It is said that big surprises come in small packages. Last week's "small package" was a brief article in the AICPA's online edition of its Journal of Accountancy, reporting that its own Financial Reporting Executive Committee (formerly the Accounting Standards Executive Committee) submitted a comment letter to the FASB. FinREC expressed "extensive concerns" with the revenue recognition exposure draft for converging FASB and IASB standards:
"We believe that based on the outcome of [what clearly must be extensive] re-deliberation by the boards, re-exposure of the proposed standard should be strongly considered to ensure sufficient and appropriate due process has been provided to those impacted by the exposure draft."
The "big surprise," however, is the last sentence of the article – which could well be the accounting understatement of the year:
"The suggestion that the proposal should be re-deliberated and re-exposed comes as FASB and the IASB are under pressure to complete the project [and numerous other major projects] by their self-imposed June 2011 deadline."
If I were an editor at JofA, this would have been the headline of that article:
IFRS ADOPTION PRONOUNCED DEAD BY FinREC!
How, with over 1,000 other comment letters having been submitted (mainly, I presume, from issuers trying to figure out how to be able to manage their earnings with impunity under a new standard) will the FASB be able to comprehensively re-deliberate, revise, re-expose, digest the next tidal wave of feedback, and then finalize? And, I didn't even mention the possibility of field testing. The proposed rules (they are not principles, as the boards' propaganda would have us believe) are very broadly specified, with little more than a few simplistic examples to serve as implementation guidance. This is a standard that is practically begging to be field tested.
Especially given the importance of revenue recognition, the next due process iteration would normally take at a minimum two to three more years; but the FASB and IASB have given no indication that they're giving up on getting something, anything, finalized so as not to miss their date with destiny. Give the AICPA credit at least for acknowledging the problem, albeit sotto voce, lest they be too blunt and give the SEC no option except for throwing in the towel on IFRS adoption – and losing face in the process.
The sorry state of the revenue recognition project, already eight years in the making, is also a prime opportunity to express my concerns with a statement in the staff's progress report: in evaluating the quality of the IFRS that the U.S. would adopt, the staff will consider without further evaluation converged standards to be good enough for U.S. consumption. [page 5] I'll be providing my own analysis of the revenue recognition exposure draft in my next post, but if the SEC would simply read FinREC's comment letter, they would see that what is going on here severely challenges the staff's presumption that convergence per se means high quality accounting standards. If a converged revenue recognition standard of the same scope as the exposure draft somehow is finalized in the next six months, we will have a convergence, but we could also have a standard akin to the collision of two garbage trucks at high speed. And that doesn't even take into consideration the accidents waiting to happen with the leasing and financial instruments projects.
The only way for the SEC to save face at this point is to do the right thing, right now; which is to stop this Keystone Cops approach to accounting standard setting before investors get hurt.
Even the AICPA, the captain of the IFRS adoption cheerleading squad, appears to be on the verge of openly admitting that IFRS adoption possibilities may have receded from "inevitable" to dead duck.