Peeling away financial reporting issues one layer at a time

On IFRS, CA Magazine Publishes what JofA Won’t

The April issue of CA Magazine, which is published by the Canadian Institute of Chartered Accountants, has a lengthy feature article provocatively entitled "IFRS: Dead in the USA?". It author is Lawrence Quinn, a freelance writer based in Atlanta. Thus, I would hesitate to say that the article provides a Canadian perspective on our IFRS hemming and hawing, except for the editors having the mettle to publish a refutation of the south-of-the-border party line. You can bet the house that the AICPA's Journal of Accountancy would rather mail out pages of blank T-accounts than an IFRS downer like this one; shilling for IFRS is in JofA's job description.

Quinn reports that, despite the SEC's best efforts to spin the tepid and sparse feedback on its Roadmap proposal, even the erstwhile staunch proponents of IFRS adoption are ready to move on. A Microsoft executive says, "We've followed IFRS for years and have been proactively involved as the process moves forward. Nevertheless, we've finished our initial assessment of what will be involved in conversion or adoption, and we just don't see the savings." [italics added]

A FedEx executive is even blunter: "I sum up IFRS this way: SOX meets Y2K."

If IFRS adoption isn't for Microsoft or FedEx, then from whom is it? Even a PwC IFRS partner, whose job for years must have been to preach the gospel of IFRS, could not bring himself to allay the fear of runaway changeover costs: "I think cost is individual to every company; it's [conversion costs as a percentage of revenue?] not really calculable. I don't think anyone has really gotten their hands around this yet, and if they have, it's from 75,000 feet."

All of this has been reflected in responses to the Roadmap proposal by other credible sources. But, an interesting revelation to come from the article is that even after IFRS goes live in Canada, their public companies may still be able to choose US GAAP for its basis of accounting. After the paranoid EU pooh-bahs shut down Germany's US GAAP option before it could spill over the border to infect France et al, the Canadian option could be the next hope for hard evidence of real differences and similarities between IFRS and US GAAP. For one thing, it will be interesting to see how many Canadian companies currently applying US GAAP will stay with it; and of the Canadian GAAP companies, how many will switch to US GAAP instead of IFRS.

If the SEC were really interested in making an evidence-based decision, they should be waiting at least three or four more years for the mother lode of financial statement and security price data to be delivered to its doorstep. Waiting to learn from the Canadians' eminently reasonable and prudent policies would push off a final decision on IFRS in the U.S. until 2015 or thereabouts, four years later than the current impetuous schedule.  But, just because almost two years of an arbitrary timetable have been frittered away, a headlong rush into adoption does not all of a sudden become a sane or even reasonable thing to do. And, according to the CA article and virtually every other source, few here in the US (except, of course, the Big Four) are clamoring to put IFRS on a fast track anymore. In these trying times, it makes more sense that the SEC should be left alone for a while to repair the holes in its regulatory and enforcement regimes laid bare by the financial crisis, Bernie Madoff, and Judge Rakoff.

For its part, the FASB could be working to close some of the gaping holes in financial reporting, instead of merely "converged" – and very partially at that. Don't forget that some huge differences are not even on the agenda: pensions, asset impairment, and R&D, just to name three off the top of my head.

I'll have more on this in subsequent posts, but suffice it to say for now that many of the joint projects for which it appears that convergence is about to be attained (e.g., leasing, revenue recognition, financial instruments with characteristics of equity, financial statement presentation), are setting up to be real duds. They are hardly what anyone would consider principles-based, as is the SEC's wont, or will have resulted in 'demonstrably higher quality' accounting standards.

It seems that convergence is merely creating new rules, much as the new wavy mirror in the fun house makes one look short and fat instead of tall and thin.  Everybody knows that changes to accounting rules inevitably change management decision making. If the mirror on earnings is distorted, then contorted decision making could actually look good when viewed from that mirror.

The way 'convergence' seems to be going, the demand for managerial contortionists should continue unabated whether IFRS is adopted in the US or not.     


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