Accounting's Wild Times of 2010; 2011 Predictions

A lot is happening in the accounting world right now. Just in the past few months, the Financial Accounting Standards Board has issued exposure drafts on revenue, leases, and financial instruments. Public comments on those and other proposals are pouring in, and the debate on those topics is sure to be lively in the next few months. But there have been some other developments in the accounting world that may be even more significant in the long run. In the past few months we have also witnessed:

FASB Chairman Robert Herz's surprising departure;

The decision to enlarge FASB back to seven members;

The selection of Hans Hoogervorst to succeed Sir David Tweedie as chairman of the International Accounting Standards Board in 2011;

The slowing of several joint IASB/FASB projects, including an overhaul to financial statement presentation.

The effects of these events will not be clear for some time, but that has never stopped many of us from trying to glean indications of what lies ahead. Some of the speculation has left me thinking, and some of it has left me laughing, but it has also encouraged my own speculation.

It's All About Financial Instruments

Some of the rumbling includes suggestions that the changes at FASB are largely a reaction to the negative response to the financial instrument exposure draft, or perhaps an attempt by the Financial Accounting Foundation to promote a different answer on that project. While I wouldn't blame Bob Herz for walking away out of frustration by the pressure put on FASB to do the impossible-to develop a standard that is transparent yet doesn't affect any measures that would affect a bank's operations-I seriously doubt that difficulties on one project would lead to his resignation.

Similarly, I don't believe the Financial Accounting Foundation, which oversees FASB, would change the composition of the board to facilitate an outcome on this one project. First, doing so would be a huge change in the FAF's normal operations. Beyond that, if the FAF wanted to direct an answer, it would have appointed a new board member with a clear view on the topic to tip the balance—but new FASB member Russ Golden's views on the project are not well enough known for them to have played into his appointment.

Those who see the accounting for financial instruments project as the obvious catalyst for reshuffling are generally attached to the banking industry. It might surprise them to know that it isn't really always about Wall Street.

There are signs that changes to the direction of standards for financial instruments may be in the offing, but those signs, including the results of outreach by FASB staff to users of financial statements, don't require reading any tea leaves. The feedback leads me to believe that some moderation in the proposal is likely, with less mandatory use of fair-value measurements for financial instruments. My not-so-bold prediction is that FASB will eventually move to an answer that is similar in terms of measurement of assets to International Financial Reporting Standard No. 9, Financial Instruments, issued last year by IASB.

Is Convergence Dead?

The pace of work on several joint FASB/IASB projects has slowed recently, and convergence seems elusive for several others, including insurance and financial instruments. Many people (including me) believe that FASB has been the one to apply the brakes on these projects. All along, IASB seems to have considered the mid-2011 target that the boards were working toward to be more important than FASB did. IASB has seen a unique opportunity to improve and converge standards that would expire in 2011, while FASB has generally viewed 2011 as a goal, not a deadline.

The question arises as to whether convergence efforts are about to end. Will the boards just finish a few of the projects close to completion, declare success, and then move their separate ways?

Of course, Herz is a proponent of convergence, and the move from seven to five board members that occurred in 2008 was partly driven by a desire to allow FASB to be more nimble and to enable quicker action on convergence with IFRS. Herz's departure and the move back to seven members understandably raises concerns that perhaps FASB's strategy is to pursue convergence more slowly.

IASB's commitment to convergence may also be softening somewhat. Board members have said that the post-2011 strategy will not be dominated by convergence, and some constituents dislike IASB's relationship with FASB and would like convergence efforts to stop if the United States doesn't agree to move to IFRS.

So the question arises as to whether convergence efforts are about to end. Will the boards just finish a few of the projects close to completion, declare success, and then move their separate ways? While some see this as an obvious result of the recent changes, I doubt it. Convergence existed before the big push that started around 2005 and will likely continue. The reason is simply that the best accounting for a particular transaction does not change based on where the financial statements are published. Given that, the major standard setters will almost certainly continue to see value in working together to find that common best solution.

We may very well see convergence efforts scaled back, so that the boards have more time to devote to other projects, and we'll almost certainly see a reduction in the number of major projects worked on at once. But I find it hard to believe that FASB and IASB will start ignoring each other or stop working together in an attempt to find common solutions.

Will the United States Move to IFRS?

Related to (but separate from) the convergence question is whether the Securities and Exchange Commission will allow or require U.S. public companies to convert from U.S. Generally Accepted Accounting Principles to IFRS. When the Commission last spoke on this subject, we were told that a decision could be made on a mandatory conversion date in late 2011. That was in February 2010; since then, a lot has happened. And just about all of it has been read to indicate various motives or likely reactions from the SEC.

One theory goes that the SEC is trying to manipulate IFRS without committing to it, keeping its options open while gradually moving the rest of the world in the direction the SEC wants. Under that theory, convergence projects are being slowed to give the SEC an easy explanation for not making a decision on adoption of IFRS in 2011. David Tweedie's replacement is a securities regulator friendly with the SEC, so that the new standards will be more regulatory in nature. In this scenario, the SEC never has any intent to move to IFRS, but will just study the issue to death, until there's no need to convert because IFRS has moved so far along that its nearly identical to GAAP anyway.

I actually had to stop several times while writing that last paragraph because of how preposterous it all sounds to me, but it summarizes what I've heard from some interested parties. I worked long enough at the SEC to be very confident that the SEC is not interested in, and likely not capable of, executing a long-term strategy involving that much behind the scenes string-pulling.

That doesn't mean that recent events will have no effect on the SEC's consideration of a move to IFRS. For one thing, despite statements to the contrary, I do think that the slow-down in the joint FASB-IASB board projects is likely to delay the SEC's decision-making progress past 2011. I believe that the SEC will want to see the outcome of those projects. If the two boards cannot in the end find common ground at the standards level in key areas, it doesn't bode well for companies finding common ground in applying IFRS.

And we shouldn't lose sight of the choice of IASB chairman either. That he is not an accountant is a surprising development. It may turn out to be a brilliant move to have an investor-focused chairman whose skills lie in the direction of policymaking rather than technical accounting, and the SEC's comments upon the announcement were strongly favorable. Nonetheless, in the United States, we have generally tried to separate the standard-setting responsibilities from politics to the extent possible. The IFRS Foundation's selection of a non-accountant as IASB chair certainly seems to suggest that such separation won't be possible internationally. The effect of that decision on the adoption of IFRS in the United States remains to be seen, but I think it will play a role eventually.

2011 should bring us important standards on revenue recognition, leases, and financial instruments, at least. But perhaps more important than that, we'll begin to see what the significant changes at FASB and IASB will mean to the world of accounting standards. And whether my reading of the tea leaves is right or not, there's certainly every indication that things will continue to be as interesting as they have been in the past few years.