Peeling away financial reporting issues one layer at a time

What the Chief Accountant’s Resignation Means for the Future of IFRS in the U.S.

As I was sitting down today to write the second and final installment on periodic lease expense, I received this email from a friend [bold italics supplied by yours truly]:

I was at the IMA annual conference …. Leslie [Seidman, FASB chair] and Bob Herz [former chair] both spoke, not at the same time, however. Each had essentially the same message. Total convergence is off the table. At most SEC will encourage FASB to 'endorse' IASB proposals, if they make sense in the context of U. S. financial reporting. It looks like the great optimism of a couple of years ago has vanished under the impact of actual experience in working together.

Nothing said explicitly but reading between the lines, the FASB is somewhat disillusioned with IASB and the whole process. As and when the SEC IFRS 'paper' is released (it has been written and nobody is talking about when it will be released) it will NOT have any staff recommendation. Interesting.

"Interesting," indeed. Leasing will have to wait – hopefully not much more than a day.

The Staff Punts

The Chief Accountant to the Commission, James Kroeker, has just submitted his resignation and will be departing in a few days; so, how could the forthcoming paper from a leaderless staff possibly have any recommendations?

Even the most ardent IFRS supporter will recognize that the timing of Mr. Kroeker's resignation leaves little doubt as to the reason: that he should be spared the final indignity of the SEC's now-inevitable (remember when IFRS adoption was 'inevitable'?) retreat from IFRS adoption. It was the idée fixe of his three-year tenure, but it quickly devolved into an exercise in damage control with as little as could be said about IFRS from the SEC, the better. Sad to say, but failed IFRS convergence is Mr. Kroeker's only legacy.

What Next from the SEC?

If Mr. Kroeker was the SEC staff's accounting leader, he had to have been the Commissioners' accounting rudder, if for no other reason than the complete absence of anything close to a background in accounting practice or policy amongst them.

Rudderless or not, it has finally, finally come time for the Commission to fish or cut bait. Most everyone on this side of the pond is hoping that it will acknowledge – however delicately it may be phrased – that convergence has been, at best, a huge waste of time and resources. At worst: (1) convergence with IFRS has squandered momentum from the financial crisis of 2008 to close the loopholes that banks have exploited for years to hide immense risks and losses; and (2) has relegated to the dustbin too many good ideas that emanated from the FASB's own deliberations, which were summarily rejected by the EU and the IASB.

Alas, although decisive action from the SEC is to be hoped for, it is surely too much to expect from the current group of fence sitters. Which brings us to the point in this blog post where I want you to imagine me grunting like an ape, beating my chest with both fists and repeating my prediction from February 2010: the EU, and not a dithering SEC, will be the ultimate decider of the fate of IFRS adoption in the U.S.

The EU will declare that enough is enough. It will tell that IASB that it is better off with the one that brought it to the party, and send the U.S. packing. For its part, the SEC will feign disappointment at having been deprived of a shotgun wedding.

The Right Thing to Do

Parting ways with the IASB raises the question of what to do with the projects the boards are racing to complete: financial instruments, leasing and revenue recognition. 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 more.

The SEC needs to recognize that these projects are laden like no others before them with unpalatable compromises; and the political jerry rigging is taking place as we speak. It should inform the FASB that converged final standards should no longer be considered to be in the public interest. Moreover, the FASB should ignore pressures from the EU to truncate deliberations and finalize standards before reason has a chance to prevail.

The staff's report could be the best opportunity for the SEC to direct the FASB to undertake a fundamental assessment of each current project. For one thing, it could find (as I have) that continuing the revenue recognition project is no longer worthwhile. Although, the project got off to a promising start ten years ago, it has become watered down to the point where there can be no valid expectation that the final standard will result in significant improvements to U.S. GAAP.

* * * * * *

IMHO, the only remaining IFRS adoption question is whether the SEC will act honorably by calling an end to the convergence charade, or whether it will leave the dirty work to the EU.

I'm still betting on the EU to do the deed. But either way, the SEC will have egg on its face.

1 Comment

  1. Reply nemo July 15, 2012

    Sanity prevails.
    You’re lucky. I live in a country in which we had IFRS thrust upon us (as if our former imperial masters still held sway out here).
    Perhaps I’m old fashioned, but some of the nonsense that now appears in our IFRS-compliant financial statements makes me physically ill.

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