Financial Accounting Standards Board chairman Leslie Seidman and International Accounting Standards Board chairman Hans Hoogervorst appeared side by side at an AICPA conference Tuesday in a joint appearance to discuss what went awry in U.S. support for International Financial Reporting Standards.

The Securities and Exchange Commission has yet to make a decision on whether to allow U.S.-based companies to file their financial reports in accordance with IFRS, even though the FASB and the IASB are nearing the end of their 10-year convergence efforts to harmonize U.S. GAAP with IFRS.

[IMGCAP(1)]“Over 100 countries now use IFRS, including three quarters of the G20,” said Hoogervorst at the AICPA Conference on Current SEC and PCAOB Developments in Washington, D.C. “Almost all of Europe, including non-EU countries such as Russia and Turkey, are now on board. Africa is increasingly committed, as are big parts of Asia and the Middle East. In the Americas, we have almost all countries applying IFRS, including Brazil, Argentina, Mexico and Canada. Of course, there is one country sandwiched between Mexico and Canada that has yet to commit.”

Seidman countered that U.S. preparers require detailed guidance on applying the standards, while the principles-based standards of IFRS are often open to interpretation.

“As the ‘boots on the ground in the United States,’ we are in a unique position to understand the needs of U.S. stakeholders, and sometimes those needs are not shared by others,” she said.

“The bottom line is that our stakeholders will demand clarity from somebody,” she added. “It’s in everyone’s best interests to have that interpretive process conducted in a transparent way, rather than individually through audit or enforcement. That doesn’t mean we want to take the judgment out of accounting. But we should try to take the judgment out of what the principle means, especially when we are introducing a new concept, such as business model or expected loss.”

Seidman noted that U.S. stakeholders frequently need support in interpreting standards, even after they have been issued. “When a question arises about the intent of a standard or the application of a standard, the FASB or the EITF [Emerging Issues Task Force] is expected to address it in a timely manner,” she said.

[IMGCAP(2)]Seidman observed that FASB ideally tries to identify any issues during the process of developing a standard, but transactions change, and field work does not involve the same level of scrutiny that is applied when a standard is actually implemented.

“I am not apologizing for our demanding culture, nor do I expect other countries to accept or aspire to these aspects of our culture,” she said. “Clearly, sometimes we have gone too far in providing guidance, and sometimes, not far enough. I am simply trying to explain, from my own experience, why we emphasize certain points and what might be the ongoing issues for the United States relating to the IFRS [standards] themselves."

Hoogervorst noted that when the IASB and FASB signed the Norwalk Agreement in 2002, establishing the convergence process, IFRS was considered by many to be a bilateral project between Europe and the U.S. “Today, the standard-setting environment looks different,” he said.  “Many emerging economies driving global growth are supporting IFRS. Understandably, they want a seat at the table of accounting standard-setting. We are seeing the emergence of regional accounting standard-setting forums in Asia and Latin America to complement that of Europe.”

He noted that as the convergence projects come to an end, the IASB is looking at new, multilateral ways to engage with such groups. Last month, the IASB published proposals for a new mechanism known as the Accounting Standards Forum to allow the global standard-setting community to be more deeply engaged in standard-setting processes. “We would like—and expect—the FASB to become a fully engaged partner in this new global forum,” he added. “We will continue to need the greatly appreciated expertise of our American colleagues. “

[IMGCAP(3)]Seidman asked what the implications would be for convergence in the future until the SEC comes out with a definitive statement. “As we all know, the decision on whether and how to incorporate IFRS into U.S. GAAP is a major public policy issue for the United States that rightly rests with the SEC,” she said. “It is very important to note that the SEC staff review has been broader than the IFRS [standards] themselves. The Commission’s staff also has been reviewing the way that the standards are interpreted, applied and enforced in various jurisdictions. The SEC staff has been examining broader issues, such as the governance, due process, and funding of the IFRS Foundation as well.”

Hoogervorst noted that the G20 has called time and again for global accounting standards. “The United States has had a proud role in this pursuit of a single set of global standards,” he acknowledged. “In 1973, the United States played a crucial role in creating the IASB’s predecessor. When the organization was restructured to become the IASB, the SEC made sure that the IASB looked very much like the FASB. The first chairman of the trustees was Paul Volcker.  A quarter of my board and a third of our trustees are North Americans."

He noted that the IASB and its parent organization, the IFRS Foundation, recently appointed some prominent Americans to their organization. Mary Tokar from KPMG, and formerly from the SEC, will join the IASB in January, while Heidi Miller, a JP Morgan executive, will become an IFRS Foundation trustee. “Apart from this direct participation, the United States has had enormous influence on our standard setting through the decade of convergence between the FASB and the IASB,” he noted. “As a result, our own analysis shows that the U.S. is very well prepared for a successful transition to IFRS.”

Hoogervorst noted that in his speech to the same AICPA conference last year, he recognized that it would not be an easy task for the SEC to make up its mind about adoption of IFRS. “I was not so naïve to expect wholesale adoption of IFRS for all companies from day one,” he said. “But there was a reasonable expectation around the world that the SEC would plot a course towards IFRS. Yet, as you know, the SEC’s intention to make a decision, originally planned for 2011, was postponed again in 2012. Self-imposed deadlines frequently slip, as we standard-setters know all too well. I also recognize that the enormous pressures of Dodd-Frank and the elections were not a perfect background for the SEC to make up its mind."

Hoogervorst observed that five years ago, a standstill in the United States would have had very serious consequences for the IASB. “The risk was that without the U.S. on board, Europe would go its own way and Asia would develop its own regional standards,” he said. “Today, such talk has gone. For the many countries I referred to, the cost of transition to IFRS is behind them. There is no appetite to undo this work and revert to national or regional standards. IFRS already has a global impact and that will not change. So there is no longer any risk of IFRS disintegrating as a result of a standstill in the United States.”

He noted that there remains much concern about continued U.S. leadership in the IASB’s work and processes if the U.S. is not going to come on board in some shape or form.

“I believe the United States should remain an important participant in our institutions and activities,” he said. “But obviously, U.S. influence will be commensurate with its commitment to our standards. To give just one example: it will make a huge difference whether the FASB will be in a position to endorse our standards, instead of being a national standard setter without a role towards IFRS. Indeed, the status quo harbours a big risk of slipping back. The uncertainty about where the SEC is going to land is not a helpful backdrop for our work on the remaining convergence projects. Already, on some issues it is getting increasingly hard to find common solutions. If we cannot achieve converged outcomes within a convergence programme, then how will we maintain convergence once the program has ended? The risk of increasing divergence will be enormous. What a waste that would be.”

Seidman countered that the United States needs clear and unambiguous standards for those who must apply the standards, enforce them, and use the resulting information. “The United States is a heavily regulated marketplace for public companies and their auditors,” she added. “We have quarterly reporting requirements and short timeframes in which to close the books. All of that has implications for what types of standards will work here. Our preparers need their standards to be sufficiently clear so that they know what to do, and our auditors need clarity to be able to express an opinion. I recognize that sometimes we have taken this to an extreme, and I am not advocating a detailed rulebook. But, I don’t believe our system can function over the long run with only broad principles.”

Hoogervorst expressed his fears that there would be divergence after all the hard work by the two boards in converging their standards. “After a decade of progress, after tireless and sometimes painful work by the boards to bring about convergence between IFRS and U.S. GAAP, after two years of analysis and report writing, many people around the world expect a clearer perspective of this country’s intentions with IFRS,” he said. “That is why we really need a tangible sign of continued U.S. commitment to a single set of global standards. Merely striving for greater comparability between standards will not do. We tried that during the 1990s and it was a failure.  In the absence of a credible, tangible step on the part of the United States, international concern could turn into international skepticism. The G20 calls for global accounting standards would start to ring increasingly hollow. We cannot allow that to happen.”

He noted that IFRS has become the de facto global accounting language for the greater part of the world over the past decade. “Investors around the globe rely on our standards to make the world safe for their investments,” he said. “I do not know of any global economic standard or organization without a leadership role of the United States. For this reason, I find it hard to imagine IFRS without a leadership role for the United States and the SEC. But leadership requires vision, mettle and tough decisions. All of these qualities should be in ample supply in the United States."

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