I recently recorded a podcast for Compliance Week with editor Matt Kelly, who interviewed me on the SEC's most recent statement on IFRS—a clear detour from the original Roadmap by any reasonable estimation.
Matt gave me some sample questions in advance, so I could organize my thoughts, and this blog post is an edited and somewhat more elaborate version of the notes I wrote down while preparing for those questions. The last third or so of the podcast took a different tack, so if you want to listen to for yourself, click here.
What do you think of the SEC's most recent IFRS actions, re-affirming interest but stalling on adoption?
I get a number of mixed messages from the Commission's statement. Even its title, "Commission Statement in Support of Convergence and Global Accounting Standards" confuses me somewhat. On the one hand, the endgame of the initial Roadmap release is adoption of IFRS. But the title of the Commission's statement only mentions "convergence" and leaves out "adoption."
You certainly can work toward achieving convergence with IFRS without necessarily sun setting GAAP and adopting IFRS; and perhaps that is factoring into the SEC's current thinking. I have a different view: we in the U.S. should be working toward providing investors in the U.S. capital markets with the highest quality and most transparent financial information available anywhere in the world. I don't believe that working on convergence with the IASB will get U.S. GAAP to where investors should expect our regulators to be.
Getting deeper into the document, the Commission appears to be willing to accept at face value the benefits of IFRS adoption that have been most frequently cited by convergence proponents: they mention enhanced comparability, savings for multinationals, and lowering the cost of capital worldwide. Yet, there is nothing in the Staff's work plan that indicates there will be any attempt to validate those benefits. I suspect that's because there doesn't appear to be any sort of reliable methods for validating them. The Commission has committed itself to evaluate research on the IFRS question, so academics can make a significant contribution in this regard. They can either: (1) explain to the SEC which propositions regarding the benefits of IFRS adoption/convergence are (or are not) subject to rigorous and reliable estimation; and (2) undertake studies allowing reliable quantification of benefits—if that is indeed possible. The studies themselves must not be directly funded or influenced by the accounting profession, or any other group that clearly has a 'dog in the hunt.'
Although the benefits part of the IFRS adoption/convergence narrative are given short shrift in their statement, I think the SEC has done a pretty thorough job of laying out the issues that will determine whether IFRS adoption is even feasible or can be accomplished at a reasonable and predictable cost. I'm very happy that the SEC acknowledges that serious thought has to be given to figuring out what the ongoing role of the FASB would be, assuming we were to take in some or all of IFRS in some manner shape or form.
So, I guess the answer to the question of whether the SEC is pushing for IFRS adoption, or pulling back, cannot be answered by me with a great degree of confidence—except to say that I am sticking with the prediction I made the day before the Commission's statement was published. I predicted that the ultimate decision maker will be the EU; the most likely scenario being that the EU will state that more convergence is not something they are interested in, especially if it means more bright-line rules. The EU is going to eventually tell the IASB that they will want a divorce if the IASB continues to court the US while everybody else has to sit around and twiddle their thumbs.
So, in the end, I expect that a no-go decision will be made for the SEC by the EU. If the EU doesn't bail the SEC out, then Mary Schapiro or her successor will be in a big pickle.
Any final decision really hinges on FASB and IASB converging their standards, whether it's by June 2011 or any other date. How do you see that effort coming along?
I see two fundamental problems,with the the "doubling and re-doubling" of convergence efforts. First, is the short-timeframe. The initial reaction of Denny Beresford, former FASB chair, to the convergence aspect of the work plan, which I read on the AECM listserv, was that many of the convergence projects that are now supposed to be fast-tracked and completed in the next 16 months have been on the agenda since he was at the FASB; and, he departed over 13 years ago! The consolidation project has been on the agenda since 1982 and the FASB still has not been able to develop a fully satisfactory definition of control. Just a couple of the scores of specific issues that will be addressed in the convergence projects are the direct method of reporting operating cash flows and reporting all financial instruments (including loans) at fair value. Those are highly controversial.
Another person whose comments I've been reading are those of retired professor Bob Jensen of Trinity University; one of his points should be a deal breaker, but somehow the Commission doesn't see it that way–yet. Bob says that high quality accounting standards can only occur if there is a reasonable opportunity for consultation with constituents. This would include exposure drafts, field visits, field tests, and other ways of communication that the FASB has developed over many years of experience. It's virtually unthinkable, he says, that seven or so highly technical and highly complicated projects can be compressed into a 16-month period and still maintain a reasonable opportunity for input and, more important, for the Boards to learn from that input and be willing to make changes.
The second fundamental problem I see is that some critical differences between IFRS and U.S. GAAP aren't even on the agenda. R&D is only one example of an abandoned project; the so-called "convergence" of business combinations standards was half-baked. And with the recently breaking news of the abuses of repo accounting that have come closer to the foreground with the publication of the Lehman bankruptcy report, the FASB may have to divert some of their resources to fix those offending portions of U.S. GAAP—and do it fast, a la FIN 46 on variable interest entities while the Enron debacle was still simmering.
But, the elephant in the room is the accounting for impairment of long-lived assets, including goodwill. I don't think you could get the EU to agree with the US approach, and I don't think you'll get US issuers to accept the IFRS standard. The fact is that both impairment standards leave a great deal to be desired—neither are what the SEC should be willing to abide. I don't see how you can end up with a so-called "stable, high-quality platform" unless this issue, among numerous others, is resolved. Yet, so far, it's being ignored.
Part of the delay in the Roadmap timetable is so the SEC staff can devise a work plan examining implementation obstacles. What are some of the practical adoption and implementation problems—stuff the chief accounting officers of the world will need to deal with— that are going to cause everyone headaches?
Supposedly, IFRS and GAAP will be sufficiently converged so that if the US does adopt IFRS in some manner, the switchover shouldn't be a big deal. A big question is whether college educators will be able to keep up with all the changes. I'm not a faculty member any more, but I've had some interesting indirect experiences through my son, who is an accounting major with plans to take the CPA exam.
Rick is currently taking "intermediate accounting." His teacher covers one chapter every two days—like clockwork. It doesn't matter how difficult or detailed the concept is, it's one chapter every two class days.
That's certainly not the way I would teach intermediate accounting. But, I suspect that Rick's teacher is close to the mode, if not right there. The one-chapter-per-two-days approach is a lot of breadth, with extremely little depth. So, given what is already being crammed into curricula now, I'm not sure how any more breadth in the form of significant knowledge of IFRS can fit in. I prefer to stress depth when I teach, and not to cram as many topics as possible into a semester, but the structure of the current CPA exam and the importance to an accounting program of its students' pass rates goes a long way toward explaining why Rick's professor does what she does.
Even though I am an IFRS adoption skeptic, I am fully aware that there is a huge amount to be learned from comparing IFRS with GAAP in class (I co-authored a textbook on comparative accounting for gosh sakes). Yet, something in college curricula has got to give.
But, based on my experience in universities, curriculum change is almost invariably a political football. Even forgetting about every other thorny issue regarding IFRS adoption/convergence, it's an odds-on bet that changes to the education sector will bump up against turf issues galore, and make widespread significant progress in that area a practical impossibility. The fundament problem is that there is only 24 hours in a day, and about 150 semester hours in a 5-year accounting major's curriculum. Something (or some academic discipline) will have to give up a portion of their fiefdom for nothing.
I wish accounting departments much good fortune as they try to convince their colleagues in marketing, finance, economics, statistics, psychology, English, foreign languages, math, science, history, gender studies and sociology that teven more time should be given over for teaching 'bean counting.'