The Mary Schapiro era at the SEC is coming to an end without, despite herculean efforts, having moved the ball forward on IFRS convergence. The final denouement was the departure of Chief Accountant James Kroeker on the day before the release of his staff's dismal (in more than one sense) final report to wind-up the two-year study of IFRS adoption. It should go without saying that the timing of Mr. Kroeker's departure was carefully timed to minimize the humiliation.
For its part, the IASB must surely understand that the SEC staff's backtracking has posed an existential threat – if not to the IASB's existence, then at least as the standard setter for the U.S. and Europe. After Europe finds that working with an IASB that doesn't control the U.S. does it no good, then it will be all over but the shouting. The next step down will be for every other country with mature standard setting mechanisms to revert to their old ways, and the IASB will find itself where it was about twenty years ago – where only smaller economies will require companies to represent full compliance with IFRS, and everyone else will pick up the rules they like and leave the rest.
While reading the IASB staff report, it occurred to me that the IASB is reacting to the SEC staff report like a patient who receives a diagnosis of terminal cancer from its doctor. First comes Denial, of which there are numerous manifestations in the IASB report; but, the following is particularly revealing:
"The SEC Staff Report notes that even after a decade-long convergence programme, some [?!] differences remain between IFRS and US GAAP. The SEC Staff Report does not imply that either US GAAP or IFRS has the better solution, only that they are different." [italics supplied]
First, let's look at a couple of the topics that the Boards attempted to convergence, but failed. Most prominent, is research and development. After many months of back and forth debate, nary a comma of either U.S. GAAP or IFRS met its demise.
Can one rationally claim that IFRS and U.S. GAAP R&D standards are merely different? If that's actually the case, then how come they aren't converged? So sorry to have to break it to the IASB staff, but they are deluding themselves. The reality is that the FASB believes that U.S. GAAP is better.
The topic of business combinations deserves a dishonorable mention, because although the Boards count this as converged, substantial differences still remain – mainly because the IASB showed itself to be more beholden to issuers on this one than the FASB. As I described here, the IFRS version gives issuers comparability-defeating free choices and watered-down disclosures in key areas.
Second, let's look at the topics for which the IASB issued new standards outside of the convergence agenda. The revisions to IAS 23 requiring interest capitalization is my favorite example for showing that when the rubber hits the road, the IASB can't be counted on to adhere to its own due process rules. Or, to cover its tracks, the IASB would have to claim that its standard is better than U.S. GAAP; for if that were not the case, then why didn't the IASB simply adopt U.S. GAAP when it had the chance?
Another situation I have written about is IFRIC 15, which harkens back to the old ways that U.S. GAAP used to treat real estate construction projects – but doesn't anymore. Here again, U.S. GAAP setters long ago rejected the IASB's approach, for it gives too much discretion to management that could be used to manipulate earnings.
Third, let's consider the numerous issues for which the chasm is so wide between U.S. GAAP and IFRS that convergence hasn't even been seriously discussed:
Statement of cash flows—The IASB proudly trumpets its sham principles-based emphasis on substance over form. There can be no greater exposure of the falsity of these claims than IAS 7, which permits (but does not require) overdrafts (i.e., loans masquerading as negative cash balances) to be offset against cash accounts with positive balances.
Contingent liabilities—The IASB is proposing that management will decide whether or not a particular contingent liability can be measured reliably. That's an open invitation to earnings management. U.S. GAAP has its own problems regarding contingent liabilities, but I'll still take it over what the IASB has proposed.
Impairment—This may be the area in which U.S. GAAP and IFRS are most different, yet it's not on the convergence agenda. That's an incredible omission.
Inventories – There is a little-known yet significant IFRS requirement to value biological assets at net fair value. It sounds principles-based, but it's just another opportunity to manage earnings. Do you prefer to recognize revenue on your current apple crop in the quarter before or after selling it on the market? IFRS gives you a choice, which you can take by the timing of your harvest.
For all of the above, I would conclude that U.S. GAAP is better – not just different. But, whatever I might think, the fact is that these matters would have been converged if there were not a difference of opinion between standard setting bodies. Logic dictates that there has to be more here than standards being merely different.
Fourth, let's consider current major convergence projects. With respect to the loan impairment project, the Boards disagree on how to implement the so-called "expected loss" approach. That the IASB Staff sees this as merely a difference is delusional.
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After Denial comes Anger. Reuters reports that "Han Hoogervorst has expressed frustration at how convergence has slowed and wants to move beyond the seemingly permanent joint meetings with the Americans."
And after Anger comes Bargaining. IFRS Trustee Chair Michel Prada (who probably knows even less about accounting than Hans Hoogervorst) seems ready to make a deal with the devil:
"While acknowledging the challenges, the analysis conducted by the IFRS Foundation staff shows that there are no insurmountable obstacles for adoption of IFRSs by the United States…"
Unfortunately, Depression pervades throughout. We'll know more about the prospects for Acceptance after Ms. Schapiro's imminently expected resignation and President Obama names her successor.