In an article titled "Global standards advocates need to understand the problems,” Professors Miller and Bahnson argue that, “International accounting standards are both undesirable and infeasible for many reasons.” As a former member of the International Accounting Standards Board, former technical staff person for both the IASB and the Financial Accounting Standards Board, former chief financial officer and former director at Deloitte, I’d like to present an alternative point of view.
For the past three years, the IFRS Foundation (under which the IASB operates) has been studying whether and how International Financial Reporting Standards are being used around the world, jurisdiction by jurisdiction. I manage that study on its behalf. (The results are posted here: http://go.ifrs.org/global-standards.) The foundation drafted profiles on the use of IFRS in individual jurisdictions and invited the respondents to the survey and others (including regulators and international audit firms) to review the drafts.
To date, we have posted profiles for 140 jurisdictions covering 97 per cent of the world’s gross domestic product. Each profile indicates: whether the jurisdiction has made a public commitment to global accounting standards; the extent of IFRS application (which companies? IFRS required or permitted? consolidated statements only?); the endorsement process; the wording of the auditor’s report; whether the jurisdiction has eliminated options or made modifications; the process for the translation of IFRS; and adoption of IFRS for Small and Medium-Sized Entities.
IS IFRS UNDESIRABLE?
The view of Professors Miller and Bahnson that IFRS is “both undesirable and infeasible” seems to be contradicted by the facts. The reality is that the relevant authority (government agency or private-sector body responsible for setting accounting standards) in nearly all of the 140 profiled jurisdictions has said publicly that IFRS is desirable. Around 94 percent of the 140 jurisdictions have made public statements favoring a single set of high-quality global accounting standards and supporting IFRS to be those global standards. Even in the few countries that have not publicly supported IFRS, IFRS is commonly used by publicly accountable entities in half of those jurisdictions. In the United States, where IFRS is not permitted for Securities and Exchange Commission registrants, the SEC permits IFRS for foreign registrants, and 500 U.S. SEC registrants use IFRS. By allowing those registrants to use IFRS, the SEC has determined that IFRS statements meet the needs of U.S. capital markets. The vast majority of the 140 jurisdictions clearly find IFRS desirable.
IS IFRS INFEASIBLE?
And as for feasibility, 116 of the 140 profiled jurisdictions require IFRS for all or most domestic publicly accountable entities (listed companies and financial institutions), and 14 of the remaining 24 require or permit IFRS for at least some publicly accountable entities. Looking at the feasibility of IFRS for unlisted (private) companies, over 90 percent of the 116 jurisdictions permit private companies to use full IFRS and 73 jurisdictions have adopted IFRS for SMEs. How can IFRS not be feasible when literally millions of companies, public and private, are today using IFRS?
WHERE IS THE ANALYSIS?
Professors Miller and Bahnson state: “Many people argued vehemently in favor of the objective of promoting global capital market efficiency through uniform, high-quality reporting standards. We agree that this goal is worth pursuing, but we’re not at all sure whether everyone who has endorsed it has sufficiently analyzed it.”
One can find many of the analyses that Professors Miller and Bahnson are seeking by a quick search on the Internet. For instance, the SEC has had numerous requests for public comment on the idea of global standards and possible adoption of those standards in the U.S. A lot of analysis went into those comment letters — both for and against — and an awful lot of the “against” was largely on cost grounds.
The SEC has given the public no fewer than seven opportunities to comment on the proposal between 2000 and 2008, and the U.S. Congress even held a public hearing on it.
And in Europe, there has been a similar level of thoughtful analysis — not just when the EU IAS Regulation was first adopted in 2002 (effective 2005), but subsequently to assess the benefits and problems of adoption. Most recently, on June 18, 2015, the European Commission published a report evaluating the EU IAS Regulation. The report notes that, “The adoption of IFRS in the European Union was designed to improve the efficiency of EU capital markets by increasing the transparency and comparability of financial statements.” The commission’s report noted that its evaluation “attracted a high level of interest from a variety of stakeholders and their input provided useful evidence for the commission.” The key findings showed that, “IFRS was successful in creating a common accounting language for capital markets. Companies were mostly positive about their experience of using IFRS and in most cases, benefits outweighed costs. Investors also largely supported IFRS for improving the transparency and comparability of financial statements. Most stakeholders considered that the process through which IFRS become part of EU law works well.”
Other jurisdictions have made similar analyses both before adopting IFRS and subsequently to assess the benefits and shortcomings of adoption. A comprehensive review of nearly 100 academic studies of the benefits of IFRS concluded that most of the studies “provide evidence that IFRS has improved efficiency of capital market operations and promoted cross-border investment.”
DOES IFRS ENSURE EFFICIENCY?
Professors Miller and Bahnson state: “IFRS cannot possibly overcome the many problems associated with developing efficient capital markets around the world.”
Proponents of IFRS do not claim that it is a panacea. They believe that IFRS is an important step in the right direction towards efficient capital markets.
The use of one set of high-quality standards by companies throughout the world improves the comparability and transparency of financial information and reduces financial statement preparation costs. When the standards are applied rigorously and consistently, capital market participants receive higher-quality information and can make better decisions. Thus, markets allocate funds more efficiently and firms can achieve a lower cost of capital. This view is supported by the findings of most of the 100 studies reviewed.
PUTTING FASB OUT OF BUSINESS?
Professors Miller and Bahnson state: “In particular, we believe that phrase [uniform, high-quality reporting standards] devolved from a high-minded vision statement into a frequently repeated political slogan to support minimizing FASB’s role in international financial reporting and setting it up to be replaced by the IASB as the U.S. SEC’s designated standard-setting body.”
If there is to be one set of global accounting standards, there has to be one standard-setter to make the final decisions. But that doesn’t dismiss FASB’s role. Many of the jurisdictions that have adopted IFRS — especially the larger ones — have standard-setters that are enormously influential in developing and implementing IFRS. A few examples of how FASB and other national standard-setters are directly involved in developing IFRS are their participation in the Accounting Standards Advisory Forum (a forum that formalizes and streamlines the IASB’s collective engagement with the global community of national standard-setters, including the FASB); participation on the IFRS Advisory Council (an advisory body including investors, financial analysts and other users of financial statements, as well as preparers, academics, auditors, regulators, professional accounting bodies and standard-setters); participation in transition resource groups; participation on the IASB’s consultative groups on individual projects; commenting on the IASB’s discussion papers and exposure drafts; and participation in the IASB’s outreach activities.
“Uniform, high-quality reporting standards” is not a political slogan, as Professors Miller and Bahnson suggest. It is a goal. It is a goal agreed to by the American Institute of CPAs back in 1973 when the United States was one of nine countries that organized the IASC (the predecessor of the IASB). It is a goal agreed to by the SEC. In Commission Statement in Support of Convergence and Global Accounting Standards, dated Feb. 24, 2010, the SEC stated: “In addition to re-affirming the commission’s strong commitment to a single set of global standards, the recognition that IFRS is best-positioned to be able to serve the role as that set of standards for the U.S. market, and the convergence process ongoing between the Financial Accounting Standards Board and the International Accounting Standards Board, this statement outlines certain of these factors that are of particular importance to the commission as it continues to evaluate IFRS through 2011.”
And it is a goal that has been repeatedly endorsed by successive G20 communiqués, and only last year by the U.S. Treasury.
The world’s capital markets are borderless these days. To use the U.S. as an example, American investors have trillions of dollars of holdings of foreign securities, most of which report under IFRS. Additionally, many U.S. companies are subsidiaries of IFRS parents and, thus, are required to prepare IFRS financial statements for global consolidation purposes. Similarly, many U.S. companies have foreign subsidiaries or investees reporting under IFRS. These have to be converted to U.S. GAAP for U.S. consolidation purposes.
UNIFORMITY AT ANY COST?
Professors Miller and Bahnson believe: “Uniformity is not all that people tend to think it is. Specifically, many, if not most, seem to believe that applying uniform financial reporting standards will inevitably enhance comparability between financial statements produced by all companies. While superficially appealing, this idea is too simplistic to be valid.”
I agree that comparability is only one of the qualities that make accounting information useful to investors, lenders and others. But I think the two examples cited by the professors (accounting for research and development costs and accounting for investment property) don’t make their case at all and, in fact, argue in favor of IFRS.
An overriding quality that makes accounting information useful is the relevance of that information to the kinds of decisions that confront the financial statement users. Buy, sell or hold? Lend, and at what price? Extend credit, and at what risk? Those financial statement users try to assess the future cash flows that a company’s assets and liabilities will provide to the company and, ultimately, to themselves.
Comparability of financial information is very important because financial statement users have multiple investment, lending and credit-extension opportunities. But the critical issue is comparability of information that is relevant to the decisions at hand. In the case of R&D, U.S. GAAP achieves comparability by charging all R&D to expense when incurred, including the successful R&D that will bring future cash flows to the company. IFRS capitalizes the successful part, also achieving comparability with the important benefit of more relevant information.
MODIFICATIONS AND CARVE-OUTS
Professors Miller and Bahnson say: “Another shortcoming in the claim that moving to the IASB from FASB would produce comparable financial reports is its adherents’ disregard for the fact that there are no means for compelling any country, much less all of them, to adopt a single set of standards. Despite the widely used (and known) practice under which countries’ regulators ‘carve out’ parts of IFRS they find to be offensive or otherwise unsuitable in their jurisdictions, adherents for abandoning GAAP and FASB acted as if IFRS is already universally accepted and applied everywhere but the United States.”
Without question, as a private-sector body the IASB has no power to compel any country to adopt a single set of standards. The reality, however, is that the great majority of the world’s countries have adopted IFRS, as previously noted — and not just for listed companies but for private companies as well.
With regard to whether modifications and carve-outs are “widely used” by adopting jurisdictions, the short answer is no. The 140 jurisdictions profiled to date have made very few modifications to IFRS, and the few that were made are generally regarded as temporary steps in the jurisdiction’s plans to adopt IFRS. And the facts simply do not support assertions that there are many national variations of IFRS around the world. The most notorious modification — the optional carve-out by the European Union of some paragraphs from IAS 39, Financial Instruments: Recognition and Measurement — is elected by fewer than two dozen out of the 8,000 listed companies in the EU. And the European Commission itself describes the carve-out as “temporary.” A few jurisdictions deferred dates of several standards, notably IFRS 10, Consolidated Financial Statements, IFRS 11, Joint Arrangements, and IFRS 12, Disclosure of Interests in Other Entities. Most of those deferrals were for one year and terminated on Jan. 1, 2014. A few jurisdictions modified or deferred several standards pending completion of IASB projects — notably those on use of the equity method in separate financial statements; loan loss provisions of financial institutions; and rate-regulated entities. The IASB has now completed those projects and jurisdictions have begun eliminating the related modifications and deferrals.
I applaud the SEC’s insistence that a foreign company using IFRS for its U.S. filings must use IFRS as issued by the IASB if it wants to avoid reconciling its figures to U.S. GAAP. By doing so, the SEC has strongly discouraged jurisdictional modifications and deferrals of IFRS. Indeed, if the SEC were to require or permit domestic U.S. companies to use IFRS as issued by the IASB, there would be massive pressure for jurisdictions to remove the few modifications that currently exist.
AN EMPTY SLOGAN?
Professors Miller and Bahnson state: “Another key part of the popular phrase used by many to justify moving to international standards asserts that having uniform, high-quality reporting standards will promote more efficient capital markets in other economies. This section shows how the fallacy in this claim further weakens the argument for global standards.”
Proponents of IFRS do not claim that IFRS ensures capital market efficiency. They would certainly agree with Professors Miller and Bahnson that things like the banking system, information infrastructure, population with adequately distributed wealth, the regulatory system, the judicial system, cultural norms such as fair dealing, and full and fair disclosure all contribute to capital market efficiency. Good standards aren’t sufficient for capital market efficiency, but they are a necessary condition. If, indeed, nearly 100 academic studies of the benefits of IFRS concluded that most “provide evidence that IFRS has improved efficiency of capital market operations and promoted cross-border investment,” capital market efficiency is much more than an empty slogan or unattainable goal.
There is a perfectly reasonable debate to be had about whether and how the U.S. should move forward with IFRS. Some in the U.S. argue that U.S. GAAP should be retained, while most of the rest of the world really doesn’t understand what all the fuss is about and believes that the U.S. should just get on and do it.
Professors Miller and Bahnson argue that there is no decision to make, because widespread adoption of IFRS is some sort of mirage. However, their argument is not supported by the facts. There is indeed widespread support for the objective of a single set of global accounting standards, as well as clear evidence that, for almost all of the world, IFRS already are those standards.
Paul Volcker, former chairman of the U.S. Federal Reserve, summed up the need for comparable, high-quality, global accounting standards eloquently and simply: “If we really believe in open international markets and the benefits of global finance, then it can’t make sense to have different accounting rules and practices for companies and investors operating across national borders. That is why we need global standards. Ultimately this will get done.”
Professors Miller and Bahnson titled their article, “Global standards advocates need to understand the problems.” I think we do understand the problems. And we believe that the solution is IFRS. AT
Paul Pacter is a former member of the IASB and currently manages the IFRS Foundation’s study of IFRS use around the world. From 1973 to 2010, he was a staff member of FASB, the IASC and the IASB. The views expressed here are his own.
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