Peeling away financial reporting issues one layer at a time

The SEC’s “90% Convergence” Fantasy

"…[W]e know there are going to be challenging issues to resolve under any [IFRS] incorporation decision. The issues of LIFO and contingencies immediately come to mind. But even with all of this, I would offer up one final thought for your consideration: Would it better to be 90% converged and understand the differences, or should the objective be abandoned? [bold italics supplied]

Paul Bestwick, SEC deputy chief accountant, asked this question at the end of his remarks on IFRS at the AICPA conference last December. As I'll explain further, it's an inappropriate question; and I thought as much when I read it around the time it was asked. But, I had decided to live and let live, considering that I had already issued a pretty brutal send up of Beswick's boss, James Kroeker, for his own IFRS comments at that conference.

All that changed a few days ago upon reading a report in the Financial Times that the European Commission is still balking at endorsing reasonable and U.S. GAAP-like standards for consolidating special purpose entities:

"The [European Financial Reporting Advisory Group] said some companies felt that [2013] was not enough time to meet the deadline [for adoption], citing additional opposition from financial services groups, including insurers." …

However, European reservations go deeper than timing. France is questioning the substance of the new consolidation rules, which say a company can have a de facto control of an entity while holding less than half of voting rights." [italics supplied]

Basically, the EC is thumbing its nose at GAAP/IFRS convergence. The EC is the elephant in the room, and it will never leave, so anything the IASB wants to do to address its governance processes and independence is mere window dressing. It seems to me that there will always be (a) France standing in the way of investor-purposed financial reporting. (To their specific gripe, I say meh. An entity can be structured so that nothing of substance may be subject to a vote of the common shareholders.)

Not only are we not getting enough convergence out of the joint projects, but there will always be forces standing on guard to break apart what has been converged and is not paltable to the EC — or India, or China. That's why the FT article made me realize that this ludicrous notion of a "90% solution" has to get it with both barrels.

Let's start with Beswick's implication that IFRS and GAAP will be 90% converged after completion of the current joint projects. What does "90% converged" even mean? On its face, it may have been a slick rhetorical device (recall that Beswick also takes credit for coining "condorsement") to get the audience's heads nodding up and down, but it's far too slick. In fact, it's highly misleading.

First, there's the pretense that convergence will beget comparability, the putative object of the exercise. How could a single set of standards without a single, consistent and rigorous enforcement mechanism deliver on the promise of comparability? But, even more important, IFRS is so loosey-goosey that comparability is not a practical possibility even with the requisite enforcement mechanism.

Second, even if revenue recognition, leasing and financial instruments are converged, even the study (as bad as it is) coming from Beswick's bailiwick shows that differences between U.S. GAAP and IFRS exist for practically every topic – even the ones that have been declared "converged" by the powers that be. Are these differences between GAAP and IFRS significant? Of course they are; for if they weren't significant, they would have been converged already!

Third, there is the problem of costs and benefits. Even Beswick acknowledges (albeit somewhat as an afterthought) that "strong voices" are "concerned" that the cost of IFRS incorporation could be "significant with no commensurate benefit, either to an individual company and or the U.S. markets"; and that IFRS is not high quality. To these naysayers, Beswick coos, "I think these will be important issues the staff will need to consider." The staff has never once stated that it would conduct a study to evaluate the benefits of IFRS incorporation.

* * * * *

Obviously, my answer to Beswick's question is YES, PLEASE ABANDON CONVERGENCE WITH IFRS.

And, I'd like to ask him one: Thus far, what benefits have U.S. investors realized from the ten-year effort to converge IFRS and U.S. GAAP?


  1. Reply Phil Wilson February 2, 2012

    Don’t always agree with you, but you nailed this one!

  2. Reply Kalin Kalev February 4, 2012

    Dear Mr.Selling,
    Admirations to your blog. Just one of the best.
    Know that even in Bulgaria your blog is read.
    Can you answer to a very simple questions that i am confused and it is interesting to know your opinion: What is the difference between transparent financial reporting and high-quality financial reporting?
    Is there such one?
    Again admirations,
    Kalin Kalev

  3. Reply Milton Bradford February 7, 2012

    Mr. Bestwick’s question makes me think he lives in a world where there are no heros or courageous people. If France wants to miff the process, the courageous thing to do would be to call off the convergence. Courageous people also face the existing reality(ies). In this case, your statement that “there will always be forces standing on guard to break apart what has been converged” means many people are wasting their time–ten years so far.
    I will add my compliments to your blog.

  4. Reply accountingedmonton February 14, 2012

    My Thought on IFRS:
    Many of these differences are not very
    important. But getting rid of them through a
    process of convergence could take up many,
    many years. That is why I am even more
    convinced that it is not in the best interests
    of investors in the US or anywhere else in
    the world to spend another 10 years seeking
    to eliminate ever-smaller differences, which
    entail significant costs for change without
    much incremental benefit. That is also why
    the time is right for a positive decision on
    the incorporation of IFRSs into the US
    financial reporting regime.

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