Exasperation, Resignation on IFRS

Voices from all corners of the financial reporting world had a clear message for the Securities and Exchange Commission at a recent forum on global accounting standards: Set a date already.

Despite varying views on exactly how the United States should make the switch to International Financial Reporting Standards and whether the financial reporting community here is really prepared for it, panelists at a recent Financial Accounting Standards Board forum agreed on one fact: There won’t be much progress by anyone until the SEC sets a date and forces the issue.

Herz

“The ball is certainly very much in the court of the SEC,” FASB Chairman Bob Herz said at the June 16 event in New York.

Pressure has been building for the SEC to make its intentions known since the agency voted last November to let foreign companies file their financials using IFRS without any additional reconciliation to U.S. Generally Accepted Accounting Principles.

In theory, the SEC will soon propose giving U.S. companies that same choice to file IFRS. SEC officials have also promised an updated roadmap laying out how the United States will move to IFRS—but specifics on either proposal have yet to appear.

Several panelists at last week’s event suggested that the current lack of clarity and fixed deadlines for moving to IFRS is fostering inertia in the financial reporting community. Representatives from the auditing profession, academia, private companies, non-profits, and other government agencies cited a list of actions each group would need to take for a successful transition to IFRS. The consensus among them was that there’s little incentive to move forward without a firm date for a switch.

Melancon

Barry Melancon, president of the American Institute of Certified Public Accountants, summed up the day’s sentiments with a blunt: “Let’s get a date certain so momentum can build.”

The discussion last week also made clear that the debate has shifted to when—not if—the United States should move to IFRS. Conrad Hewitt, chief accountant at the SEC, said the focus should be on adopting IFRS “in the next three to five years.”

Still, like many previous forums examining precisely how a switch to IFRS could be pulled off, no consensus emerged on the best way to accomplish such a transition. A principal sticking point was whether to mandate IFRS outright, give U.S. companies a choice between IFRS and U.S. GAAP, or create some combination of the two.

Remarks at the event suggested the SEC may be leaning toward the third option. Hewitt said the forthcoming roadmap would address the question of whether U.S. companies should have the option of moving to IFRS and would also include milestones to help “guide the SEC on mandating IFRS.”

Hewitt

Hewitt also said standard setters must do more work on converging U.S. and international accounting rules in major areas before the United States can mandate IFRS. Two significant problems are revenue recognition rules (which are complicated at the best of times) and inventory accounting—specifically, that the LIFO method of valuing inventory, widely used in America, isn’t allowed under IFRS.

Beyond those hints, neither Hewitt nor John White, director of the SEC Division of Corporation Finance, said much about when a new roadmap to convergence would be released, other than “later this summer.”

Which Comes First?

FASB has repeatedly called for the SEC to outline a detailed plan for the adoption of IFRS, including a fixed date to make IFRS mandatory. Herz described the current situation of working to maintain U.S. GAAP while also planning a move to IFRS as “riding two different horses.”

“[Convergence is like] riding two horses. Sometimes they go different speeds and in different directions. It’s not an easy ride.”

— Bob Herz,

Chairman,

FASB

“Sometimes they go different speeds and in different directions,” he said. “It’s not an easy ride.”

Cangemi

Some panelists, including Michael Cangemi, president of Financial Executives International, said a period of voluntary adoption prior to a mandate would help build momentum for a switch to IFRS. Others, such as Gail Hanson, deputy executive director for the State of Wisconsin Investment Board, believe a mandate without a voluntary option is best. Hanson said she’d like to see a “long lead time with a drop dead date.” Several participants said three to five years would be a reasonable period of time.

Patricia O’Malley, coordinator of the International Financial Reporting Interpretations Committee of the International Accounting Standards Board, stressed that there “isn’t any one model” for moving to IFRS. Every country that has made the move “has tailored its approach to its existing system of regulation,” she said. “They’ve each gone at it in a way that makes sense given their existing framework.”

KPMG Partner Sam Ranzilla, who represented large audit firms at the panel, said large firms could be ready for IFRS in relatively short order—if they had a target date.

“The biggest issue around training is the timing and uncertainty we sit with now,” he said. Ranzilla said audit firms are reluctant to invest much in IFRS training without a date certain, because the training will be wasted unless auditors will use it right away.

Conversely, Steve Rafferty of regional accounting firm BKD—who acted as spokesman for smaller audit firms—said his peers are nowhere near ready to work with IFRS. What’s more, smaller firms aren’t likely to make much progress preparing for IFRS unless regulators set a fixed date and fire the starter’s pistol.

Educators said much the same. Changes to the accounting curriculum and textbooks that would be required to teach IFRS “won’t happen until we get a drop dead date,” according to Sue Haka, president-elect of the American Accounting Association and a professor at Michigan State University. Moreover, the move to IFRS could require changes to every section of the CPA licensing exam, said Arleen Thomas, AICPA senior vice president of member competency and development. Still, Thomas said the changes “are very doable” and could be completed by 2011.

Ray

Tom Ray, chief auditor of the Public Company Accounting Oversight Board, said some targeted changes might be necessary to make U.S. auditing standards “more framework neutral,” if the United States moves to IFRS. But, he added, “I don’t believe there’s anything in the standards that would prevent auditors from applying them now.”

Underlying Questions

Meanwhile, efforts are underway to address the funding and independence of the International Accounting Standards Board, the body that promulgates IFRS. Many have questioned how independent IASB really is, and whether the United States wants to subrogate its authority to an overseas body so quickly.

Philip Laskawy, chairman of the trustees of the International Accounting Standards Committee Foundation, which oversees IASB, said those efforts to bolster independence include the formation of a monitoring group to oversee the IASCF. The group will be comprised of representatives from the SEC, the International Organization of Securities Commissions, the European Commission, the Japan Financial Services Agency, the World Bank, and the International Monetary Fund.

Additionally, Laskawy said there are plans for the London-based IASB eventually to add satellite offices in Asia and North America, implying that there could be a future role for FASB.