The Road to Globally Accepted Accounting Standards…where does it go from here?
Over the last year, there has been a significant amount of activity towards implementing a single set of high quality, globally accepted accounting standards. For example, in April 2008, the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) renewed their commitment to converging US GAAP and International Financial Reporting Standards (IFRS). As a result, the Boards issued a timetable of milestones to be reached through 2011 for 11 accounting areas where convergence was deemed critical.
Later in the year, the Securities and Exchange Commission (SEC) took the convergence initiative a step further. In November 2008, the SEC issued a proposed roadmap for adoption of IFRS by U.S. filers beginning in 2014. Since November, the SEC has received over 240 letters of comment on the proposed roadmap from various stakeholders, ranging from investors and multi-national issuers to public accounting firms. The following is a sampling of some recurring comments contained in the letters.
Reaction to SEC roadmap
Support for adoption comes with concern
The strongest support of the SEC’s roadmap came from the top U.S. based accounting firms and international filers. A common theme in their responses was that a single set of high quality global accounting standards are necessary to increase transparency and comparability in financial reporting. These supporters did however express some concerns with the current roadmap, including the lack of a firm decision date.
In the roadmap, the SEC stated that a final decision on whether to mandate IFRS would not be made until 2011. Based on this vagueness, many filers are not making the effort to transition to IFRS.
Let’s take the current adoption timeline proposed in the roadmap as an example. The roadmap calls for large accelerated filers to adopt IFRS for the year ending December 31, 2014. Since it is necessary for these filers to present current year results plus two years of historical, comparative data, large filers would really need to adopt in 2012 in order to comply with the 2014 deadline. Therefore, the majority of companies are not going to commit the necessary funds or resources to adopt IFRS unless mandated by the SEC. If that mandate is not made until 2011, it is unrealistic to expect that the conversion can be made in a year. In order to meet the proposed timeline, the SEC will need to commit now, not in 2011.
Cost vs. Benefit; Directly related to Convergence vs. Adoption
Many commentators were concerned that the benefits of adopting IFRS do not outweigh the costs associated with adoption. There is a strong belief that the continued convergence of U.S. Standards with IFRS is the most cost-effective and efficient way to reach the goal of a set of quality global standards. In addition, supporters of convergence also argue it is a better solution since it would enable U.S. private companies to be included in the transition process. If adoption of IFRS is mandated for U.S. public companies and not for private US companies, there will be a lack of consistent financial reporting among U.S. companies. Convergence would avoid these inconsistencies and allow for a smooth transition to global standards in the future.
Consistency under IFRS
Commentators expressed that consistency among filers is not guaranteed under IFRS. Since IFRS is principles-based, an issuer will have more discretion when developing accounting policies based on IFRS principles. Some fear that this could lead to issuers having more latitude in financial reporting under IFRS then under the current rules-based U.S. GAAP. Given the economic crisis that the U.S. and the world have experienced, commentators feel that rules are important, now more than ever.
The Future of Global Standards
So far in 2009, there has been little news from both the FASB and SEC on the status of the convergence and adoption efforts, leaving interested parties asking the same question; what is the future of a single set of globally accepted accounting standards? Mary Schapiro, the new SEC Chairman, has indicated IFRS adoption is not her top priority, leaving filers to question whether IFRS will be adopted in the United States.
On June 17, 2009, President Obama announced a comprehensive plan for financial regulatory reform that calls for accounting standard setters to make substantial progress by the end of 2009 toward development of a single set of high quality, global accounting standards.
While many believe that global standards are on the horizon, one thing is certain: the transition to global standards, whether mandated though adoption of IFRS or through convergence, will be an ongoing process in the U.S.