International Financial Reporting Standards (IFRS) was the hot topic in accounting areas for several years, but it appears to have faded away. Various reasons explain this swing. We can mention the state of the economy or the readiness of the financial community in the United States (U.S.). Several articles provide examples and illustrations on why the adoption of the IFRS is probably not such a good idea.
Our view is that most of critics focus on the current situation only, whereas we believe that analysis should be looked forward.
Status of IFRS in the USA
Since May 2008, privately held companies are authorized to prepare their financial statements in accordance with IFRS. Furthermore, smaller entities can apply a simpler version of IFRS, following the issuance of the standard IFRS for Small and Medium-size Entities (SMEs) (July 2009). It is difficult to assess how many US private companies have adopted IFRS. However, we have noted that lending departments of financial institutions are showing more and more interest in IFRS. Would this be a sign that financial institutions become more incline to finance US companies applying IFRS?
Domestic public companies cannot use IFRS for their filings with the U.S. Securities and Exchange Commission (SEC). Following the issuance of its Roadmap to IFRS in 2008, the SEC reiterated several times that no decision will be announced before 2011. In February 2010, the SEC presented its Work Plan to complete its analysis. Another factor of importance is the completion of the convergence projects of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) (scheduled for 2011). The SEC clearly indicated that the Work Plan (see Appendix) has to be executed and the convergence completed before a decision is made.
Most of common critics against the adoption of IFRS focus on areas similar to those identified by the SEC. The difference being that critics consider that the mere fact these issues exist today should be sufficient to stop the process toward IFRS, whereas the SEC has a dynamic view.
Common Critics to the Adoption of IFRS
- Accounting matters
The usual difference noted between U.S. Generally Accepted Accounting Principles (GAAP) and IFRS is that the former is rule-based whereas the latter is principle-based. This principle-based concept generates concerns that it will be more difficult for a preparer to defend its position in case of litigation. The truth is that it is very difficult to assess the validity of this argument. It seems reasonable that an accounting position documented by a specific rule is easier to defend than a professional judgment. Actually, a lot of litigators share the view that the reverse may be just as true: it can be more difficult against a professional judgment, as long as it is properly documented, than to prove that a rule was misapplied or ignored.
One aspect rarely mentioned by critics to the adoption is the difficulty, under IFRS, to structure a transaction just to meet a certain accounting objective. The recent debate on the “Repo 105” would not exist under IFRS, since the substance of a transaction would take preeminence over its form to decide the proper accounting treatment.
Another concern raised by commentators is that initially U.S. GAAP were principle-based as well, but they moved to rules over time (principally due to the U.S. legal environment) and there is a risk that IFRS will follow the same path. IFRS are probably less likely exposed to this risk than US GAAP. Countries applying IFRS have very diverse legal systems and therefore, this diversity should provide effective protection to the principle-based approach.
- Organization aspects
Another point for discussion is the risk to see the standard setter becoming less independent and/or that the USA having less control on their accounting standards.
The independence of the standard setter is a key factor to ensure the high quality of the standards. The recent changes on the IASB structure and the ones to come should provide additional comfort that the IASB is independent from political pressures, at least as much independent as the FASB is immune from such pressures. Debates on fair value accounting following the financial crisis early 2009 generated high pressures on the FASB and on the IASB from various authorities and it is not clear which Board was the most effective in resisting to them.
Actually, the real concern is not so much the potential lack of independence than the fact that the IASB is not a US organization, and therefore not under US control. By definition the IASB is an international organization, but one cannot ignore the strong presence of the USA at various levels of the IASB: approximately one fourth of the members are US citizens and the SEC is an active member of the Monitoring Board. Therefore, the USA are in the unique position to be active in the making of IFRS, despite having not committed to apply IFRS.
- Cost and timing issues
The cost and the duration of the transition are often presented as a major hurdle, especially in this difficult economic environment. The complexity of the transition and then its cost will depend for the most part upon the completion of the convergence. The convergence process is expected be completed in 2011. Assuming the SEC decides on 2015 for the year of transition, changes for companies should be less complex, since both standards will be converged.
- Teams Readiness
Finally, the last issue is the human factor: are the preparers, users, auditors … experienced enough in IFRS?
There is no doubt that specific training will be required to ensure IFRS are known by various categories of people dealing with IFRS. Focusing on the situation today is probably not the right approach: true there is today a lack in knowledge, but the situation is evolving rapidly. The AICPA has indicated that IFRS will be included to the CPA exam starting in 2011, and therefore students will learn these standards. Also, training programs tailored for all needs, from the bookkeeper to the member of audit committee, exist and are more and more accessible in the USA. Also, following factors have to be considered as well in order to fairly assess the situation: The convergence will reduce the need of specific training on IFRS, since new and converged standards are applied under US GAAP as well;
People dealing with foreign companies on financial and accounting matters will become (or are) familiar with IFRS, since most of countries apply IFRS;
Multinational companies already developed teams knowledgeable to IFRS in order to complete the transition to IFRS for their foreign subsidiaries. This expertise still exists in house and can be tapped when needed, to manage the conversion project, to train teams.
Overall, a lot of arguments put forth against adoption of IFRS in the U.S. focus on the situation as of today. We believe that to fairly address these concerns, one should look at the foreseeable situation at the time of transition (probably 2015), which is exactly what the SEC tries to achieve in its Roadmap and its Work Plan.
|Rate this article 5 (excellent) to 1 (poor). Send your responses here
Remi Forgeas, CPA, is an audit and assurance partner for Mazars in the U.S. For U.K. IFRS, you can contact Steven Brice who is a technical partner in the financial reporting advisory group for Mazars UK.
* The views expressed in this article are the author’s own and do not necessarily reflect the views of the AICPA or AICPA CPA Insider™.