Peeling away financial reporting issues one layer at a time

“Convergence Flaws” v. Convergence Spin

I recently read the transcripts of two recent speeches on the question of the future of IFRS in the US.  They are as different as two speeches could be on this topic.

As one might expect, the adopt-IFRS-or-the-sky-will-fall speech emanated from David Tweedie, the IASB Chair. It should also come as no surprise that he gave it in a protective bubble: a meeting of the freest-spending corporate lobbying group in Washington – the U.S. Chamber of Commerce. To those tone-deaf-to-investors ears, Tweedie must have sounded like a Bach chorale. But, I wonder how many of those Dodd-Frank and fair value bashers actually understand (or care) that GAAP and IFRS will be far from converged even after the frantic race to the bottom on leasing, financial instruments and revenue recognition has been declared fini in just a few months. Here's a quick list off the top of my head of projects that were abandoned, never fully addressed or mutilated by "convergence" (feel free to add your own):

  • Impairment of long-lived assets
  • Research and development costs
  • Borrowing costs
  • Pensions
  • Financial statement presentation, statement of cash flows and disclosures
  • Contingent liabilities
  • Business combinations
  • Joint ventures
  • Oil and gas accounting
  • Agriculture
  • Goodwill impairment

I wonder how many of Tweedie's audience understand (or care) that rigorous SEC enforcement of IFRS with only 'soft-touch' enforcement elsewhere in the world will only make us out to be chumps.

Or, that the loss of sovereignty to set our own accounting rules should be antithetical to practically everything else the conservative Chamber has lobbied and stands for. From their anti-regulatory free-market standpoint, there is no valid reason why the U.S. should be colluding with the IASB on accounting standards. Instead, U.S. regulators should be pushed to compete against the IASB with constant improvements toward the highest quality financial reporting standards in the world.

Or, that Tweedie's latest "now or never" gambit sounds more like a desperate suitor whose love interest has finally discovered his true callow nature. There is absolutely no valid reason for the U.S. to be rushed into determining the long-term status of IFRS in the U.S.

"In talking with many investors over the past few years, and during the darkest days of the financial crisis, not one has ever said to me, 'What we need is to move to international accounting standards.'"

That's from the other speech, "Convergence Flaws," by Wall Street Journal columnist David Reilly.

Reilly has been following the IASB and IFRS convergence for a number of years and, and while he does not address any of the technical issues (like incomplete convergence and mutilated standards), he and I end up at the same place: there doesn't seem to be much good that can come out of U.S. adoption of IFRS, or even further efforts at convergence.

Enforcement problems – One of Reilly's more interesting observations comes from drawing an analogy between common accounting standards and a common currency. Like others, he attributes much of the Euro's problems to the absence of political unification.

"Without a common political view, there is no real way to enforce measures needed to guarantee the structure and credibility of the currency – witness how even years before Greece nearly imploded, countries such as France flouted some measures that all euro-zone countries had agreed to follow, with little to no consequences.

Similarly, a common accounting system needs a common enforcement system. Having the most intelligently crafted rules means nothing if companies feel they can simply ignore them without fear of any meaningful consequence. … Does anyone think for a moment that rules will be as consistently enforced in Russia as they are in, say, London? And it's worth noting that there isn't even a single securities regulator within the European Union." [italics added]

Moreover, Reilly scoffs at the notion that auditors are capable of taking up the slack, or that a global securities regulator, as suggested by John Mack, former chairman and CEO of Morgan Stanley, is politically workable.

Whom Should Capital Markets Serve? –Reilly explains that it is hard to come to converged accounting standards if one's view as to whom capital markets regulation should serve differs: investors, issuers (in the name of capital formation), or even authoritarian political regimes (in the name of political stability):

"It's hard to see that countries with such differing views will strive for standards that put investors first or will abide by an accounting outcome if it conflicts with a national objective.

Consider that Greece has admitting [sic] to fudging numbers about its national accounts. What then makes us think it wouldn't hesitate to twist corporate accounting rules? France has often intervened in markets to promote the interests of national champions and has already shown a willingness to politicize and pressure the IASB. And let's not pretend the Chinese communist party would hesitate to twist the accounting if it suited the needs of the politburo."

And, Why are We Going to Do This? – Even apart from cost considerations, Reilly says that if there were ever a time for U.S. adoption of IFRS, it has come and gone:

"[The push for IFRS adoption] came at a time when there was much debate about the competitiveness of U.S. capital markets. The argument went that burdensome regulation was going to push capital markets activity to London and Hong Kong. To counter that threat, the argument went, we needed to embrace the kind of light-touch, principles-based regulation and standards setting seen in London.

Today, we know better. A lack of regulation and regulatory will, not too much of it, was a large contributor to the financial crisis that brought our economy and markets to their knees. London, by the way, has since repudiated the light-touch approach."

Reilly, of course, wasn't speaking to the U.S. Chamber of Commerce choral society. He spoke at a meeting of accounting academics – the functional equivalent of a herd of cats. In other words, he spoke to people with an open mind, and without marching orders from the corporate elite.

I wonder how well David Tweedie's speech would have gone over after David Reilly's?

7 Comments

  1. Reply Ron Ratliff March 21, 2011

    Tom,
    Your article highlights several excellent points but the most telling, in my opinion, is the (mis)concept(ion) held by those in favor of IFRS that a level playing field exists out there in the real world – particularly when it comes to the issue of standards.
    I suspect that the key fallacy in the pro-IFRS argument is the belief that there is such a thing as a “common accounting system”….it only exists in academia – certainly not out here in the real world.

  2. Reply Steven Lazar March 21, 2011

    Hey Tom,
    I’m an undergrad accounting student and I really have enjoyed your last few articles on this situation. My professors believe is IFRS is inevitable and we (the students) should accept that it will be adopted during our careers. Hearing your point of view (especially the line about varying degrees of enforcement and how the united states should individually seek out the most appropriate accounting guidelines for itself) This ‘IFRS is inevitable’ mindset loosening finally being countered for me. I hope to read more from you.
    Thanks,
    Steven Lazar

  3. Reply Jonathan Hamilton March 21, 2011

    It is amazing that most of the talk focuses on convergence when really the points you bring up shouldbe focused on and/or addressed.

  4. Reply Aleksey March 22, 2011

    Hi Tom,
    It is really an interesting discussion that you are driving on. I’ve been working in Russia for many years and now moved to Europe – still see that everyone everywhere (Russia and Europe, I mean) is really enjoying IFRS. I’m not able to convince that US GAAP (in my opinion in the most of the parts) are better. That makes me believe that I’m in the minority. Do you have any reliable links to show prons and cons of IFRS as the best set of standards instead of US GAAP as they are currently exist? Principle based accounting seems more attractive but it gives too much flexibility to companies that does not help users to analyze what’s happening.
    Thanks,
    Aleksey

  5. Reply Tom Selling March 22, 2011

    Hi, Aleksey:
    You have put your finger on a major issue. GAAP is clearly more detailed than IFRS. However, I do not believe that either set of standards are adequately founded on principles.
    I do not presume to advise the EU or Russia as to what accounting standards best suits their capital markets; my opinion is pretty much restricted to the U.S. — where my education and experience inform me that IFRS adoption would be a significant step backwards for financial reporting.
    Best,
    Tom

  6. Reply Intrinsic Value April 1, 2011

    Hi Tom,
    I think the convergence of IFRS and GAAP will be inevitable. However it will not be a smooth process. My background is Finance, not accounting so I cannot comment on the nuances, but the current CFA program is heavily emphasized that convergence is expected.

  7. Reply Daniel Stulac April 22, 2011

    Why not require US GAAP in all regulated markets?
    We can call it International standards if that will satisfy the French. US GAAP as regulated by the SEC is the most promulgated and enforced standard in the world.
    If the international comunity wants a say lets appoint some to FASB. There are numerous Ivory tower guys at the Big 4 firms. Put some foreign ones on the FASB.
    Personally my experience (at the Big 4) is that the standard is US GAAP and there are many competent non US academicians at these firms.

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