When the Financial Accounting Standards Advisory Council met in September to discuss the use of International Financial Reporting Standards, they found themselves answering questions with questions.FASAC, which advises the Financial Accounting Standards Board on a variety of issues, had been given the task of providing perspectives on where accounting and financial reporting might be going over the next two or three decades - with special consideration of the role of IFRS.
"This is going to be the hot topic over the next two or three years, because this is where we'll be going over the next two or three decades," said FASAC chair Dennis H. Chookaszian.
IFRS are of particular interest since the Securities and Exchange Commission asked for comments on two big ideas: whether to allow foreign companies to use financial reports prepared under IFRS to register on American stock exchanges, and, if so, whether U.S. companies should be allowed the same privilege. Foreign companies may currently do so, but only after reconciling their statements with U.S. standards.
While those are nice ideas, as council members started probing the implications, they spiraled deeper and deeper into accounting's biggest questions.
"During much of the meeting, we were asking some very fundamental things," said member Michael Young, a partner with Willkie Farr & Gallagher LLP, and an expert in securities law and accounting standards. "What is the purpose of accounting? What is the importance of comparability? What do we mean by principles-based accounting? Is there such a thing? Do other areas of the world do things better than we do?"
Each question seemed to spawn more, and the answers to each seemed to exceed the number of people in the room.
They did manage to generally agree on one thing - that a single set of accounting standards for the whole world would be a good thing. But that raised a crucial and inevitable question: How do we get there?
"Generally, most people were coming around to the viewpoint that a single set of international standards is probably going to happen, but there's a wide difference of opinion on how that's going to happen and what time frame it will require," Chookaszian said. "This is a very interesting time in the evolution of accounting."
A shift to IFRS would mean setting aside FASB's rules-based standards, reputed to stack up to a pile some four feet high, and replacing them with the International Accounting Standards Board's two inches of principles-based standards.
As the council debated the merits of letting companies or countries set their own rules based on a set of principles, one member told the story of the time he flew to Germany and was picked up at the airport by a friend in a BMW. They then took a quick ride on the Autobahn, the renowned highway unburdened by a speed limit. By "quick," he meant 130 miles per hour. As the German countryside blurred by, the American accountant began to think that maybe sometimes rules are a good thing.
As Young noted, however, "Trying to capture the totality of human conduct, or just accounting conduct, with rules gets to be too much. You don't want to get overly granular. You end up with an Internal Revenue code."
The council spent a lot of time envisioning a world crunching its numbers under a single set of IFRS. The participants wondered whether the world would need a global regulatory agency to enforce consistent practice. They grappled with the idea of a global interpretative organization to ensure consistent interpretation, perhaps with levels of authority for quick interpretations and more thoughtful ones. They cogitated the implications of nationalized versions of IFRS.
With the concept of global enforcement needing more attention, FASAC broke into smaller groups to explore how it might be done. When Young returned from his group, he unveiled a large sheet of paper on which he'd written their points of agreement. It was blank.
The council did generally agree that the efforts by FASB and the IASB to converge IFRS with American generally accepted accounting principles was worth pursuing. The process has been producing standards that are not only increasingly similar but also of higher quality. But members expressed concerns over the impact of allowing the use of unreconciled IFRS in the U.S. With less need of similar standards, the convergence process might stall out.
"If we lift the need for reconciliation, there's little incentive for further convergence," said FASB Chair Robert Herz. "People will say, 'Hey, we've got the keys to the kingdom here. We got what we wanted, so FASB ... you can stop working with IASB.' They'd be prepared to settle for a two-GAAP world."
