It can be entertaining sometimes to watch the interaction between the SEC, IASB, FASB, FAF, and the AICPA as they debate the future of the U.S. financial reporting system. It reminds me of the Abbott and Costello routine, “Who’s on First?” What started with the signing of the 2002 Memorandum of Understanding between the FASB and IASB — with its aggressive convergence goal to bring IFRS and U.S. GAAP into close alignment — has slowly succumbed to reality as noted by FASB chair Robert Hertz in his comments that convergence could take 10-15 years. In 2009 the convergence projects and expected time frames included the following:
- Leases - 2011
- Financial instruments – 2010
- Revenue recognition – 2011
- Financial statement presentation – 2011
- Financial instruments with elements of liabilities and equity – 2011
- Fair value – 2010
- Consolidations – 2010
- De-recognition - 2011
What happened? As most observers expected, the goals were unrealistic and many of the material projects remain unfinished. Despite the enormous effort by the FASB to converge with IFRS and some significant progress, many standards are simply not operational in the U.S. (such as contingent liabilities, offsetting, etc.). Even the primary objective of the proposed Accounting Standards Update on Going Concern was recently tabled. The original proposed a simple adoption of the IASB language from IFRS IAS 1, “in assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, 12 months from the end of the reporting period.” The responses and subsequent deliberation in connection with the FASB’s due diligence illustrate the difficulty with the convergence concept. The respondents’ primary concerns stemmed from the U.S. legal environment and for what they would be held accountable. They wanted more clarity around the potential time frame they
would have to cover and the phrase “all available information.” Questions were raised as to whether the standard would “in essence” require an opinion on the viability of the business model. The FASB decided to not require management to assess the entity’s ability to continue as a going concern (FASB project). Yet, the IASB standard is completely operational throughout the rest of the world.
This raises a serious question: should the U.S. reporting system be required to transition fully to IFRS? As the Deloitte wiki reveals, countries that are reported to have adopted IFRS have not required all reporting entities to adopt IFRS. Many countries require the use of IFRS for certain industries, permit an IFRS option for others, and retain country GAAP for privately held companies. The SEC, in its proposed “condorsement” model, which many support, suggests that U.S. GAAP should be transformed through the gradual integration of standards that are consistent with IFRS. It notes that exceptions should be “rare and generally avoidable” (Proposed Condorsement Model). How would this be possible given their experience since 2002? Furthermore, where would this leave privately held entities? Would they too have to bear the cost of the on-going transformation of U.S. GAAP?
The FAF is insistent that standards for all nongovernmental entities should remain under the FASB umbrella (FAF Proposes a PCSIC). The AICPA, on the other hand, is adamant that the FASB is ignoring the majority of its constituents and has threatened to establish another standards-setter to provide for a separate set of standards (AICPA Message to FAF).
While the standards-setters continue to talk in circles, large multinationals are being left out of the global capital markets. The IASB is also getting impatient (Is the IASB Tired of Convergence?). It is also running out of money and needs the U.S. to ensure its success (FAF gives IASB $500,000). Why not simply take the obvious next step and make IFRS optional?
Some argue that the dual-standard reporting system would be too complex, but investors are already using IFRS as more and more capital is raised outside of the U.S. Let the marketplace determine the answers. Furthermore, the SEC would still be able to provide implementation guidance and create exceptions through Staff Accounting Bulletins. FASB could then shift its attention to improving U.S. GAAP by reducing complexity and increasing transparency and communication, as previously suggested by the SEC (Advisory Committee Report). In the meantime, enjoy the show. Who’s on First?
