Peeling away financial reporting issues one layer at a time

Is the IFRS Rhetoric Machine Running Out of Gas?

I haven't posted for a few weeks, because I broke my leg (road bicycling). I'm working on a few things having to do with leasing, but Floyd Norris's recent NYT column, "The Case for Global Accounting" has me back in the saddle again – though not on my bike L:

"For more than a decade, politicians and regulators around the world have claimed to want a common set of high-quality accounting standards that applied globally. The extent to which that rhetoric will become reality may soon become apparent."

"Rhetoric"? I would have chosen a stronger pejorative. But coming from the likes of Floyd, it clearly implies the absence of substance: that special interests are blithely spouting anything they can get away with just to keep the IFRS conversation alive. Everyone knows that GAAP/IFRS convergence has been a spectacular failure; yet the Big Four, the AICPA, maybe a few mega corporations, too-big-to-fail banks and the EU (albeit ambivalently) are continuing to prod the "politicians and regulators" to the point where many are wishing this whole IFRS thing would go away on its own.

But before I get to the main purpose of my post, let's not forget to give China – whose financial shenanigans could easily occupy the entire staff of the SEC's Division of Enforcement all by itself – its rhetorical due:

"'China and the United States support the objectives of a single set of high-quality global accounting standards,' the two countries said in a joint statement after a meeting in Beijing."

What a joke. China claims to be behind IFRS 100%, but its own standards are more like War and Peace condensed to ten pages instead of what one would normally regard to be a comprehensive basis of accounting. Chinese Accounting Standards (CAS) have less than one page of guidance on consolidation (CAS 33), and CAS 24 on hedge accounting is only seven pages. The Chinese representative to the IASB (Dr. Zhang Wei-Guo), I am told, seemingly has nothing to say for public consumption, and the Chinese contribution to the IASB's budget barely covers his $600,000 per year salary.

Bringing Back David Tweedie for an Encore

The undisputed king of IFRS rhetoric remains David Tweedie, even though he is no longer IASB chair. Mr. Tweedie's reconstructed version of history is that none other than Chair Arthur Levitt, promised back in the 1990s that the SEC would consider adopting international accounting standards, and "… the S.E.C. can complete [Levitt's vision] or not."

The problem is that Mr. Levitt never promised, or envisaged, any such thing. What he did promise was to consider allowing foreign private issuers only to file financial statements in accordance with international standards without reconciliation to U.S. GAAP – after the IASC's core standards project (1995 – 1999) was completed. It wasn't until ten years later, when Chair Christopher Cox (who has been pretty much relegated to the dustbin of SEC history) "surprised many" (Floyd's words) by permitting FPIs to file IFRS financial statements without reconciliation.

But, just to be sure that I had my facts straight, I checked with Lynn E. Turner, who served as Arthur Levitt's chief accountant at the time. This is what Lynn wrote me:

"Neither Arthur Levitt or I ever endorsed the International Accounting Standards while we were at the SEC. While IFRS is an improvement over statutory accounting principles used by some countries, it would seriously impede the competitiveness of the US capital markets by impeding their ability to provide greater transparency than is available elsewhere. Accordingly, I strongly oppose their adoption by the SEC for use in the US." [italics supplied]

Oh well. Even my beloved New York Times makes mistakes.

Key Players Coming to Their Senses?

The best news coming out of Floyd's article is the sense that the FASB and SEC are finally acknowledging the problems that have always been present, and have never gone away. From the FASB chair:

"'I am in favor of some form of incorporation of international standards, but we do not have a compelling urgent need to adopt I.F.R.S.,' said Leslie F. Seidman, the chairwoman of the [FASB] in an interview. 'We believe in the goal of minimizing differences and ultimately having a common set of standards.'" [italics supplied]

That's starting to approach passable, but I would like to ask Ms. Seidman why she still thinks that formal endorsement of IFRS standards is appropriate or necessary; and especially why the goal of common standards is worth limiting the FASB's flexibility to set its own agenda in any way.

Seidman's remarks are also consistent with speculation that Mary Schapiro, SEC chair, "… will step down after the election and would be happy to leave [the IFRS status] decision to her successor." If that wishful thinking becomes reality, then her successor's choice for chief accountant should foretell right away whether the IFRS question will be subject to reason, or just more rhetoric – just as Ms. Schapiro's choice of James Kroeker reliably indicated that she was greasing the skids for IFRS adoption.

And, speaking of Mr. Kroeker, I would have to say that I was most pleased to read this:

"At the Baruch conference last week, [Mr. Kroeker] asked the audience of accountants, 'Does anybody know of an entity that will provide global enforcement' of international standards? No hands were raised." [Italics supplied]

Mary Schapiro has failed to demonstrate any appreciation for the accounting nuances her staff deals with on a daily basis, or the implications of the complex differences between IFRS and U.S. GAAP. Now, however, her own chief accountant must be thinking, "No SEC means no hope of enforcing consistent application of IFRS."

To which I would add that the SEC's influence will be universally unwelcome outside of its narrow jurisdiction.

Is there anything else the SEC chair needs to know in order to make her decision?

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