Convergence Divergence

Critics question the entire rationale for adopting international financial reporting standards.
Marie LeoneOctober 1, 2008

The unveiling of the Securities and Exchange Commission’s new road map to international financial reporting standards (IFRS) in late summer came as a relief to some, but also sparked a backlash as critics questioned not only certain details but the entire rationale for adopting international standards.

By delineating a series of possible deadlines, the SEC capped several years of uncomfortable uncertainty about when and if the United States would switch from generally accepted accounting principles (GAAP) to global accounting standards.

But that triggered uncertainty of a different kind. Moving away from U.S. GAAP will “put in jeopardy the thing that gives the U.S. a competitive advantage,” Charles Niemeier, a member and former acting chair of the Public Company Accounting Oversight Board, told a conference audience last month. “We have the lowest cost of capital in the world. Do we really want to give that up?”

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A process that once qualified as “convergence,” Niemeier said, has now become one of “capitulation,” driven by the misimpression that a too-strict regulatory climate is harming American businesses.

SEC spokesman John Nester counters that “the Commission’s proposal comes directly in response to the fact that more U.S. investors are investing in more foreign companies in more international markets than ever before, which suggests the need for an international language to protect investors and facilitate their comparisons of corporate financials.”

Under the SEC’s proposed timetable, the largest U.S. multinationals could choose to use IFRS in 2010, with the expected deadline for all large companies coming in 2014. All public companies, big and small, would begin using IFRS by 2016.

That plan may well change. Already, Robert Pozen, chairman of MFS and of the SEC’s Advisory Committee to Improve Financial Reporting, has said he thinks the SEC is starting the conversion process too fast and letting it drag on too long.

Final deadlines are not likely to emerge until 2011, when the SEC will assess how well IFRS is developing and how onerous initial efforts to adopt it are. The government could still shut down the project entirely at that point, though few think that’s likely. But wiggle room will probably abound, as the SEC has already said it will consider extending the deadlines further for small companies.

Additional reporting by Sarah Johnson and Tim Reason

The SEC's proposed timeline for converting to IFRS