The United States might one day let its domestic companies move to International Financial Reporting Standards (IFRS). But that day is not now. And it is financial instruments accounting, as much as anything, that has sounded the death knell for the vision of a single set of global accounting standards.
When the London-based International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) set about converging their respective literatures, they paid little more than lip service to financial instruments. Although commentators broadly agreed that this area of accounting was defective, there was no agreement on the fix.
The 2008 financial crisis briefly focused minds. Driven by massive write-downs on bank assets and calls for a forward-looking expected-loss-impairment model, the boards accelerated their work on financial instruments.
The project got bogged down from the start. While political pressures forced the IASB to develop its new standard, IFRS9, in phases – dealing in turn with classification and measurement, impairment, and hedge accounting – the FASB opted to consult on its model in a single exposure draft.
And there are serious concerns, stateside, about the IFRS9 model. Here’s the rub: were the US to adopt the IASB’s proposed expected-loss model as a basis for loan-loss accounting by its banks, the very institutions at the heart of the financial crisis in 2008 will almost certainly make lower provisions for bad debts than they do now.
“Let me be honest,” says Donna Fisher, a tax and accounting specialist with the American Bankers Association. “Our standard-setter would have looked ridiculous in the US if they had gone with a model that reduced our accounting for loan losses. That wasn’t the point of this exercise and so, sometimes, the national perspective is important. What would investors have thought if we adopted IFRS 9 and the result was a reduction in US banks’ loan-loss reserves?”
Although ABA member banks safeguard $11trn (€8trn) of customer deposits, its membership is drawn not from Wall Street but from smaller regional banks based in places that have yet to operate on a federal level, let alone internationally. It is a hard-to-reach constituency that IFRS has yet to crack.
“The concern that we have had throughout this process,” adds Fisher, “is that we need to feel that our voice has been heard. I have a lot of praise for the efforts that the staff in London went to in their outreach efforts, but our position is not reflected in IFRS9.
“The concern we have is one of sovereignty. No, we cannot run around being bossy Americans, and nor do we want to do that but, nonetheless, we have the concern that rule-making for our sector, banking, will be handed over to a foreign entity that cannot hear our views to the same extent that the FASB can.”
Blunt though that assessment might be, it is no surprise that it has happened now. In a keynote address to the Annual SEC and Financial Reporting Institute Conference on 5 June, the former IFRS cheerleader-in-chief and SEC chairman, Christopher Cox, announced that he had come, not to praise IFRS but “to bury it”. So went wrong? Reality, it seems, intruded. Cox’s intervention is all the more significant because it allows many to say what they have long been thinking in the US.
Tom Selling, a well-known and long-standing convergence sceptic, familiar in the US for his blog, the Accounting Onion, says the problem with IFRS is that it must do more than play lip service to investor interests.
Speaking on his own account, Selling, a member of the Public Company Accounting Oversight Board’s standing advisory group, points out that the goal of a single set of standards “is based on the false premise that it could actually work in practice”.
He explains: “The Europeans have a very different interest in the way accounts will be used – to promote confidence and stability. The Chinese have their view – security and trade protection, and the US believes that financial statements are supposed to provide relevant information to investors. If we lose our sovereignty, we are at risk of compromising that principle, which many believe is directly related to the desirability and safety of US capital markets.
“At least, at this point, everyone in the US plays lip service to investor interests. That is not the case in China, and nor is it the case in the EU. For example, in Europe they talk about structural interests that might trump investor interests. In the US we might compromise, but we risk losing sovereignty over the principle that investors receive relevant information. That distinguishes us from the rest of the world.”
So could the US ever overcome its reservations and move to IFRS? Yes, says Fisher, but only if the IASB grows up and shifts its operations out of “sales and marketing” mode and comes across as a less “desperate”.
“The question the IASB has yet to answer is this: does the US need IFRS right now? Well, because financial services is a global business, it is desirable to have a single set of global standards. However, there has to be value to both preparers and users in adopting those standards, and I’m not sure that we can see that right.” There must be, she concludes, “some pretty significant changes before that shift can happen”.
Global Accounting standerds - a continuing slog
The IASB and the US FASB set out on the path toward convergence of IFRS and US GAAP with the inking of their so-called Norwalk Agreement in 2002, the product of a joint meeting of the two boards on 18 September 2002 in Norwalk, Connecticut.
The agreement acknowledged a commitment to develop “high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting”. The boards also pledged to co-ordinate their work programmes in order to maintain that compatibility.
By 2005, the two boards were ready to provide the outside world with the details it longed for with a memorandum of understanding (MoU). Driving the new agreement was the prospect – eventually realised – of the Securities and Exchange Commission: lifting the requirement for IFRS foreign registrants to reconcile their financial statements to US GAAP.
The MoU listed 11 areas for action and split them between short-term convergence efforts and “other joint projects”. By 2007, the US GAAP reconciliation requirement was consigned to history and in 2008 the two boards issued an update to the MoU. The talk was now about convergence by 2011 and a US decision on adoption thereafter.
But then the financial crisis intervened and suddenly the G20 countries were watching. At the September 2009 Pittsburgh Summit, G20 leaders urged the standard setters to “redouble their efforts” to arrive at “a single set of high quality, global accounting standards” by June 2011.
But a lack of agreement on such critical issues as impairment, and failure by both boards to agree on such high profile efforts as lease accounting, caused the US to all but walk away from the process. An SEC staff report in late 2012 called for “additional analysis and consideration…. before any decision by the [SEC] concerning the incorporation of IFRS into the financial reporting system for US issuers can occur.”