International Accounting Standards Board chairman Hans Hoogervorst said the U.S. Financial Accounting Standards Board is not likely to face obstacles in joining the new multinational Accounting Standards Advisory Forum that is being set up to provide input to the IASB on setting future accounting standards, even though the Securities and Exchange Commission has not formally committed to supporting International Financial Reporting Standards.
During a conference Thursday at the offices of the New York Society of Security Analysts, Hoogervorst appeared alongside FASB chair Leslie Seidman and an SEC official, Jenifer Minke-Girard, senior associate chief accountant in the SEC’s Office of the Chief Accountant, in a discussion moderated by former FASB chairman Robert Herz.
[IMGCAP(1)]FASB’s parent organization, the Financial Accounting Foundation, recently wrote a comment letter to the IASB’s parent organization saying it supported the new Accounting Standards Advisory Forum, but objected to a proposed requirement that the participants need to make a commitment to IFRS (see FASB Parent Supports New Accounting Standards Forum). The FAF pointed out that it has no control over the SEC giving its approval to IFRS and should not be barred from participating in the new forum. The multilateral ASAF is seen as the eventual successor to the bilateral relationship that FASB and the IASB have enjoyed during the decade-long process of converging IFRS with U.S. GAAP.
“The proposal would require a commitment to support a single set of standards written by the IASB, in full and without modification,” said Seidman. “On the surface, that condition would seem to exclude some major jurisdictions that haven’t yet decided to adopt IFRS. In our case, as we all know, it is the SEC that has the ultimate authority to decide what accounting standards are followed by public companies in the U.S. It’s my understanding from talking with Hans and others at the IASB that the proposed commitment was not intended to exclude the United States from participation in the ASAF. Nonetheless, the FAF, the FASB’s oversight body, suggested that the commitment be modified to encourage broad participation by the world’s largest capital markets, regardless of their current status regarding IFRS. We understand that the IFRS Foundation will consider potential modifications to the wording of this commitment as well as some other aspects of the proposal.”
Hoogervorst indicated that he thought the proposal for the ASAF would be modified to include the U.S. in the new multilateral arrangement. “The period of an almost exclusive relationship with the FASB will soon be over,” he said. “Now, what will be next? All our major participants in our community want a place at the table, and that’s what they are going to get. We’ll have a body of about 12 standard-setters and regional bodies. They should become a technical sounding board for the IASB throughout the lifecycle of the standard-setting process. We want to deepen cooperation and encourage the sharing of resources and knowledge and ultimately to deliver a higher-quality single set of global standards. We hope also by involving national standard-setters at a very early stage in our standard-setting, in an advisory function, to increase the buy-in for our standards and to decrease the risk of non-endorsements in the future. Leslie said that a couple of countries including the FASB have commented on the required commitments. I think that can be fixed. Our current MoU is governed by joint commitments to the single set of global standards. If we can use those words, I think, which are a bit more neutral than the words that were proposed in the original draft of the paper, I think that we should be able to resolve our problem.
[IMGCAP(2)]“We indeed do count on the FAF and the FASB to be involved in what will be a very important initiative because we are keen to continue our decade-long period of cooperation—cooperation with ups and downs, but with more ups than downs, which has been very fruitful in the past,” he added. “It will of course be in a different context. It will be in a more multilateral context.”
Seidman said that FASB would still work towards convergence with IFRS. “We remain committed to the goals set many years ago,” she said. “We still believe that improving U.S. GAAP and promoting its convergence with IFRS ultimately will result in differences so insignificant that for all intents and purposes, we have a single set of standards, sort of like American English and the Queen’s English,” she said. “This won’t happen without an ongoing, sincere commitment to working together, with active engagement and sharing of technical perspectives and practical views during the development of standards, coordination of implementation efforts and post-implementation reviews, and sharing information about emerging financial reporting issues.”
Minke-Girard noted that the SEC has a statutory obligation to define accounting standards for public companies and has recognized FASB’s standards as generally accepted for purposes of the federal securities laws. “Therefore the commission and its staff have a responsibility to oversee FASB,” she added. She noted that the SEC staff also monitors the IASB and considers convergence with IFRS. In 2011, there were approximately 200 foreign issuers filing financial statements with the SEC using IFRS, she noted. In 2012 that number had climbed to about 400. “The expectation is that by the end of 2013, when companies file their 2012 annual reports, we will have about 500,” she added. “A lot of that increase is due to the first-time adoption of IFRS in Canada and South Korea as well as early adopters in other countries such as Argentina and Mexico.”
Summarizing the various points of view of the panelists, former FASB chairman Herz noted that the FASB and FAF position is that global comparability is very important, and probably the most practical way for the U.S. to achieve that would be to continue over time through various mechanisms to narrow the differences between U.S. GAAP and IFRS. “Eventually you’ll get to a point where the differences are de minimis,” he said. “You can almost have a clean-up call and essentially U.S. GAAP would be IFRS. On the other hand, the position of the IFRS Foundation, from their strategy document of a year or so ago, was that in getting to a single set of standards, the most effective way is really wholesale adoption, and while convergence in the interim might be OK, it’s probably not the most effective way to get there.” He noted that they were on almost opposite sides of the same coin in getting to global comparability.
Seidman pointed out that FASB serves at the pleasure of the SEC. “We have our authority because the SEC has looked to us to set the standards for public companies in the United States,” she said. “My comments must be taken in the context that the SEC has not made a decision that we should adopt IFRS. So the question is what do we do in the meantime? What I want to do is emphatically state that we do believe that having globally comparable standards is extremely important. I have tried to lay out the manner in which I think we should do that in the absence of a decision by the SEC to move further and definitively to IFRS.”
Hoogervorst agreed with Seidman. “That’s very well put,” he said. “As long as there is no decision, the best you can do is indeed to try to move as close together as possible. If you look around the world, there are a couple of countries that have, prior to adopting IFRS, gone through a couple of years of convergence, making the most important differences in national standards go away. For example, the Mexicans have operated that way. That is one way of doing it, but there the regulator had given the national standard-setter a very clear message: In the end, it’s going to be IFRS. And obviously we would not have made such progress around the world if every country had adopted a continuous convergence goal where you sort of get there in the end. We did reach a lot of progress in the last decade, but there are still quite a few differences between IFRS and U.S. GAAP, and of course U.S. GAAP is very much intertwined with national regulations. That was the case in many other countries that have adopted IFRS. That was the case in South Korea and Brazil. You have to make some adaptations.
“In the end, you do not escape making a final decision,” said Hoogervorst. “I like to say that IFRS has reached an unstoppable momentum, and I still think that’s the case. It’s obvious that we’re the only game in town in being a global language. But I also think all the countries that have adopted IFRS are not going back to national standards simply because the SEC has not taken a position. Some have predicted that would happen, but I don’t think that’s going to happen.”
Hoogervorst rejected the notion of having two accounting systems operating around the world and competing with each other. “I don’t think it works that way,” he said. “When you have two standard-setters, what usually happens is they get played off against each other. They try to find the weak spots in one set of standards with the constituency for the other.” He pointed to the experience in the wake of the financial crisis with the financial instruments standards. “That’s what happens when you have two different standards,” he said. “I think it’s not an ideal situation. Long-term I’m still hoping something will happen here, although it is sometimes difficult to have that perspective.”
Minke-Girard noted that until there is a decision by the commission, everybody has to continue doing what they’ve been doing. “From an SEC staff perspective, speaking as one staff person, obviously all of our day jobs have to continue,” she said. “Companies have to continue raising capital and investors have to continue making their investment decisions. At the SEC, we have to continue to answer questions. Standard-setters have to continue to try to improve standards. It’s difficult to operate in a period of uncertainty without having a decision, but that’s where we are. From my perspective, we can’t forget that our mission is to make sure investors have the information that they need. It may be better to have one set of standards so that they don’t have to learn two sets of standards. That information gets in the way, but we have to just keep doing our jobs until we have more clarity as to what the direction will be.”
[IMGCAP(3)]On the sidelines of the conference, Dr. Nigel Sleigh-Johnson, head of the financial reporting faculty at the Institute of Chartered Accountants in England and Wales, said he supported having the U.S. participating in the multilateral Accounting Standards Advisory Forum even if the SEC has not formally committed to supporting IFRS.
“We certainly are trying to emphasize the need for patience when it comes to the U.S. decision,” he said. “Other jurisdictions around the world are looking to IFRS, and should not take it as a signal that there are problems with IFRS. They should make their own decisions on whether to move forward. On the other hand, it’s certainly short-sighted to take any steps to reduce the role of the U.S. in the IFRS Foundation’s structure, so it’s very important that the SEC is there on the Monitoring Board. And where there are high-quality U.S. citizens with standard-setting experience, they should be sitting on the IASB itself, on the board, and amongst the IFRS Foundation trustees.”
FASB member Marc Siegel was asked in an interview about a comment from one of the speakers at the conference predicting that FASB and the IASB will not get to a converged standard on insurance contracts.
[IMGCAP(4)]“We’re working toward an exposure draft and the IASB is working toward an exposure document of some sort,” he said. “It’s unclear what will happen after that. What we do after issuing an exposure draft is we listen to all the feedback. We’re going to get feedback both on what their proposal is and what our proposal is and then we’ll address it. It’s premature to say, and I haven’t prejudged, but as of right now we are not converged on some major issues.”
When asked about the leasing standards, Siegel said FASB and the IASB would issue another exposure draft of the standards and redeliberate on them. “It’s certainly not imminent the standards will be effective anytime soon,” he admitted.
Siegel declined to speculate on who might succeed Seidman as FASB chair when her term expires at the end of June. “I’m not in the running and I don’t want to be in the running,” he said. He said he did not know whether her successor might come from inside the board or outside, or the timing of the announcement.