100 countries have adopted the global rules that replaced the hotchpotch of GAAPs that made universal accounting a nightmare.

Indeed, IASB chairman Hans Hoogervorst is right in saying that "the era of convergence is coming to an end". But that end still seems a long way off. Starting a job is not the same as finishing it, and all of the IASB's salesmanship and rhetoric is unlikely to chivvy the US into moving faster than it wants to, while India and Japan still need a lot of convincing as to whether adoption is necessary.

"Clearly, it is a case of three steps forwards, one step back," says BDO partner Merryck Lowe.

While it would be unfair to accuse the US of signalling the retreat over convergence, it is clear that it has dug its heels in and is not going to budge for the foreseeable future.

However, the US has some valid arguments in its favour for putting off making a decision about IFRS, regardless how farcical such dithering sounds.

The US Securities and Exchange Commission, which recently issued a non-committal paper on the subject of IFRS, has Dodd-Frank legislation clogging up its administrative arteries. Running to 848 pages, the need to whip the bloated law – spawned in the aftermath of the financial crisis – into shape is bound to take precedent over the comparatively dry arguments for convergence with IFRS.

Add to that the departure of the SEC's chief accountant – an advocate of the reform – and an upcoming US presidential election, and the IASB's rhetoric is bound to fall on deaf ears.

Adoption by degree

Japan, like the US, is waiting in the wings – yet seems unlikely to make any great strides towards mandating IFRS any time soon, despite allowing companies to apply the rules voluntarily.

A recent impact study looking at the pros and cons of adoption in Japan and India questioned whether introducing IFRS is in the national interest, and is indicative of the scepticism with which the project is viewed.

The study, jointly written by Tomo Suzuki and Jaypal Jain of Said Business School, asks whether reporting in a common standard will really provide greater capital access to financial markets. Simply put, do the capital benefits outweigh the pain of adoption?

The report also raises questions about how the fair value of assets and liabilities will be treated – an argument that sounds strikingly familiar to the standard's critics back at home – while pointing out that premature adoption could lead to "decreased transparency and comparability".

All eyes will be on the US when, if everything goes as expected, it finally makes a decision on how it will implement IFRS in 2013. The actions of the US will likely be followed to a greater or lesser extent by the likes of Japan. Once the US falls into line, others will too.

The success or failure of IFRS as a truly global standard will hinge on what carveouts will be made when the US makes its decision. In Europe, there is already the option to avoid the controversial IAS 39 rule, which deals with the accounting of financial instruments. There is likely to be some form of carveout when the laggards come on board – the key is how fundamental those carveouts are to the principle of international harmonisation.

The two standard-setters, the IASB and US counterpart FASB, are working through a number of projects towards harmonisation, namely: leasing, revenue recognition, financial instruments and insurance.

The difficulty of finding common ground was highlighted last month when the two bodies agreed on a two-model approach for accounting for lease expenses on the balance sheet – after much wrangling.

The issue of lease liabilities has been debated since 2006.

"What you don't want is divergence on issues that are fundamental. For instance, you don't want divergence on areas like revenue recognition," says Lowe.

"As long as there aren't so many carveouts as to make to make convergence pointless in practice, it's better to get to a stage where a mostly agreed IFRS can be adopted by all."

According to Lowe, the remaining areas of difference can be hammered out once the fundamental rules are in place. "You can see that in the refinements that have been made to the IFRS in recent years," he says.

One senior audit partner suggested that the IASB's convergence project is "starting to unravel". This seems to be an overly harsh diagnosis, but the project is clearly fraying under tension.