Peeling away financial reporting issues one layer at a time

EU to IASB: It’s Our Way, or the Highway

The EU is simply too committed to pertuating the giddy notion that financial statements can serve investors — and be smoothed at the same time. That's why I predicted that they would soon respond negatively and vociferously to the SEC's recent statement of support for a brand of convergence that would end up forcing broader application of fair value on unwilling European financial institutions.

But, I could not have predicted that a reaction would come so soon, or so crudely. In an article entitled "Accounting Convergence Threatened by EU Drive," the Financial Times has reported that, "in a tense meeting on future funding for the IASB," the EU's internal market commissioner made its financial support conditional on greater board representation for banks and their regulators.

Is this a credible threat? I think, yes. The EU has already achieved its major objective for beating down US GAAP, which was to browbeat the SEC into accepting financial statements prepared in accordance with IFRS from European issuers without reconciliation to US GAAP. Granted, that objective has only been partially met, because the SEC still insists on the reconciliation of differences between "IFRS as issued by the IASB" and any provincial variation.

Nonetheless, the EU's saber rattling may not resonate well with European companies listed in the US. They could end up facing more onerous reconciliation requirements over time if the EU takes this issue to the brink. What's a bank to do if US GAAP requires fair value for its assets and liabilities, while a future watered-down version of IFRS, permitted in the EU, does not require reporting those fair values?

The bank would either have to break ranks with its European counterparts and reconcile to US GAAP, or terminate its US listing (including ADR sponsorship).* Neither would be an appetizing prospect, but the indications to this point are that the EU would dislike that scenario less than losing its leverage over the IASB should convergence continue—and especially if the US adopts IFRS. It seems that henceforth, the EU will be saying at virtually every new fair value increment that it really, really does not want to see the US adopt IFRS.

For its part, the IASB is boxed in. If it were to make a principled stand against this blatant threat to its independence, it could be quite easy for Europe to abandon the IASB for some alternative standard setting mechanism. Or, if the IASB caves to the demands of the EU, then it will lose the US. So, either way, convergence and US adoption of the IFRS are lost causes; obviously, the IASB cannot afford to be abandoned by the EU.

Some at the SEC may continue to disingenuously insist that convergence is like 'apple pie,' but this recent development should finally make it evident that convergence has become more like an albatross around the neck of the FASB. If the EU had their way, convergence would be nothing more than a race to the bottom, with the interests of investors cast aside in the process.

As one friend who called the FT article to my attention put it, "it appears the independence of the IASB is more a matter of one's imagination than reality." It's time for the SEC to get real.

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*If you are curious to know how a foreign issuer can avoid filing a Form 20-F even though it has US shareholders, you should take a look at Exchage Act Rule 12g3-2(b)

1 Comment

  1. Reply Indepdendent Accountant April 13, 2010

    I have long opposed US adoption of IFRS. I still do.

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