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The international standards are of dubious quality, the SEC is vague on how it will judge them, and the benefits of adoption are contradictory, the accountants charge.
David McCann, CFO.com | US
March 6, 2009
A prominent accountants group filed a comment letter with the Securities and Exchange Commission Thursday displaying deep skepticism about the workability of the current roadmap for requiring U.S. public companies to use international financial reporting standards.
The New York State Society of Certified Public Accountants registered a broad range of concerns, addressing the quality of the international standards; conversion costs; an alleged contradiction between the two main benefits of adopting IFRS put forth by the SEC; eligibility criteria for early adopters; and a forthcoming version of the standards for use by private companies.
The roadmap calls for the SEC to vote in 2011 whether to move forward with mandatory adoption, which under the existing plan would be phased in from 2012 to 2014. It also allows a limited number of large U.S. companies to adopt the international standards as early as this year.
The quality issue is foremost to the New York accountants. "The SEC Roadmap does not present, in sufficient detail, the methodology and criteria expected to be applied...in assessing the adequacy of IFRS," they wrote in their comment letter.
Apples and Oranges?
In their letter, the accountants seemed to question whether the SEC is doing enough to make sure financial reports that use IFRS will be comparable with one another.
Any assessment of the international standards, the NYSSCPA wrote, should consider whether they are consistent with the Financial Accounting Standards Board's Concepts Statements. They singled out Statement No. 1, which says that financial reports should provide information investors and creditors can use to make informed decisions, and Statement No. 2, which says comparability and consistency are important characteristics of financial statements.
The accountants also questioned whether the decision-making process of the International Accounting Standards Board, which promulgates IFRS, "is conducive to setting future high-quality standards." They criticized the IASB for its move last fall to let companies retroactively reclassify assets so they could "cherry pick" ones with significant losses and remove them from net-income calculations. In doing so, the international board gave in to pressure from the European Commission, the accountants suggested, saying they are concerned about "the influence of various national regulators, users, and others who promote the interests of their specific constituencies, as opposed to the needs of the worldwide community."
Further, the NYSSCPA said the supposed main benefits of adopting IFRS — comparability with non-U.S. reporting entities and allowing management greater judgment in preparing financial information — may both be desirable but appear inherently contradictory.
"The comparability of financial statements prepared in conformity with IFRS may be overstated," the comment letter said. "IFRS does not seem to be consistently applied from country to country, as the number of allowable options is conducive for the regulatory agencies in each country to interpret IFRS pursuant to their respective needs and business environments."
Comparability is further reduced, the letter added, by the tendency of preparers and auditors, "because of their habits of mind," to apply IFRS in a manner that is as similar to their current or former national accounting standards as possible. "When using principles-based standards, reasonable people arrive at materially different results after applying their judgments to a given set of facts and circumstances," the accountants wrote.
When and Who?
The letter also questioned the prudence of the conversion to IFRS when the depth and duration of the financial crisis are hard to predict. "It would be reasonable to conclude that the monetary and human capital costs of the transition could be burdensome to entities with limited resources and prohibitive for some smaller entities, even over a period of many years," it said.
An alternative, the NYSSCPA suggested, would be for FASB and IASB to vigorously pursue efforts to converge the American and international standards, which it said would produce the best-quality global standards and help minimize conversion costs for U.S. companies when IFRS adoption does finally become mandatory.
At the same time, though, the society said it fully supports allowing early adoption of IFRS, and in fact the eligibility criteria should be expanded. The roadmap suggests that the proposal to limit early use of IFRS to the 20 largest companies in so-called IFRS industries is grounded in an assumption that larger companies will be more likely to have sufficient expertise and resources to carry out the adoption.
"We disagree," the accounting society members wrote. "In fact, IFRS adoption experience in Europe has shown that smaller entities may need less time to complete the IFRS transition, while large companies with numerous subsidiaries in different countries may take as long as five years."
U.S. companies that are among the 20 largest worldwide in "IFRS industries" — such as oil and gas and some retail sectors in which IFRS is the most-often-used financial-reporting system — are eligible to adopt the international standards as early as this year. The SEC has estimated there are at least 110 such companies.
But, according to the accountants, the SEC potentially should let all filers in an IFRS industry be early adopters. If any restrictions are imposed, their basis should be the significance of the company's foreign operations rather than on market capitalization, they added.
Finally, the comment letter noted that while the SEC's authority is limited to public companies, many private and not-for-profit entities likely will convert as well. The problem is the version of the international standards designed for them, which IASB expects to roll out later this year.
"Full IFRS and the proposed IFRS for Private Entities represent a Big GAAP/Little GAAP system," the comment letter complained. "The accounting profession in the United States has consistently rejected Big GAAP/Little GAAP over the years. Any decision in 2011 to adopt IFRS must adequately address this concern."