In February, the Securities and Exchange Commission issued a Commission Statement in which it made it clear that it believed that a single set of high-quality globally accepted accounting standards would benefit U.S investors, and in which it directed its staff to execute a workplan to help evaluate the impact IFRS might have on the securities market.
In the wake of the SEC's increased activity around IFRS, the volume of debate surrounding the potential adoption of IFRS in the U.S. has increased. The following discussion provides considerations regarding 10 of the more common sentiments about IFRS that have been made in the debate.
1. It's better to simply continue to "converge" standards. While convergence has been helpful in terms of narrowing differences between IFRS and U.S. GAAP, the resulting standards are not identical and raise questions about how far the convergence process will take us. Recent events have highlighted the arbitrage resulting from differences between IFRS and U.S. GAAP. Unless the standards are identical, which is not the goal of convergence, the door will remain open for continued arbitrage.
2. There really isn't one version of IFRS used globally. While processes for endorsement of new IFRS in some jurisdictions may be troubling, there has been increasing pressure on many jurisdictions to conform to full IFRS. In their public comments, members of the International Accounting Standards Board have been outspoken against some local jurisdictions using the "IFRS" name in characterizing their local standards, which are not completely compliant with "full" IFRS. In addition, the SEC has been clear regarding its desire to have a single set of standards - not variations. This was evident in the SEC rule eliminating the requirement to reconcile to U.S. GAAP for foreign private issuers that use IFRS, as published by the International Accounting Standards Board. Issuers using a variation of IFRS would not qualify for this exemption.
3. IFRS provides too much flexibility and not enough comparability. Many critics associate comparability with uniformity. However, many believe that the focus should be on "transparency" and not necessarily "uniformity." Moody's Investor Services, one of the largest credit-rating agencies, in a 2008 commentary, noted that IFRS has brought more comprehensive reporting globally, including better information on pensions, leases, and disclosures about judgments used (revenues and provisions). The Moody's commentary also noted that IFRS better reflects the economics of transactions, including financing transactions, minority interests, put options, depreciation, revenues, and consolidation policy.
4. IFRS is not comprehensive and needs improvement. The insurance and extractive industries are often cited as industries where U.S. GAAP guidance exists and IFRS is lacking. However, there actually are "temporary" standards relating to insurance contracts (IFRS 4) and extractive industries (IFRS 6). For the most part, U.S. issuers would be able to continue to use GAAP for these areas until the IASB completes the subsequent phase of these projects.
More generally, there are few areas where fundamental differences continue to exist (e.g., impairment and intangibles). These are areas where IFRS is often viewed as more reflective of the underlying economics. In addition, in many of the areas where IFRS is criticized as needing improvement, GAAP is also criticized (e.g., revenue recognition and financial statement presentation).
5. The detailed guidance in GAAP provides for greater rigor in application and better information for users. While IFRS in its current form has only been applied since 2005, many of the standards are based on GAAP, so some of the expected practice issues have been anticipated and dealt with in a manner that is consistent with GAAP. Critics also typically associate more detailed guidance with increased rigor in financial reporting. This association has not necessarily proven to be true, as overly detailed guidance sometimes results in artificial accounting outcomes that may not reflect the underlying economics of transactions and events.
6. There is no global enforcement mechanism to enforce IFRS. Today, the world's regulators are working much more closely together than was the case just a few years ago. For example, the SEC has a work plan with European Union regulators to address differences in interpretation and application of IFRS. Furthermore, in the U.S., the SEC will continue to enforce the applicable accounting and reporting standards used, whether U.S. GAAP or IFRS is in place.
7. Investor protection will be weakened by IFRS adoption. The SEC will have a strong voice in the oversight of the standard-setting organization, consistent with its investor protection mandate, and ultimately the SEC will continue as the legal standard-setter with the right to "veto" any standards for U.S. reporting purposes. In addition, there may be a possible role for the Financial Accounting Standards Board in a post-IFRS environment, possibly as an "endorser" and/or liaison to the IASB on issues.
8. The IASB is not a sufficiently independent standard-setter. The independence of the IASB has been questioned in light of certain issues relating to the global financial crisis. In many respects, the events that had led to these criticisms highlight the arbitrage that exists in terms of the standards-setting process and differences in standards. The movement to a single global set of accounting standards would eliminate accounting arbitrage between standards that should lessen the potential for political interference in the standard-setting process.
9. Too many costs to implement IFRS. It is important to be cautious in developing implementation cost estimates, given that actual costs will vary by company, and will be incurred in adopting new standards, regardless of whether they are U.S. GAAP or IFRS. Suggestions on how to reduce costs include implementing a robust training program, building adequate time into implementation programs, conducting improved initial assessments, having an effective project management process, and communicating effectively with subsidiaries.
10. Benefits of switching are minimal. In a Duke/Oxford survey, U.S. respondents indicated that they see more benefits to IFRS than EU respondents. U.S. respondents also believe that ongoing compliance with GAAP is more costly than IFRS. For example, cost reductions under IFRS are expected to result from companies centralizing accounting functions, being able to recruit resources from a global talent pool, and having to spend less time managing compliance with detailed accounting rules.
The last couple of years have been chaotic and turbulent for financial reporting, to say the least. History has revealed that sometimes there is a "disconnect" between the accounting outcome recognized in the financial statements, and the economic reality that underlies the transactions that are being accounted for. These issues remind us of the challenges still to be faced in improving the quality of financial reporting - the importance of transparent financial information and accounting outcomes that reflect economic reality. They also remind us of the importance of a global perspective on financial reporting.
Joel Osnoss is a partner with Deloitte & Touche and a leader of Deloitte's Global IFRS and Offerings Services Group
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