Peeling away financial reporting issues one layer at a time

To Head in the Right Direction on IFRS, the SEC Should Make a U-Turn

In my first post with results of our IFRS opinion survey, I focused on three questions that indicated respondents' overall attitude towards IFRS adoption without getting too deep into the specifics. In this second and final post, I am going to peel the onion a couple of layers deeper: (1) down to the touted benefits of IFRS as compared to GAAP; and (2) the policy question of convergence—irrespective of IFRS adoption.

If you would prefer to be given an executive summary before (or without) reading further, it is this: (1) IFRS is not perceived to be better, in the respects examined, than GAAP; and (2) continued efforts to bring the two bases of accounting closer together are not expected to be worthwhile—unless you are a Big Four auditor or work at a Fortune 500 company. Bottom line: the SEC should make a U-turn on its roadmap proposal.

Benefits of IFRS—Or More Accurately, Complete Lack Thereof

One of the clearest messages to come out of our survey, which I described in my first post, was that only 23% of all respondents believe that the benefits of IFRS adoption would exceed the costs. Of that minority, a disproportionate number work for the Big Four or the Fortune 500 ("B4+F500"). These two groups comprise slightly more than 1/8 of the respondents, but are about 1/4 of the minority view.

Some of the survey questions peel the onion on the benefit side of the cost-benefit tradeoff: the two most touted benefits of IFRS relative to GAAP being greater comparability, and enhanced relevance and reliability. For example, we asked whether the greater latitude afforded to issuers of financial statements by IFRS affects the relative value of financial statements prepared according to IFRS ("value" is a broader concept than comparability or relevance and reliability):

One of the most lopsided results of the survey is the almost 5:1 verdict against the information value of the management judgment afforded by IFRS. Even the B4+F500 are on the same side on this question, albeit by a lesser (approx. 1.5:1) margin.

I should point out that I did not intend for this question to be a referendum on "principles-based accounting standards." I interpret the responses as expressing a preference for detailed guidance when no universal principle or objective has been provided as a benchmark. Such is most often the case with both IFRS and U.S. GAAP. As an analogy, detailed rules and interpretive guidance has been the modus operandi of the SEC, and perhaps its most distinctive characteristic as compared to other national regulators. Notwithstanding the hiccups of the last decade, which I believe are more broadly attributable to an apalling lack of effectiveness on the part of the private sector gatekeepers, it has been the detailed rules and guidance toward the objective of full disclosure, combined with a narrow focus on investor protection, that has made our capital markets the global benchmark.

Specifically in regard to comparability, proponents of IFRS adoption claim that U.S. companies should experience greater access to global capital markets if those companies were to report under IFRS. One may suppose that analysts would be able to make comparisons among potential investments more efficiently. However, only 42% of respondents believe that IFRS adoption within the next ten years would positively affect comparability, and less than 10% would characterize the effect on comparability to be "significant":

The above chart also indicates that, once again, that the B4+F500 are disproportionately represented within the minority view.

Regarding relevance and reliability, only 21% of respondents are of the opinion that IFRS would enhance relevance and reliability:

The Value of Convergence, Or More Accurately, Lack Thereof

Even before the SEC's IFRS Roadmap proposal, the Big Four strategy has been to browbeat the rest of us into submission with incessant mantra-like repetition of "IFRS is inevitable." A variation on that shtick, "apple pie" characterization of convergence. Our survey results indicate "cow pie" may be more apt:

It appears that hardly anyone, save the B4+F500, are of the opinion that convergence efforts over the past several years has significantly improved U.S. GAAP; and 58% believe that the process has either been a dud or has somewhat diminished U.S. GAAP.

So, the answer to the convergence policy question, "What's in it for us, the U.S. investor?" seems to be—not much. Indeed, although it is impossible to tell to what extent convergence has retarded the already glacial pace of standard setting in the U.S., it is safe to assume that projects like financial statement presentation, leasing, loan fair value and even revenue recognition could be much closer to completion without the helpful input of the French, et. al.

There does not seem to be a great deal of optimism regarding future convergence efforts, either. Only 32% of respondents disagree with the statement that a single set of accounting standards is a realistic goal:

Moreover, a whopping 70% of respondents (including the B4+F500) don't think that the boards will resolve all of the significant differences between GAAP and IFRS:

I suspect that "convergence" is less a defined term than it is a marketing gimmick. If you think I am being too cynical, kindly recall that the "convergence" euphemism replaced the even more mellifluous term, "harmonization." Neither term of art can be matched to a corresponding dictionary definition that remotely indicates the underlying policy objective. At their best, they are metaphors for … who knows? Now that even the IFRS proponents have been forced to admit that identical standards is no longer a possibility, it is high time to get more specific about what "convergence" is intended to accomplish. Getting "close enough for government work" is a better match for processes that have taken place to-date, but respondents (including, for once, B4+F500) don't even expect even that amorphous objective to be met.

Final Words 

Given my oft-mentioned preferences against IFRS adoption, one would not be unreasonable to be skeptical of any claim of absence of bias in my analysis. That's just one reason why the entire database of responses is available here.

You could also make a valid point that, in addition to the caveats mentioned in the companion post, academics are over-represented among the respondents and investors are under-represented. As to the academics, the data does not indicate to me that the views of academics are radically different than any other group, save the B4+F500 zealots. Others have also remarked that my survey may be the most comprehensive data available thus far on the opinions of academics regarding IFRS. I also can't see that academics as a group have ecoomic incentives that would cause them to support or oppose IFRS adoption, but that may be a reflection of my own biases.

As to under-representation of investors, it remains a mystery as to why they appear so reluctant to weigh in on the issue of IFRS adoption. For example, the CFA Institute surveyed approximately 97,000 of its members worldwide. Their response rate was 1.6%. 1,576 responses sound like a lot, but the potential for non-response bias must be very high. I have no way of knowing how many persons viewed our invitation to be surveyed, but I am guessing that our response rate was more on the order of 10%.

2 Comments

  1. Reply Dan M November 25, 2009

    You bring up some great points in your analysis. Something else that isn’t very often talked about is that we love competition in markets because it keeps people honest. The same should be true in accounting standards. If there is only one standard we have nothing to compare it to to decide if the standard is good or bad.

  2. Reply KPO'M December 4, 2009

    I think investors make so many adjustments to US GAAP anyway that all adopting IFRS will do is make them start from a different point. Neither US GAAP nor IFRS is particularly investor-friendly.

Leave a Comment