Special Report: How the Consensus Shifted Away From IFRS Adoption

By:
Chris Gaetano
Published Date:
Jun 16, 2015

Wind Vane copy2When the Securities and Exchange Commission (SEC) released its proposed road map for International Financial Reporting Standards (IFRS) in 2008, then Chair Christopher Cox described the move toward a “true lingua franca for accounting,” that would be used in capital markets everywhere, as a near inevitability. Though the larger world remained a multilingual place, he said during an open meeting in Washington, thanks to IFRS, financial statement users around the globe would not have to wait long to speak the same tongue. 

At the time, approximately 113 countries permitted or required the international standards, and Cox’s message was clear: The United States risked being left behind if it did not adapt. The agency’s plan outlined several milestones, including improvements in the ability to use interactive data in IFRS reporting, education and training that, if met, would facilitate the country’s evolution. 

Since Cox’s speech, however, the SEC’s discourse on IFRS and its relationship with U.S. generally accepted accounting principles (GAAP) has shifted dramatically. Indeed, in a June 2014 speech, Cox likened the entire project to the Tower of Babel. While at one time, he said, full-scale adoption may have been possible, today, the prospect “is bereft of life.”

The SEC’s Chief Accountant James Schnurr sounded a similar alarm last month during a talk at Baruch College. Though many constituents still find the idea of a single set of global accounting standards attractive, he said, on a practical level “there is virtually no support to have the SEC mandate IFRS for all registrants” and “there is little support for the SEC to provide an option allowing domestic companies to prepare their financial statements under IFRS.”  

Many in the accounting world had long since reached the same conclusion. Donna J. Fisher, the senior vice president of tax, accounting and financial management for the American Bankers Association, recalls the urgency with which people spoke of IFRS several years ago, as well as the accounting firms that were telling banks they needed to get ready for the new standards, and soon. “Now, we’re not hearing any of that. It’s gone completely silent,” she said. 

Renee Mikalopas-Cassidy, a past chair of the NYSSCPA’s International Accounting and Auditing Committee, said that while there had been broad interest in IFRS-related matters in the past, with the  anticipation of an eventual full-scale conversion, today, it’s become the domain of a smaller audience—people like herself who work with international companies that require the use of IFRS in their filings. 

Which begs the question: How did full-scale IFRS adoption get derailed? What turned a once hot topic so cold? And what does it mean for CPAs? 

A tough sell to make

According to Jo Ann Golden, an NYSSCPA past president who sits on the Society’s Financial Accounting Standards Committee, IFRS was a “tougher sell than everyone thought,” largely because of fundamental philosophical disagreements over what accounting standards should do and be. The main bone of contention: whether standards should be primarily rules-based, as has been with GAAP, or primarily principles-based, like IFRS. While “we like to think of ourselves as free spirits,” Golden said, the United States is, in general, a rules-based culture that likes having clear, delineating distinctions between what is and is not acceptable. 

Much of that comes from a desire to ensure that all bases are covered, legally, in the event of a problem. Americans are much more likely to litigate than their foreign counterparts, said Robert W. Stewart, senior vice president of public affairs at the Financial Accounting Foundation (FAF). 

“The U.S. is a society that is somewhat litigious, so preparers want very detailed guidance,” he said. He added that the FAF had found that investors also desire that level of detail when weighing their options. 

Beyond this, there are many who simply prefer GAAP and think that a switch would impair accounting quality. GAAP is considered by some to be a more mature set of standards that has had more time to cover more ground and undergo more trial and error than the comparatively younger IFRS.  

That perception of higher quality has been a big factor in people’s hesitance to embrace full-scale adoption, according to Fisher. Other countries that adopted IFRS, she said, may not have had such developed and robust standards in place when they did so; in those cases, taking on IFRS represented an improvement.  

“We have a very high-quality set of accounting standards,” she noted. “It’s hard to think about just giving that up for the sake of a single set of accounting standards.” 

According to Paul A. Zarowin, an accounting professor at New York University’s Stern School of Business, there is a school of thought, which he himself subscribes to, that “our financial reporting and disclosure system is as good as it gets,” and that switching to IFRS is a situation where “we have everything to lose and nothing to gain.” 

“It may be a little arrogant, but I do think that is the way people here think about it,” he added. 

Down for the count?

Despite the waning interest in IFRS over the past few years, there is a possibility that as the economy globalizes even further, IFRS matures, and other capital markets grow, support can pick up again, said Paquita Davis-Friday, an accounting professor at Baruch’s Zicklin School of Business. 

Indeed, the stalled progress of the standards’ adoption doesn’t mean that, in principle, Americans don’t support the idea of a single set of global accounting standards, Fisher said. The problem is “how do you get there from here?” 

That point was also echoed by Gary Kabureck, an International Accounting Standards Board (IASB) member, who noted that the while “the long-term end point” of a single set of global standards is clear, “achieving any form of international standardization takes time—and IFRS is still a relatively young initiative.” 

He pointed out that the IASB isn’t hanging all of its hopes for IFRS on full adoption. Foreign companies listed in the United States are allowed to use IFRS. Relevant stakeholders, including regulators, investors and auditors, are already familiar with IFRS statements, and U.S. investors use IFRS when making investments abroad. 

“The decision on [the] use of IFRS by domestic companies is only one dimension of IFRS usage in the U.S.,” he added. 

What’s more, while adoption, for now, seems to be off the table, there’s still another major avenue for the increased internationalization of U.S. accounting—the convergence project, in which the Financial Accounting Standards Board (FASB) and the IASB have cooperated, with the intention of creating a common set of high-quality, mutually intelligible standards on significant accounting topics, such as revenue recognition, leases and fair value accounting. 

While this process itself has had its own fair share of difficulties, with many of its major projects facing significant delays since it was first formally launched in 2002, it remains a much more politically palatable option for more international integration into U.S. accounting practices.

In a speech earlier this month at the 34th Annual SEC and Financial Reporting Institute Conference, Schnurr himself said that he believed convergence was still a worthy use of time and energy, and that both the FASB and the IASB should continue their work to reduce or eliminate differences between their two sets of standards. 

“In my opinion, in the near term, FASB and IASB should continue to focus on converging the standards,” he stated. “The boards should renew their commitment to cooperate and develop standards that eliminate differences between IFRS and U.S. GAAP whenever it meets the needs of its constituents and improves the quality of financial reporting.” 

cgaetano@nysscpa.org

 

We’ll continue the conversation on IFRS with Part 2 of this story, which takes a closer look at the FASB and IASB’s convergence project, in an upcoming issue of The Trusted Professional.

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