Michel Prada, chairman of the IFRS Foundation Board of Trustees, which oversees the International Accounting Standards Board, took countries like the U.S. and Japan to task for taking what he called an “à la carte” approach to accounting standards by not fully embracing International Financial Reporting Standards.
In a speech Tuesday at a meeting of the Financial Accounting Standards Foundation in Tokyo, Prada pushed back against efforts by countries to continue using their own national accounting standards at the expense of IFRS. He reviewed the history of the IASB’s predecessor organization, the International Accounting Standards Committee, or IASC, which had allowed countries to use international standards as merely a “reference” for their own domestic accounting standards, similar to an à la carte menu in a restaurant. Different jurisdictions could pick and choose the aspects of the international standards they liked or develop their own alternatives when they disagreed with the international approach.
“The reality is that, given the opportunity, every IFRS jurisdiction would like to choose from the à la carte menu; to tweak the IFRS standards to better reflect local preferences or accounting traditions within their own jurisdiction—a form of nostalgia accounting,” said Prada. “However, the basic premise of IFRS is what rational choice theorists call a dilemma of collective action.’ If we all work together, taking into consideration our local knowledge and expertise, to develop a single set of standards of the highest quality, and if we all commit ourselves to abide by the outcome of the standard-setting process that takes into consideration global input gained along the way, then we are all better off. Yet, if some jurisdictions—particularly the larger ones—go back to the à la carte model, then we should not be surprised that others will follow. Before we know it, we are back with the old IASC model and everyone loses.”
The IASB has recently begun transitioning away from its efforts to converge IFRS with U.S. GAAP, moving toward a more multilateral approach through its Accounting Standards Advisory Forum, in which the U.S. Financial Accounting Standards Board will be one of a number of national and regional standard-setters contributing their input on IFRS development to the IASB.
“Some have argued that the concept of a single set of global accounting standards can be approached in an informal way by the dominant economies working together to eliminate differences in their respective standards,” said Prada. “This is an appealing concept for many. After all, who wouldn’t want the benefits of global standards while maintaining national GAAP? Unfortunately, this is a false premise. You only need to look at the IASB and the FASB’s decade-long convergence program to see the practical difficulties of expecting two or more independent boards to independently come up with the same answer. If the IASB and the FASB could not come up with the same standards for the netting of derivative contracts, and has struggled to find a common loan loss impairment model, despite years of sitting around the same board table, then what chance is there for multiple boards to independently reach the same outcome?”
FASB and the IASB are still working on some of their long-delayed convergence projects and plan to release a converged standard on revenue recognition in the first quarter of 2014. Final standards on two aspects of the financial instruments project—classification and measurement, and impairment—are expected to be completed next year, as well as the leasing standards project in late 2014, according to a speech last month by FASB chairman Russell Golden (see FASB Chairman Golden Plots Path Forward for U.S. GAAP). FASB and the IASB also hope to complete their work on a converged standard for insurance contracts at some point after that.
But Golden has indicated that FASB may go its own way on some accounting standards, putting the U.S. capital markets and U.S. investors ahead of the convergence efforts. “GAAP is here to stay—just as long as we at the FASB work to serve the needs of our stakeholders and our capital markets by preserving the core of GAAP while enabling it to evolve to meet the needs of the future generations of investors, creditors and companies,” he said last month.
As for IFRS, Golden said in October, “The FASB should, as a starting point, carefully evaluate and consider IFRS when implementing improvements to GAAP, seeking to promote global alignment where it is in the best interests of investors and other capital market participants. Any improvements that the FASB makes to GAAP also may influence the shape and future direction of international standards.”
While the Securities and Exchange Commission has not yet taken a vote on the issue of whether or not U.S.-based companies can use IFRS, Prada acknowledged in his speech Tuesday that the SEC has made some accommodations for IFRS. “In the United States, the SEC decided in 2007 to permit non-U.S. companies to report using IFRS,” he said. “Today, more than 450 foreign private issuers are reporting using IFRS as issued by the IASB, representing trillions of dollars in market capitalization. This shows that IFRS is clearly a major player in US economics today. The SEC has been a long-term supporter of our work to develop a single set of high-quality global accounting standards, but it is fair to say that progress in the U.S. has been slower than many of us would wish. The SEC’s chief accountant Paul Beswick has spoken about a softer transition’ or a change over time.’ I think that is what we should expect in the U.S. It may not happen overnight, but I do believe that we will get there eventually. American investors hold trillions of dollars of securities issued by IFRS companies; and investors in IFRS countries hold trillions of dollars of securities issued by American companies. The need for comparable financial information is undeniable.”
Prada also pointed out to his Japanese audience that Japan has not yet made a full commitment to IFRS either. “Japan, of course, is also yet to mandate a full transition to IFRS, but the dynamics of IFRS here continue to be very strong,” he said. “Japan already permits the use of IFRS. Currently, 16 of Japan’s largest multinationals are using IFRS for domestic reporting. The Japanese Business Association, the Keidanren, has estimated that in the very near future that number will increase to 60 Japanese companies reporting using IFRS, representing around 20 percent of total market capitalization of the Japanese Stock Exchange.”
Trouble in Europe
Prada noted that the decision by the European Union to undertake a wholesale adoption of IFRS from 2005 gave IFRS credibility and critical mass, while important decisions in Asia and other regions have prompted the number of IFRS jurisdictions continue to increase. In the past five years, over 25 countries have required IFRS for all or most listed companies, including Argentina, Brazil, Canada, Chile, Israel, Korea, Mexico, Russia, Taiwan and Ukraine, he pointed out. At least 81 jurisdictions have made a public commitment to supporting a single set of high-quality global accounting standards, according to IFRS Foundation research, and 85 percent of those jurisdictions have already mandated IFRS for all or lost publicly listed companies.
However, even in the European Union, IFRS has come under pressure from increasingly skeptical lawmakers, with the European Parliament recently introducing a draft law requiring the IASB to include the concept of “prudence” among its basic tenets, thereby encouraging accountants to err on the side of caution when assessing the losses at financial institutions. IASB chairman Hans Hoogervorst called the move “highly worrisome,” during a meeting of the board’s advisory council last month, according to Reuters, saying, “This is something we cannot accept. If Europe is going to do this, other parts of the world might be encouraged to do so. It’s a threat to our independence.”
Prada insisted it is important that countries abide by the repeated commitments by the Group of 20 government finance ministers during their annual meetings in support of a single set of high-quality accounting standards, and he wants the Accounting Standards Advisory Forum to serve as the vehicle for bringing various countries together around IFRS. “There are some voices in favor of a sort of decentralized process by which national regulators would work together with a view to either converge towards international standards, or not, according to so-called national specificities and interests,” he said. “They would then choose whether or not to adapt their national standards accordingly. This would be a most regrettable step backwards. I strongly believe that we must all remain focused on the ultimate goal of a single set of high-quality global accounting standards, and I believe ASAF is the place where a truly international dialogue must help us to reach this objective.”