Ian Mackintosh, vice-chairman of the International Accounting Standards Board, described some of the failures of the convergence process with the Financial Accounting Standards Board in a speech Wednesday, insisting that wholesale adoption of International Financial Reporting Standards is preferable to convergence.
In a speech at a joint conference of the IFRS Foundation and the South African Institute of Chartered Accountants in Johannesburg, Mackintosh discussed how global accounting standards are an inevitable consequence of the process of continued economic globalization. He argued that IFRS is in the best position to provide those standards, with more than 100 countries, or about four-fifths of the nations in the world, now mandating the use of IFRS. Momentum towards IFRS adoption is continuing in most of the remaining countries, Mackintosh noted, citing recent developments in India, Japan and Singapore.
Turning his attention to the convergence process with U.S. GAAP, Mackintosh first pointed to some of the successes in the process.
“The objective of the decade-long convergence program with the U.S. was to work together to improve U.S. GAAP and IFRS, and in doing so to bring the standards closer together, thereby making an adoption decision easier and more acceptable,” he said. “That program has had some success, and also some failures. In many important areas, the IASB and the U.S. have managed to align disparate requirements, such as in the accounting for business combinations, fair value measurement and most recently, in the all-important revenue recognition project. These achievements should not be overlooked, because they have improved the quality and comparability of financial information around the world.”
However, Mackintosh also described some of the failures, including in the financial instruments project, where the IASB recently released its own separate standards (see IASB Releases Its Own Financial Instruments Standard).
“At the same time, we have also seen failures in convergence in other important areas, such as in the financial instruments project,” said Mackintosh. “In various aspects of this project, including the netting of derivatives, loan loss provisioning and in the classification and measurement of financial instruments, we have seen the boards sit around the table and reach a converged outcome, only to see that agreement melt away.”
Although FASB and the IASB recently managed to issue a mostly converged revenue recognition standard in May, the two boards appear to be parting ways on the leasing standards as well (see IASB Reverses Stance on Lease Accounting). Mackintosh echoed recent comments by IASB chairman Hans Hoogervorst, who reportedly told attendees at an accounting conference in Singapore that full convergence was no longer achievable (see Accounting Convergence Unachievable). FASB chairman Russell Golden has said that his board’s priority is to improve U.S. GAAP for the U.S. capital markets and other capital markets that use U.S. GAAP.
“It’s not altogether surprising that this happens when you have two boards with different imperatives—one prioritizing the feedback from their national constituents and the other striving to understand and carefully balance feedback from around the world, including the U.S.,” said Mackintosh. “Where that feedback is consistent, then convergence follows. Where it is not, then convergence generally fails, as in the financial instruments project.”
Mackintosh compared the effort to the failure of the IASB’s predecessor organization, the International Accounting Standards Committee, to achieve a set of global accounting standards, which began in 1973 and gave way to the IASB in 2001.
“This was the structural fault with the old IASC approach to international standard-setting, and it is the same structural fault that exists with convergence today,” said Mackintosh. “Independent boards with different imperatives considering finely balanced questions of judgment have a nasty habit of reaching different, and often incompatible, conclusions. Moreover, much like a football team that always plays the same formation, our critics have learned how to use convergence to play the boards off against each other, and by doing so to delay or derail much-need improvements to financial reporting. The strategy of divide and conquer’ pre-dates the Roman Empire, and has become an effective tool for defeating efforts to achieve convergence. Pick off one or other board to deviate from an agreed position, and then argue that a lack of convergence undermines the benefits of the project.”
Mackintosh argued that converged national standards were not the same as a single set of global standards. “Moreover, there are many dangers in pretending that converged national standards can serve as a substitute for global standards,” he said. “The devil is always in the detail. Small differences in accounting requirements can have a substantial effect on reported performance. We should not expect investors and other users of financial statements to have to understand differences buried in thousands of pages of accounting literature in order to compare the financial performance of, say, Ford, Hyundai, SAIC, Toyota and Volkswagen. These are the reasons why full convergence can probably never be achieved, and why adoption of IFRS is the only viable approach to achieving global accounting standards. There really is no shortcut to meeting the challenges of economic globalization, other than by providing a single set of high quality, global accounting standards. That is what IFRS does.”
Mackintosh contended that the IASB was in the best position to set accounting standards across the globe. “This quality and global applicability does not come about by chance,” he said. “The IASB has refined its processes over more than a decade to ensure IFRS is both of high quality and capable of being applied on a globally consistent basis. The nations of the world need to have confidence in the IASB’s processes, judgment and outreach to ensure the necessary quality is maintained. Much of the success of IFRS has come about as a result of the commitment of the global standard-setting community to get behind the IASB and to dedicate resources around the world to the achievement of high quality, global standards.”
National and regional standard-setters are now providing input to the IASB through the Accounting Standards Advisory Forum as an alternative to the convergence process with FASB.
“The ASAF provides a platform for national and regional representatives to discuss technical views on important topics with the IASB in an open and transparent manner,” said Mackintosh. “The ASAF meets in public, with all papers published and available on the IFRS Web site. Any ASAF member can present his or her proposals for discussion, with that set of proposals then subject to peer review by other ASAF members. Having attended every ASAF meeting since it was formed, I can testify that these are incredibly useful discussions and really do help to inform the IASB as well as others about the different views around the world, and those discussions do have an impact on our decisions.”
He noted that when the ASAF was established about two years ago, the standard-setters agreed to conduct a review of all aspects of ASAF and its operations two years after the establishment of the group. “As that review approaches, we will be reaching out globally to seek views on how this important group can be improved, for the benefit of all constituents,” he said. “As the G4+1 concluded in its final communiqué, it is important that the global standard-setting community continues to focus its limited resources on advancing our work to achieve the long-term vision of a single set of global accounting standards. The upcoming review will provide a mechanism to ensure that this continues to be the case.”