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.
I fear IASB is suffering from denial and the G-20 is caught up in the delusions of the uninformed.
Briefly, the alleged advantage of comparability through common standards is mythical. Comparability could be achieved only if standards required everyone to report the same relevant facts. Alas, today's standards, even the hotly debated proposed new ones, do not put relevant information in financial statements. The reason is the persistence of political resistance by managers against all efforts to require truthful representations.
Second, it is illusory to imagine that one set of standards would work in each and every economy and culture. That doesn't even work within Europe, why would it work for all countries with their different views on truth-telling as a value? And how would it work in controlled economies or those that mix socialism with free enterprise? The G-20 has been misled or willingly believed a false but appealing theory.
Third, it appears no one outside the U.S. and most inside this country will not acknowledge the hard fact that the only way the SEC could endorse the IASB as the standard setter would be for that board to submit to the Commission's oversight and accept all its funding from the Commission using fees collected from American public companies. That provision is right there in the open in Sarbanes-Oxley for all to see. None are so blind as those who chose to not see it.
Fourth, all standard setting is incredibly political, even within one country. Only the totally naive would think the IASB is immune against that sort of compromised-based environment.
In conclusion, global international standards are a pipe dream of the uninformed and the power-hungry. The SEC has actually known and realized all these things for the last several years but has not been able to say so clearly because the current administration, including Treasury Secretary Geithner and the President, are eager for more world alliances. It's time for all parties to come to grips with the fact that global standards are not attainable and probably not even worth pursuing because they won't achieve the impossible benefits claimed by their supporters.
Paul BW Miller
Professor of Accounting
University of Colorado at Colorado Springs
Posted by: Paul B. W. Miller, 02 Aug 2012 | 23:19
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