By Anuja Pande Joshi
One minute the global accounting community is all for IFRS convergence, the next minute everyone hates it, particularly in the increasingly recalcitrant US.
It looks like the debate on convergence of IFRS and US GAAP has coming full circle or off the rails. From agreement to convergence to condorsement—the harmonization of International Financial Reporting Standards and US GAAP is anything but harmonized. And now, companies doubt whether full convergence is possible at all in the US. Ernst & Young in a recent comment paper noted some form of endorsement process seems necessary, although the creation of a “US flavor of IFRS,” inevitable.
This has left many to wonder, wasn’t this about a “single” set of high quality accounting standards?
The E&Y comment letter published on July 28 doubts whether achieving that ultimate goal is realistic now. As stated in its letter, “although we support the approach described in the [SEC] Staff Paper, we believe it is unlikely that method would allow US issuers (following a transition period) to assert compliance with IFRS as issued by the IASB.” The E&Y comment letter was in response to the SEC’s “Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for US Issuer’s” report.
Convergence Timeline
The idea of convergence began in 2002 when the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) committed to developing a set of high-quality accounting standards.
Over the years the FASB reiterated its support and worked on eliminating the differences between US GAAP and IFRS. In a big step forward in 2007, the SEC removed the reconciliation requirement for non-US companies registered in the US, thereby allowing them to use IFRS as issued by the IASB in preparing financial statements.
In October 2010, the IASB and the FASB issued separate documents asking for input on the effective dates and transition methods for several new standards, mainly the ones that are being jointly developed by the two Boards. Later that year the FASB published a comprehensive hedge accounting exposure draft (ED) followed by an IASB-issued hedge accounting ED (under Phase III of IFRS 9) in December. The comment period closed on March 9, 2011.
But these changes in hedge accounting practices are proving to be quite a headache for the two accounting standards-setters.
Delay (rejection)
Re-deliberations are ongoing and the IASB aims to replace IAS 39 in the second-half of 2011, and IFRS 9, it is now hoped, will become effective beginning the first day of 2015. The IASB had originally set the mandatory effective date for IFRS 9 Financial Instruments as January 1, 2013. However, following its July 28 meeting in London, it became questionable whether that date was still a realistic deadline to finalize all aspects of IFRS 9 and allow sufficient time for implementation. The IASB staff recommended delaying the mandatory effective date to annual periods beginning on or after January 1, 2015.
The FASB has been strongly considering the IASB’s approach on financial instruments. According to an E&Y update on IFRS 9, the delayed effective date helps by way of giving the IASB sufficient time to put out for comment the FASB’s final standard on classification and measurement of financial instruments.
Phase III of IFRS 9 is focused on a new model of hedge accounting. The new rules will make it relatively easier for non-financial companies to make disclosures in line with their risk management practices. Tom Selling, an emeritus professor at Thunderbird School of Global Management and who writes the widely followed accounting blog, Accounting Onion, notes that the IFRS hedge accounting proposal, “allows for greater flexibility and is somewhat more sympathetic to treasury management.”
Some discord
Not everybody agrees. An early 2011 article published in International Treasurer noted that, “guiding hedgers to better risk management via accounting rules should not be the IASB’s mandate and it would be a step backwards that is unlikely to end well.”
Practitioners are divided on the impact of changes introduced by the IASB and there have been strong reactions on both sides. Naysayers point out that IFRS 9 could potentially allow companies, as the Wall Street Journal put it, to ignore losses on derivatives “simply by claiming they are part of their risk management strategies,” and then, if the value of the instruments rose, book gains on them by claiming their strategies had changed.”
In sum, critics of IFRS say that this could allow companies to “manage” their earnings and manipulate results. In comparison, while the FASB tries to simplify rules, its proposed changes are much narrower in scope.
Of course, the SEC begs to differ and insists, like the IASB (see sidebar below), that IFRS is good for US business. SEC Commissioner Kathleen Casey, in a June 2011 address to the Society of Corporate Secretaries and Governance Professionals, reiterated the US position on the issue of convergence. “I believe the choice is clear—the Commission must decide to incorporate IFRS for US issuers…the risks of not moving forward with IFRS for US issuers are simply too great.”
It’s Good for you
Recently Hans Hoogervorst, the new chairman of the IASB told a gathering in China that IFRS made economic sense for the US.
“US investors invest globally, and US companies seek international capital, and it is in the economic interest of the US to adopt IFRSs.” That’s because it “supports economic growth and establish a high-quality level playing field for globalized markets.”
To be sure, some US companies remain skeptical.
Although some have criticized the US for its foot-dragging, others wonder at convergence’s charms. In a recent post on his Accounting Onion blog, Mr. Selling wrote that if incorporating IFRS is supposed to be “some fantastic opportunity for achieving one set of accounting standards worldwide, then why was no one at the SEC’s roundtable on IFRS jumping for joy at the prospect?”
Mr. Selling was referring to the July 7 SEC roundtable held in Washington, D.C., to discuss investor understanding of IFRS, the impact on smaller public companies and the benefits and challenges of incorporating IFRS into US public company accounting.
According to accounts available following the roundtable, representatives from small and medium enterprises (SMEs) did not see any benefits to switching to IFRS. Bloggers—skeptics and supporters of convergence alike—described the roundtable as another exercise in redundancy. Others have pointed out that the SEC’s recent idea of “condorsement” smacks of recalcitrance. Condorsement, a combination of “convergence” and “endorsement,” is aimed bridging the gap between rule sets. However it is seen by some as a thinly veiled rejection of the whole concept of convergence.
Gaylen Hansen, the National Association of State Boards of Accountancy representative questioned SEC’s basic premise for convergence and noted that “the SEC owes it to the national interest to establish that IFRS itself is at least better than US GAAP, if not far superior, to justify such a radical change with so many unknown variables.”