Is FASB Fading Away?

In its response to an SEC proposal that could quicken the demise of GAAP, FASB suggests it'll have to cede its standard-setting power.
Sarah JohnsonNovember 13, 2007

In the days leading up to a critical vote by the Securities and Exchange Commission, accounting experts are wondering whether the regulator is rushing to open the floodgates for more widespread use of International Financial Accounting Standards.

On Thursday, the SEC will decide whether to eliminate its requirement for international companies to reconcile their IFRS-prepared financial statements with GAAP. In the meantime, the regulator has been collecting feedback on its idea of giving U.S. companies the same choice. By giving global firms the option, the SEC’s thinking went, U.S.-domiciled businesses — particularly multinationals — would surely want the same treatment.

However, that concept has scared some observers into worrying that the SEC is moving too fast with its push for IFRS. They wonder if enough thought has been put into the future of GAAP, the ongoing GAAP/IFRS convergence project, and the Financial Accounting Standards Board’s role.

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In fact, FASB itself isn’t confident about its position in a world where IFRS dominates. “As the king of GAAP, it’s like contemplating your own mortality,” Robert Herz said of his role as FASB chairman during a roundtable discussion on international accounting standards at New York University’s Stern School of Business on Monday. “But you have to move on.”

In a letter written by the board and its trustees, FASB suggested it may lose its standing as the official standard-setter of the accounting rules that U.S. public companies use. Instead, the 34-year-old group could turn into either a standard-setter just for private companies and nonprofits, an IFRS educator, or a far-flung adviser to the International Accounting Standards Board.

Those scenarios for FASB’s future role were also brought up by other commentators. For example, KPMG said the board could become a liaison between IASB and U.S. companies. PricewaterhouseCoopers figures FASB could offer the SEC recommendations when IFRS standards are modified and could at least continue to be the standard-setter for private companies.

For the most part, the major accounting firms seem in favor of the SEC’s proposal. They consider it an inevitable move on the SEC’s part to eventually require companies to adopt IFRS. The Center for Audit Quality, which speaks on behalf of more than 800 firms, told the SEC that the current version of IFRS is already a “reputable” set of standards.

To be sure, with so many questions left to be answered, critics of the SEC’s so-called concept release for allowing the IFRS choice are concerned about timing. Would allowing a dual report system in the U.S. wreck the convergence efforts to create one set of strong global accounting standards? Or should that concern be pushed aside in favor of competitive concerns between U.S. multinational companies and their overseas counterparts?

For the near future, the SEC commissioners’ decision on Thursday could introduce a tiny preview into what a dual reporting system would look like in the United States, possibly as early as 2009. At the most, it could affect 180 foreign private issuers. On the other hand, giving U.S. companies the IFRS option — the idea explored in the SEC concept release — would obviously have much broader implications.

Most of the comment letters posted so far to the SEC’s website as of Tuesday (the deadline for filing comments on the concept release) support the goal of a single set of standards, which many — including Herz — believe would be a revised version of IFRS. However, the comments are split on whether the SEC is acting prematurely by allowing the non-converged IFRS to be used by its U.S. filers in the near future.

“We harbor serious reservations about allowing U.S. registrants to choose between IFRS and U.S. GAAP,” wrote Jack Ciesielski, a member of the Investors Technical Advisory Committee who also writes the Accounting Observer blog.

On the other hand, the SEC is offering a sound idea for capital-raising purposes, according to the Institute of Chartered Accountants of Scotland. “This is a welcome step that will be of immediate benefit to U.S. companies who wish to raise capital in more than one country, and in the longer term will be beneficial to the convergence process by assisting in the acceptance and understanding of IFRS in the USA,” wrote Amy Hutchinson, assistant director of accounting and auditing for the institute.

However, those who oppose the notion of a choice between GAAP and IFRS for U.S.-based issuers believe such an allowance would actually hinder convergence. They suggest such a move would imply that U.S. regulators don’t support the project, which will not be complete until at least 2012.

At the same time, FASB feels that convergence is progessing much too slowly for it be accomplished in a reasonable amount of time. Further, FASB wants a new approach outlined for it — a so-called blueprint that Herz has been campaigning for during public outings in the past few weeks. The board is asking for a plan that would outline how to move all U.S. public companies to an “improved version” of IFRS but does not provide details or time estimates on how to pull that off.

Without necessary improvements, IFRS isn’t strong enough to take over GAAP just yet, FASB suggests. “Immediate adoption would replace a weak U.S. standard with a weak IFRS standard now, and then require U.S. companies to incur additional costs to adopt a new improved standards at some point,” wrote Herz and Financial Accounting Foundation chairman Robert Denham.

Concerns about the quality of IFRS as it exists were shared by many of the commentators. They also questioned the viability of the IASB as a standard-setter. Unlike FASB, which is funded by SEC registration fees, the IASB gets its funding from donations, which IASB admits is not a long-lasting option. Its funding mechanism could also interfere with U.S. investors’ preference for an independent standard-setter.

For IASB’s part, the board’s trustees have committed themselves to creating some sort of oversight board that would review the group’s budget and funding mechanisms, as well as approve trustee appointments. Unlike FASB, IASB does not have the equivalent of an SEC to question its actions.