This article was first published in the September 2012 UK edition of Accounting and Business magazine.
The only surprise about the unwillingness of Securities and Exchange Commission (SEC) staff to recommend US adoption of International Financial Reporting Standards (IFRS) is that anyone is surprised. Annoyed, yes – especially at the London headquarters of the IFRS Foundation and the International Accounting Standards Board (IASB). But when the deadline passed at the end of last year, the pattern of US foot-dragging was clearly established.
The best excuses are that the US already has a decent set of standards and that the SEC’s priority has been to write rules implementing the Dodd-Frank Act. It is also understandable that nothing that smacks of giving up national powers will be contemplated in the run-up to a presidential election. But if patriotic pride in US generally accepted accounting principles (GAAP) remains a significant factor, the main concern for anyone (including the G20) who believes in global standards is that the US will never fully opt in. As with previous SEC documents, this 137-page mixture of a few genuine concerns and lots of nit-picking is a comprehensive source of reasons to say ‘no’.
So, 10 years after the IASB and its US counterpart, the Financial Accounting Standards Board (FASB), agreed to converge standards, that process is at an end. As I wrote a year ago, the least that is needed is for US companies to be given the option of using IFRS, as foreign ones listed there already do. In the absence of even that step, the dilution of US influence over IFRS has rightly accelerated.
The least controversial aspect of this is that other national standard-setters are doing more work with and for the IASB. Much more sensitive is whether IFRS-US convergence turns into divergence. It has already happened with the offsetting of assets and liabilities, which will leave bank balance sheets under IFRS up to 40% larger than under US GAAP.
The latest disagreement is over impairment, or the way provisioning for loans can move from an ‘incurred’ to an ‘expected’ loss model. While FASB portrays this as a delay for further consultation, Hans Hoogervorst, IASB chairman, has apparently expressed exasperation that after three years, there is still no answer. Even on leasing, where the IASB compromised to enable an agreement, further cavilling by the FASB could lead the IASB to revert to plan A. This would remove the recently proposed property-lease option for straight-line amortisation.
What if the US never plumps for incorporation of IFRS into its GAAP? Well, after 10 years and the input of many Americans, the standards are not far apart. Projects supposedly nearing conclusion – revenue recognition, leasing, insurance and financial instruments – would narrow the gap to a crack. SEC criticisms with more legs include the need for the IFRS interpretations committee, IFRIC, to be more proactive, which is at last happening, and for the organisation to secure its funding. The SEC reckons that fewer than 30 countries that use IFRS contribute. This is disputed, but even on IASB estimates there are a few dozen free riders. That must be addressed.
The most stubborn difference is a cultural one between the US’s preference for detailed and prescriptive rules, drilling down into different sectors, and the IASB’s more principles-based approach (although it certainly cannot be accused of eschewing detail). This is captured in the SEC’s vision of an endorsement process that would retain the FASB’s ability ‘to add to or modify the IASB standard’.
To avoid encouraging centrifugal forces, in the European Union for instance, the US can no longer both retain national power to set standards and be a leading player in the international movement.
Jane Fuller is former financial editor of the Financial Times and co-director of the Centre for the Study of Financial Innovation