The International Accounting Standards Board (IASB) has achieved “almost” worldwide acceptance and adoption of its precious and hard-delivered (that is, more than 30 years in the making) “baby”—International Financial Reporting Standards (IFRS), a comprehensive set of financial reporting standards. However, that “almost” is a very significant one: the US, the largest capital market in the world, is still reluctant to fully incorporate IFRS into its financial reporting system, despite the recognition of IFRS on all continents during the last ten years.
It has been announced many times on the both sides of the Atlantic that the goal of the key standard setters is to achieve a single set of globally accepted standards. Therefore, I find it really strange that after at least 13 years of hard work (even if only counting from the formal 2002 IASB/FASB Norwalk Memorandum), by the world’s best accounting minds, there is still no sign as to when (if ever) the IFRS-US Generally Accepted Accounting Principles (GAAP) convergence will take place. Yet, there is no lack of public statements by the US Securities and Exchange Commission (SEC) and its staff expressing the view that a single set of international accounting standards should be developed and accepted by everybody. Most recently, the SEC’s Strategic Plan for Fiscal Years 2014–2018 stressed that “the SEC will continue to promote the establishment of high-quality accounting standards in order to meet the needs of investors. Due to the increasingly global nature of capital markets, the agency will work to promote higher quality financial reporting worldwide and will consider, among other things, whether a single set of high-quality global accounting standards is achievable.” But the reality today—though all the joint IASB/US Financial Accounting Standards Board (FASB) projects are complete or nearing their completion—is that the convergence of IFRS and US GAAP has not been achieved.
Is it time for us to admit that the “single set” objective is not practical or achievable in the foreseeable future? Unfortunately, the most likely answer seems to be “yes.” In this opinion article, I will describe and analyze what I regard as the three major factors that seem to be preventing IFRS from becoming a financial reporting framework for US domestic issuers.
Litigious Business Environment in the US
Firstly, the US has a highly litigious business environment where, if something goes wrong, accountants and auditors are often blamed before anybody else (and then sued, alone or along with the reporting company’s management) for investor or creditor problems that are even tangentially related to reporting (be it truly an accountant’s fault, management’s fraudulent reporting practices, or anything else).
In an environment of “high professional liability,” it is understandable and even justifiable that accountants in the US demand a highly elaborate set of very specific rules rather than “general principles” that “merely” declare neutrality and faithful representation, leaving a lot to preparers’ judgment.
There is no doubt that professional judgment is important and even critical for a high-quality reporting process, but at the same time, it is hard to deny that in real life, along with judgment, come different and conflicting opinions, ranges of estimates, and other “lee-ways” that may serve other interests. That is why the FASB keeps generating very specific reporting rules, which, unlike IFRS, address narrow reporting issues and business situations, thus creating potentially more and more differences with IFRS. It looks like the war between the “principles” (IFRS) and the “rules” (as US GAAP is perceived by many, but admittedly, not very fairly) is far from over yet.
FASB’s Own Priorities
Second, the FASB continues to work full swing on many “non-convergence” technical issues on its own (that is, without joint projects or consultations with the IASB), and frequently issues new technical guidance—almost on a weekly basis—that sometimes diverges from IFRS. The list of recently completed projects on the FASB website (for example, in July and August of 2015) shows that almost all of them address relatively narrow, specific issues without corresponding changes being introduced by the IASB. Thus, among the latest US GAAP standards are the following, none of which has a corresponding IFRS equivalent:
- Application of the Normal Purchases and Normal Sales Scope Exception to Certain Electricity Contracts within Nodal Energy Markets;
- Employee Benefit Plan Simplifications;
- Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent); and
- Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions.
New (however small) technical differences, along with the “old” ones, and those not eliminated in the course of past convergence projects (such as the goodwill calculation options, for example), keep building and expanding a body of diverging technical guidance, which clearly does not facilitate the process of convergence or even harmonization of US GAAP and IFRS from a pure technical standpoint.
Additionally, even the joint IASB/FASB technical projects, officially labeled as “convergence projects,” at the end yielded (or, are expected to yield) somewhat diverging guidance. Examples of this divergence are the recently reached different decisions by the IASB and FASB on clarifications and interpretative guidance to their respective revenue recognition standards; and detailed accounting rules resulting from the leases and financial instrument projects. The IASB/FASB parallel insurance projects have also not led to convergence in that important reporting area.
Politics
The third, and possibly main reason for the lack of convergence progress lies in the political, and not technical, accounting area. It appears that the US is reluctant to give up the GAAP standard-setting authority over domestic issuers to a foreign, even truly international, body located in London (with a second headquarters in Tokyo). Declaring (and rightfully so) that their main goal is to protect US investors’ interests, the SEC notes that IFRS lacks consistent application, allows too much leeway with judgment, and is underdeveloped in many specific areas, for which the US GAAP has detailed and accepted guidance and established practice (especially, in terms of industry accounting and reporting, and many specific transactions, for example, the most recent August 2015 US GAAP guidance on the presentation of costs related to revolving lines of credit).
Expressing the view of the general investor constituency in the US on replacing US GAAP with a new set of global standards, in its July 2012 Final Staff Report, the SEC stated that “investors do not believe that high-quality standards should be compromised for the sake of uniformity.” In other words, until the IASB’s standards reach—in the eyes of the SEC and the hypothetical “US investor”—the high bar established for them by the US, it is not likely that the SEC and FASB would concede their standard-setting authority to the IASB. Moreover, the same report goes on to state that “further, investors noted that the FASB, in acting as an endorser, could serve an important role, ensuring that any standard incorporated into the US financial reporting system is of sufficient quality so as to maintain or improve on the financial reporting system.” This means that even in the relatively distant future, when (if?) IFRS are finally adopted for US issuers, those standards still will be reviewed (and possibly, altered?) in the course of the FASB endorsement, in the name of the specific needs of the American investor.
It is not surprising that the above-mentioned Final Report did not provide any conclusions or recommendations to the SEC for actions with respect to IFRS in the US.
If the SEC truly believes that a single set of globally recognized reporting standards is needed and that it would benefit US investors—even in the somewhat distant future—it should develop a definitive timeline for working toward that goal. Otherwise, the significant amount of work done over the years by many accounting professionals around the globe in the name of IFRS/US GAAP convergence may eventually dissipate, yielding to the fears (however justified they may be) of the “underdevelopment,” “inconsistent application,” and “lack of enforcement” of IFRS.
Trends in the IFRS perception and interest in the US
If from 2000 to 2008 one could see some signs of interest in IFRS and even public encouragement and initial moderate “excitement” about their use in the US, then 2009 marked the beginning of the period when IFRS started losing both public and institutional support in the US:
- 2009—The new SEC Chair expresses reservations about IFRS to Congress.
- 2009—The FASB and the FAF's response to the second SEC road map is "wait and study".
- 2011—The SEC staff reports on IFRS's shortcomings.
- 2012—The SEC publishes a final staff report without providing a recommendation on IFRS adoption.
- 2014—The former SEC Chair, Mr. Cox, expresses limited appetite for IFRS in the United States.
Concluding Remarks
As discussed above, in its latest major strategic document, the Strategic Plan for Fiscal Years 2014–2018, the SEC mentions that it is willing to consider the idea of a single set of global accounting standards, however, it never refers to IFRS or the IASB in the entire document. What set will it be? It is unlikely that US GAAP will become a “single set” in the future, given that the majority of countries around the globe have already adopted IFRS as their reporting framework for public interest entities (such as listed companies, banks, insurance companies, etc.). It obviously makes a lot of sense for a globally interconnected economy to have a single set of standards, expressing the underlying economics of a business regardless of the country of its incorporation, and that set most likely will be IFRS. However, the amount of time it will take for IFRS to be “admitted” into the US as an internal reporting regime, and then mandated for the domestic issuers, will probably be measured in decades, not years.
