Although the Securities and Exchange Commission has signaled that convergence of international financial reporting standards (IFRS) with U.S. generally accepted accounting principles (GAAP) may not be the its highest priority, the rest of the world’s standards-setters aren’t standing still. Indeed, several new regional standards-setting initiatives could bring challenges to many CFOs working for U.S.-based multinationals.
The IFRS Foundation, for one, is proposing to create an Accounting Standards Advisory Forum, which would consist of national accounting standards-setters and regional representatives who can provide advice and feedback to the International Accounting Standards Board (IASB), the global standards-setter. Comments on setting up the forum are due by December 17th.
The forum is a new concept in global standards-setting, since the IASB has typically forged bilateral agreements and engaged in informal arrangements with national standards-setters. Now, however, the IASB will more easily be able to communicate with countries using IFRS and work out multilateral agreements among those countries.
The broad push for IFRS acceptance globally could also affect the CFOs of U.S. multinationals. Until now, most have been content to stand pat under U.S. rule-making, thinking either that IFRS might fade away or that GAAP will remain the “gold standard” of a converged financial-reporting system.
But rather than going away, IFRS appears to be gathering force around the globe. And the cost of complying with both GAAP in the United States and IFRS for their foreign subsidiaries could prove high for U.S.-headquartered multinationals. Even if a company doesn’t do business outside the United States, it might eventually have to adopt an IFRS version of some accounting standards if some melding does take place, some say. That would be an added cost such companies aren’t keen on incurring right now.
Nigel Sleigh-Johnson, head of the financial-reporting faculty at the Institute of Chartered Accountants in England & Wales, says the new advisory forum has the support of many participants in Europe. “There is a thought that maybe we ought to be focusing on countries that do report under IFRS,” he adds, rather than merely pondering why the United States is lagging on convergence.
The SEC’s staff report this summer found more faults with convergence than reasons to converge and left global standards-setters in the dark about when it may move forward. As Michael Gallagher, managing partner of PricewaterhouseCoopers’ audit quality functions says, “it was generally met with disappointment on the other side of the ocean.”
Further, accounting experts both here and abroad believe that incoming SEC chairman-designate Elisse Walter — an official who has up until now not been a notable change agent — will not move the commission along any quicker toward a decision on convergence.
To be sure, the new forum does include significant U.S. representation. At least three of the 12 slated board seats on the forum would likely go to U.S. representatives, with, presumably, one of them allocated to the Financial Accounting Standards Board (FASB).
Nevertheless, the forum does send a signal to the world that the IASB is moving forward with IFRS conversion — with or without the SEC. At an American Institute of Certified Public Accountants conference earlier this month, IASB chairman Hans Hoogervorst noted that “IFRS already has a global impact and that will not change. So there is no longer any risk of IFRS disintegrating as a result of a standstill in the United States.”
Even if the IASB can’t convince the SEC to move ahead with melding the two accounting regimes, some say, the new forum will help ensure that more countries adopt IFRS and become more involved in the standards-setting process itself.
Having more countries on board and participating at the meetings could dilute the SEC’s influence and add more pressure on the commission to converge. “There are some in Europe who will say there aren’t many seats [on the new forum and on the IASB in general] to go around. Maybe they should be confined to countries which actually use IFRS more,” contends Sleigh-Johnson — meaning not representatives of the United States. Indeed, the IASB is quick to point out that companies in more than 100 countries require or permit the use of IFRS and about half of Fortune global 500 companies now report using IFRS.
Regional forums are also being created in Latin America and Asia to better assist the IASB in IFRS inculcation. Last month the IFRS Foundation opened up a regional office in Asia to support the adoption of the global standards and to improve corporate communication between Asia and the IASB. The office is also expected to be a regional research hub on IFRS conversion.
Yet while IFRS is making significant strides outside the United States, its advocates emphatically want to include this country in global accounting standards-setting, says Sleigh-Johnson, noting that “it’s very important to have the U.S. involved in the whole process.”
At the same time, convergence “is never going to be perfect,” he says. “We have to be realistic.” But FASB and the IASB “have come such a long way in 10 years. If we continue in that way over the next 10 years, financial reporting globally will be utterly transformed,” he adds.
To Tracy McBride, vice president of research and accounting policy at Financial Executives International, some form of compromise over IFRS and GAAP accounting is inevitable. “Perhaps the decision will be made to have a converged world” in some areas of accounting and not in others, she notes. The biggest differences between IFRS and GAAP lie in the accounting treatment for leases, fair value, and financial instruments. Convergence might remain difficult to achieve in such areas, she suggests.
Such a hybrid accounting system, though, could lead to more reporting problems for CFOs, thereby causing “disclosure overload in financial reporting,” says McBride. That, of course, is a condition companies that report solely under U.S. rules already complain about.
For others, however, it makes sense for the standards-setters to simply agree to disagree. David Larsen, managing director and leader of the alternative asset advisory practice at Duff & Phelps, says having “two systems working somewhat hand-in-glove” would create what’s best for the users of financial information in the long term.
“Having both FASB in the U.S. and [the] IASB work together could end up with the best answers to financial-reporting problems in the long run,” he adds.