US wriggling on IFRS

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AICPA reports on the latest comments to the SEC around the proposed US transition to IFRS based on FASB research. In summary, the research is suggesting:

• Maintain U.S. GAAP with acceptance of IFRS from foreign firms
• Maintain U.S. GAAP with continued convergence between IFRS and U.S. GAAP
• Allow choice between IFRS and U.S. GAAP, but require reconciliation
• Allow unrestricted choice between IFRS and U.S. GAAP
• Adopt “U.S.- Specific IFRS”
• Set conditional timetable to fully Adopt IFRS
• Create international U.S. GAAP (I-GAAP)

One explanation:

One concern about adoption of IFRS in the U.S. is that it would eliminate competition between standard setters and grant monopoly status to the IASB. The research study lists a number of potential problems this could create which includes lack of incentives to innovate and mounting political pressure as consensus must be reached across a wide range of political regimes and interests.

In other words a continuation of the NIH (Not Invented Here) attitude to standards. It’s nonsensical. The US believes, illogically in my opinion, in the supremacy of rules based systems of accounting. It doesn’t have ‘judgment’ in its DNA. This gives rise to numerous problems, not least it acts as the gateway through which litigation can flow.

The idea of allowing unrestricted choice between IFRS and U.S. GAAP – perhaps after a period of time to allow for more convergence of the standards – may have merit to some observers. Both standards are considered high-quality. Why not let market forces drive the decision? Doing so keeps competition alive between the standard setters and would result in a more orderly transition to IFRS for U.S. companies.

I don’t understand this argument. Why is it necessary to have competition when it’s already obvious that the US system of rules driven GAAP has failed? IFRS provides better, if imperfect transparency so why is it necessary to try some hybrid?

One argument I have heard is that it would be very difficult to implement judgment based systems in the US. I don’t buy that. The UK has plenty of expertise in this area that could readily be shared across the Big 4 channels.

I certainly don’t see how the market can decide. Who is the market in this context? Is it the Big 4 dominated FASB? Is it shareholder representatives? Companies? If we are to believe that we live in a globalized world then it doesn’t make sense to be running multiple systems of standards and reporting. How are commenters meant to sensibly interpret results between comparable companies albeit in different nation states? Of course there will be nuances, especially for tax purposes, but that should not be the lever by which proven methods are side stepped in the veiled name of xenophobia.

UPDATE: via Joel Ungar:

The ICAEW institute has urged the US Securities and Exchange Commission to decide quickly on a timetable for moving to International Financial Reporting Standards in order to limit uncertainty for US companies.

In its submission to the US markets watchdog’s consultation on IFRS, Europe’s largest professional accountancy body said the global financial crisis had highlighted the need for global accounting rules.

Nigel Sleigh-Johnson, head of the ICAEW’s financial reporting faculty, said: ‘The close scrutiny of accounting for financial instruments during the financial crisis has made the need for comparable financial reporting even more obvious.’

ICAEW is right on this one.

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