We're drafting this column in January, when many were surely puzzling over Securities and Exchange Commission Chief Accountant Jim Kroeker's December announcement that the commission would not, after all, decide by year end whether the International Accounting Standards Board and International Financial Reporting Standards would replace the Financial Accounting Standards Board and U.S. GAAP.

We explain how to interpret his statement and then describe its context and the fallout of events in Europe. Our main point: The quixotic quest to create uniform international standards is dead and done.

Those who take Kroeker's words literally are likely to think this demurral is just another round of Washington's favorite game of "Kick the Can" that tediously postpones decisions. To us, however, his message is profoundly different.



The key to his real meaning is understanding the carefully chosen words in his statement that, "I'm encouraged for the prospect of incorporation of IFRS."

Just what does "incorporation" mean? In essence, it is a positive-sounding replacement for the inelegant term "carve-out," in which a country uses IFRS only after removing offending portions. Instead of focusing on what's taken out, "incorporation" focuses on leaving in the non-offending parts. In other words, incorporation will integrate suitable IFRS provisions into GAAP.

"Incorporation" is far different from "adoption," which means accepting IFRS the way it comes without removing even a comma. To adopt, the SEC would have to embrace the IASB as the authorized standard-setter, which then would bind it to accept all future IFRS, as well as those already in place. In fact, about the only countries that gave or will give carte blanche to the IASB are economically insignificant and have neither the resources nor the will to create their own credible standard-setting process.

"Incorporation" also differs from the "condorsement" trial balloon that would have FASB rubber stamp whatever the IASB produced. The Financial Accounting Foundation's November comment letter to the SEC on "condorsement" clearly said, "No way!" They argued, among other things, that this would severely compromise the SEC's influence on the standard-setting process.

Finally, "incorporation" is totally distinct from "convergence," the term for the effort to issue common standards emblazoned with the two boards' logos. To make "convergence" happen, their members struggled to reach one common consensus after another. That proved unworkable because of their disparate goals, constituencies, backgrounds, motives and perceptions. Also, the June 2011 deadline turned out to be incredibly naive.



Well, if Kroeker and the commissioners decided to "incorporate," rather than "carve out," "adopt," "condorse" or "converge," why didn't they just say so at the SEC/Public Company Accounting Oversight Board conference? Shouldn't people just accept the chief's report that they merely postponed the promised December 2011 decision for "a few months," and that the quest is still viable?

The SEC's problem was that the decision to incorporate will disappoint key players who went whole hog into the idea that FASB should be shoved aside. On the other hand, a decision to adopt or condorse would upset FASB and others who don't like giving up U.S. sovereignty. It would also fly in the face of federal statutes.

They simply could not waltz into the convention hall and blurt out the answer. They have to invest some time figuring out how to explain what they've decided in order to minimize negative reactions.

Further, notice the vagueness of the phrase "a few months." How many is a few and how will anyone know when that period has passed? Also, 2012 is an election year and any action after March or so could be perceived as lame duck, just like the now-meaningless "road map" the SEC produced in 2008.



Why did Kroeker and the commissioners decide to go this way? We think the findings of their well-conceived work plan, the FAF's November letter, and other criticism caused them to reach these conclusions:

Adopting IASB is legally impossible;

Compelling FASB to "condorse" fools no one;

Allowing U.S. companies to choose between GAAP and IFRS is absolutely unworkable; and,

Expecting both boards to agree on key issues is hopelessly optimistic.

In addition, we suspect that they realized that changing would create large costs with little or no benefits.

More savvy observers knew about these obstacles and fully anticipated this impasse. On the other hand, ardent chauvinists ignored the impediments and contrary views held by those they dismissed as "detractors."



This decision was surely encouraged by the IASB's increasing tilt toward Continental European interests. It was obvious that Chairman David Tweedie would not be replaced by a fellow citizen of the United Kingdom, and inconceivable that a U.S. accountant could be appointed unless the SEC adopted. It was no surprise that someone from the continent was selected.

However, most don't realize that Hans Hoogervorst's background is, shall we say, unconventional. His résumé reveals he was a career politician in the Netherlands and holds Master's degrees in history and international relations, not accounting or business. Importantly, he confessed in his July 2011 speech in Beijing that his "interest in accounting was truly ignited" only in 2008, a mere three years before being appointed.

Why, then, was he deemed qualified? We believe people on the continent saw political skills as more important than a technical background or financial reporting experience. Instead, they thought diplomacy would be better for gaining global dominance. The trend continued when the IFRS Foundation recently gave its chair to Michel Prada, a French lawyer and career regulator with extensive political experience.

The press release announcing Prada's appointment exudes bravado by boasting that it occurred "when IFRS are on the verge of becoming global standards."

Not so fast, mes amis.



As we reported in October, Floyd Norris of The New York Times revealed that Europe's unified front on accounting standards was bogus because banks on the Continent applied IFRS to their Greek bond investments with so much diversity that Hoogervorst initiated a stealthy back-channel effort to rein them in. (So much for the superiority of principles-based standards, eh?)

We also note the IASB's December decision to postpone the effective date of IFRS 9 on financial instruments to 2015. Despite the foundation's assertion that global standards are almost here, the IASB knows that applying this one would reveal presently concealed weaknesses in the banks' balance sheets. Its acquiescence certainly undermines its façade of resolve to reform.

Another disruption is the risk that the Eurozone might come apart. Severe economic stress has revived old intra-continental rivalries that could be suppressed only when the euro was working.

We ask, then, who could think it makes sense to subjugate U.S. standard-setting to Europe with its perennial political and economic problems? The present disarray shows that attaining uniform global standards is an ephemeral fantasy.



Michael Cohn describes decaying support for convergence in his December 7 column on AccountingToday.com ("FASB and IASB's Irreconcilable Differences"). Specifically, he reported comments by Hoogervorst and FASB Chair Leslie Seidman that suggest their boards' relationship is not as stable and copasetic as it once was.

December also brought a joint release explaining the two standard-setting boards' agreement to disagree on whether financial instruments should be offset on balance sheets. Admittedly, that's a tough question, but their now-open divergence signals that convergence was an over-hyped solution.



Going forward, incorporation means FASB will treat both old and new IFRS as potentially helpful input to its deliberations. Instead of bending over backward to find common ground with the IASB, FASB will resolve its issues as it sees fit without pressure to go along to get along.

Bottom line, the situation is pretty much where it was in 2002 before the Norwalk Agreement was signed, except that everybody, especially the SEC, should be wiser for the effort.

The commission could express that wisdom by reinstating the IFRS-to-GAAP reconciliation requirement that it suspended in 2007 in order "to encourage the development of IFRS as a uniform global standard, not a divergent set of standards applied differently in every nation." In other words, the commission wanted to slow down "carve-outs." Maintaining the suspension is inconsistent with the incorporation approach, while re-instating the reconciliation would help U.S. investors get more uniform information.



On the whole, events have vindicated our once-iconoclastic view that the IASB will not usurp FASB and IFRS will not supersede GAAP. That possibility is gone, and it never was feasible except in the overactive imaginations of those who were unaware of the pitfalls or unwilling to confront them in their haste to promote their own narrow interests.

The whole misbegotten quest collapsed because its adherents failed to realize that the SEC cannot endorse the IASB under existing U.S. law. They also did not anticipate that the Europeanized accounting standard-setting establishment would hear the siren song of worldwide adoption but never muster the political will to make hard choices that would lead to useful financial statements. In addition, the European community's political and economic base is too weak to support the proposition that they know what's best for American securities markets.

Since March 2008, we have repeatedly stuck our necks out explaining that supplanting FASB with the IASB never was a foregone conclusion or even a good idea. Although we don't have formal authority, history shows that the pen, and now the keyboard, can be powerful instruments for change. Perhaps we helped identify flaws that shook this house of cards enough to bring it down, at least for now and maybe for good.



Paul B. W. Miller is a professor at the University of Colorado at Colorado Springs and Paul R. Bahnson is a professor at Boise State University. The authors' views are not necessarily those of their institutions. Reach them at paulandpaul@qfr.biz.

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