IFRS Adoption in the US: One Year Later
Has IFRS/GAAP convergence been derailed by the magnitude of the financial crisis? Some seem to think so. Personally I'm of the school of thought that it was a bad idea in the first place and not necessarily the sort of legacy Mary Schapiro cared to inherit from her predecessor at the SEC.
Meanwhile, still we wait.
August 2008 was a hopeful time for advocates of principles-based accounting. The United States had a new plan to adopt global accounting standards, which are considered to allow for more judgment than U.S. generally accepted accounting principles. And an advisory group to the Securities and Exchange Commission unveiled a 170-page report recommending ways financial reporting could be simplified, including the belief that bright lines should not exist.
A year later, there has been no movement toward adopting International Financial Reporting Standards in the United States since then–SEC chairman Christopher Cox introduced a roadmap for the conversion last August. And while some recommendations of the Committee on Improvements to Financial Reporting were taken up by standard-setters and regulators during the year the CIFR convened, the SEC has procrastinated on addressing the meatier, more-controversial suggestions that could substantially reduce reporting complexity.
Those suggestions included having the SEC develop a policy statement on the reasonableness of judgment, in order to reduce second-guessing among companies, regulators, and auditors. The CIFR also recommended that the commission issue additional guidance on how companies should view materiality when considering a financial restatement. And, the committee offered, the SEC could require companies to write executive summaries of their 10-Ks, briefly explaining their business, financial condition, and operations.
To be sure, the SEC has been wrapped up in repairing its reputation following the Madoff scandal and the collapse of investment banks. The announcements coming out of the commission this year have focused largely on short-selling rules; executive compensation; proxy access; and enforcement actions against or settlements with financial institutions, a corporate behemoth (General Electric), and several Ponzi schemes.
Indeed, nearly seven months into her job as SEC chairman, Mary Schapiro has for the most part — at least publicly — stayed away from talking about corporate finance and accounting policies. In fact, Schapiro has yet to name a permanent chief accountant since Conrad Hewitt left in January.
(correction, the CFO article is dated August 12th and Schapiro finally committed to a chief accountant shortly after this was written.)
One tricky recommendation that SEC staffers may continue to ignore involves materiality. The CIFR wanted the commission to tell companies to consider both qualitative and quantitative factors when determining an error's materiality, and make their decision based on "the perspective of a reasonable investor." In addition, the committee wanted more guidance on how companies should address an old error. But while the SEC has not issued any new guidance on materiality since the CIFR report came out, Pozen says companies are gradually reevaluating what is considered material on their own.
Another CIFR suggestion may be dead for now. Many accounting observers believe a more principles-based approach to financial reporting, putting more trust in professional judgment, would clear up the muddy water created by decades of rules proliferation. In that spirit, the CIFR asked that standard-setters eliminate percentage tests, strict thresholds, and numerical parameters in rules.
However, FASB believes that pleas for more detailed guidance won't abate. "Although the Board is committed to eliminating or reducing the use of bright lines and exceptions, we do not perceive any significant change in the demand for such guidance," FASB wrote in a 17-page response to Pozen.
We are open to this and still standing around with our thumbs up our backsides. A direction would be wonderful but I don't think any of us are holding our breath to hear a decision from up high on where we go from here.
Have we made any progress since last year's announcement? Not in the least.