Two Blows Against Accounting Convergence

What impact will recent rebuffs by U.S. rule-makers have on International Accounting Standards Board plans to create a single set of global account...
Andrew SawersJuly 25, 2012

The mission to create a single set of global financial-reporting standards received two blows in recent days as the International Accounting Standards Board engaged in tussles with the Securities and Exchange Commission and the Financial Accounting Standards Board.

On July 13, the SEC published a staff paper written with the aim of providing the commission with the information it needs to decide whether and how quickly to proceed with adoption of international financial reporting standards for U.S.-listed companies. It was widely viewed as being 137 pages of reasons why the SEC doesn’t need to make a decision right now.

The migration toward full adoption of international standards remains a contentious issue in the United States. But for the rest of the world, it offers the prospect of greater comparability of accounts, enabling the financial statements of Royal Dutch Shell and Bayer to be more readily compared with those of Exxon-Mobil and Pfizer, for example. Signs of a go-slow at the SEC raised concerns in some quarters that a nondecision now could ultimately prove to be a decision not to proceed down this route at all.

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Richard Raeburn, chairman of the European Association of Corporate Treasurers, which has a particular interest in the financial-instruments aspects of accounting, told CFO European Briefing: “The EACT fully supports the development of truly international standards and therefore regrets any indication that it’s going to take longer than the already lengthy timescale to get to a point where reporting globally is on the same terms.”

A spokesman for The Hundred Group, an association that represents the interests of finance directors and CFOs in the largest companies in the United Kingdom, was more sanguine. “We’ve got what we need at this stage,” he told CFO European Briefing. In 2007 the SEC allowed foreign registrants to publish their accounts using IFRS and dropped the requirement for them to provide a reconciliation statement to show how their accounts would be different using U.S. generally accepted accounting principles.

Last year The Hundred Group wrote to the SEC: “We have consistently supported the objective of achieving a single set of high quality, globally accepted accounting
standards. . . . We would prefer that US GAAP either fully converges with, or is replaced by, IFRS.”

This week The Hundred Group’s spokesman said, “As long as the SEC continues to accept IFRS as the basis for filing in the Form 20-Fs, then we’re broadly content with the outcome. I suspect it’s not really a focus for the SEC in an election year, either.” (Form 20-F, issued by the SEC, must be submitted by all “foreign private issuers” that have listed stock on U.S. exchanges.)

Others have suggested that SEC chair Mary Schapiro will be replaced some time after November, no matter who wins the Presidential election. Any new appointee will probably take until the third quarter of next year before being well-enough ensconced in the commission to make any further decision on the adoption of IFRS.

The spat with FASB blew up in a recent meeting where the two accounting standards setters were working on one of their many convergence programs, which are designed to try to bring the two disparate sets of standards closer together.

The purpose of the meeting was to discuss a move from the “incurred loss” method of accounting for banks’ loans to the “expected loss” method. The former only allows a write-down of the loan book where there is specific evidence that debts have turned bad. The latter would allow banks to make provisions for the fact that a certain percentage of loans will certainly turn sour, even though it’s not yet possible to say exactly which loans will. The move is seen as an important step in requiring banks to face up to the true state of their loan assets before it’s too late.

The attempt to move to the expected loss model has been difficult and has gone through a number of iterations over several years. At the recent meeting, the IASB and its chairman, Hans Hoogervorst, had expected to make good progress. But FASB chair Leslie Seidman announced that more work was needed, partly because of previously identified technical issues and also because of feedback she had received. Hoogervorst seemed incredulous, judging by a transcript that appeared in The Financial Times:

“Leslie, I’m a bit confused here. This is the first time that we have a joint project where we get a whole list of unanswered questions that your staff is going to address with constituents again. My feeling is that many of these questions go to the core of the joint decisions that we have been taking. I’m very much concerned that this could lead, for the fourth time I think, to a reopening of this whole discussion. I hope that you can tell me that such is not the case.”

He added a moment later: “If you go to your constituents with the message, ‘Oh, we’re so unsure, we’re so unsure’ then yes, you’re going to get a lot of additional confusion, I’m
sure. . . . I think it is deeply embarrassing. So I would really hope that when your staff does this outreach they do it with an attitude of getting things fixed and not to let it unravel.”

Is this a spat that says much about the future influence of the IASB in the United States? Or is it an isolated incident in a long, sometimes rocky relationship between the standard setters? Views on that point are mixed. At the same time, views in Europe are mixed as to whether it will really matter in the long run. The IASB itself will only say, through a spokesman: “For us it’s very much business as usual in terms of finishing off the remaining convergence project and turning our attention to various new initiatives that we’ve been working on.”

These include “a new work plan, new ways of working with standard setters and regulators, a research program we’re developing, and making sure we provide adequate support to the majority of the G20 who have already adopted IFRS and supporting those other jurisdictions to complete their own transitions.”

Andrew Sawers is editor of CFO European Briefing, a CFO online publication.