“One world, one financial reporting standard” by Janet A. Paraiso (November 21, 2011)
SUITS THE C-SUITE By Janet A. Paraiso
Business World (11/21/2011)
With rapid developments in technology and communications, the phrase “the world is getting smaller” cannot be truer.
What some may not realize is that even the “language” of the accounting profession has also gotten smaller as practitioners, investors, investment bankers and regulators all gradually transition to the same accounting parlance — the International Financial Reporting Standards (IFRS). Yet as the global economy moves towards convergence to IFRS, the question remains — will the United States also move toward the use of IFRS for financial reporting purposes?
In September 2002, the International Accounting Standards Board (IASB) which is the standard-setter for IFRS, and the Financial Accounting Standards Board (FASB) which is the standard-setter in the United States, entered into the Norwalk Agreement.
Both organizations pledged best efforts to make their existing financial reporting standards compatible, as well as coordinate their future work programs maintain such compatibility.
To achieve compatibility, FASB and IASB agreed to undertake a short-term convergence plan to eliminate differences between IFRS and US Generally Accepted Accounting Principles (US GAAP).
In February 2006, IASB and the FASB signed a memorandum of understanding (MoU) which listed priorities of the convergence plan, notably eliminating the most significant differences between IFRS and US GAAP, as well as addressing areas in which the most substantial improvements were needed.
The MoU focused on 11 short-term convergence projects involving: business combinations, financial instruments, financial statements presentation, intangible assets, leases, liabilities and equity transactions, revenue recognition, consolidations, derecognition, fair value measurement, and post-employment benefits.
As of April 2011, MoU projects had been reduced to three, namely: accounting for revenue recognition, leasing and financial instruments.
The convergence project brought about significant recent developments in IFRS which include, among others, issuance of IFRS 10 on consolidation, IFRS 11 on joint arrangements and amendments to IAS 19 on employee benefits.
This only proves that US interests cannot be overlooked as they remain major influences in the development of global accounting standards.
In November 2008, the United States Securities and Exchange Commission (the “Commission”) proposed a road map for possible adoption of IFRS by US companies. The proposed road map identified several milestones that, if achieved, could result in mandatory use of IFRS as early as 2014.
In May 2011, the staff of the Commission published a paper outlining a possible approach to incorporating IFRS into the US financial reporting system. This approach was first described by Deputy Chief Accountant Paul Beswick in December 2010 as a “condorsement” approach. In essence, it established an endorsement protocol which gave FASB the authority to modify IFRS before incorporating the standards into US GAAP.
Within a defined transition period (e.g., five to seven years), the FASB would work to eliminate differences between IFRS and US GAAP through standard-setting. This possible incorporation approach included an objective that US issuers would be able to assert compliance with both US GAAP and with IFRS, as issued by the IASB, at the end of the transition period.
The proposed approach raised the following criticisms as to whether US GAAP would be substantially equivalent to IFRS post-condorsement efforts:
IFRS 1, First-time Adoption of IFRS, is the “bridge” used when a reporting entity applies IFRS for the first time. IFRS 1 adoption is mandatory for first-time IFRS reporters, and it includes a general presumption of retrospective application of IFRS (with certain specified exceptions and exemptions), to assert compliance with IFRS. Without requiring the adoption of IFRS 1, this raises the question on how US GAAP, post-convergence efforts, could be substantially equivalent to IFRS as issued by the IASB.
FASB and IASB have reached different conclusions on certain MoU projects (e.g., consolidation, financial instruments and balance sheet offsetting) and on other FASB-only projects currently under review (e.g., investment properties). Thus, it is possible that FASB will not be able to eliminate all the differences for these accounting topics, even when evaluating the international standards under a transition protocol.
There is a risk that US issuers would still refer to US GAAP for guidance, particularly in areas where there is an absence of specific IFRS standards.
To protect US public interest and investors, the Commission may tend towards providing more stringent interpretations of IFRS than those currently taken globally.
These criticisms on the condorsement approach to adopting IFRS have given rise to the concern that a “local flavor” of IFRS for the US market may be created as a result.
Twenty-eleven is a landmark year, the target date of completion of the IASB and FASB convergence agenda, as well as the expected release of the Commission’s decision on whether it will allow or require adoption of IFRS in the US. Many hope the Commission’s decision will go beyond convergence and will finally support the goal of having a single set of high-quality accounting standards around the globe.
Transitioning to IFRS may be the largest change of accounting policies and procedures ever undertaken by US companies and their affiliates operating all over the world. Such is the scope of the change that business entities may need to make significant changes in their business processes and supporting systems beyond the finance function.
Given these and many other reasons, it may be prudent for companies to begin planning for the transition now, even if the proposed time line for IFRS adoption is still uncertain.
(Janet A. Paraiso is a Partner of SGV & Co.)
This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.