by John Hughes
The SEC has just issued (on Friday, July 13) Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers – Final Staff Report. It sets out further observations on a range of areas but specifically doesn’t “set out to answer the fundamental question of whether transitioning to IFRS is in the best interests of the U.S. securities markets generally and U.S. investors specifically” (a week or so earlier, SEC spokesman John Nester had already let it be known that “staff have not established a timetable for completing a recommendation” on that matter). I’ll write more about the report at a later date, but based on a very quick initial scan, it seems to contain enough caveats and cautions to justify putting off a decision forever. Which might well be your best bet on how it plays out from here.
I’ve written several times in the past about the SEC’s ongoing deliberations (how could you not, if you claim to maintain any kind of IFRS blog?), usually expressing my lack of enthusiasm for the way they’ve handled the whole thing. I don’t mean they should have rushed to judgment – I’ve never had a view on whether the US should adopt IFRS or not – but they’ve done pitifully little to facilitate an informed, progressive conversation on the issue. Outgoing Chief Accountant James Kroeker’s bland assurances of progress suggested to many that the game was rigged; the SEC’s much-heralded “roadmaps” and studies consistently failed to engage adequately with the concerns of detractors (at first glance, maybe the new report does better at this, but don’t hold me to that). Whether or not the no-IFRS-in-the-US crowd has had the inherently better arguments, they’ve certainly been more passionate about them: if you were scoring it as a game, you’d have to say they deserve the win.
One commentator reacts as follows: “There seems to be no valid reason as to why SEC is delaying its decision on IFRS. It could be to lobbying (sic) by industry and investors, who earlier also pushed the date to 2015 for full transition to IFRS, arguing that U.S. companies would need about four to five years to implement the changes successfully. The rest of the world is rightly moving towards international standards including financial centers such as; Hong Kong and the European Union, but it won’t be fully successful unless US joins.” Of course, this is just a bunch of subjective assertions: the SEC certainly has a valid reason for not making the leap – being simply that it hasn’t successfully built the consensus necessary for such a major undertaking. I’d agree it lacks a valid reason for handling the whole thing so ineptly (“Chinese water torture” is what IASB chairman Hans Hoogervorst called it) but that’s the nature of organizations; they let things get away from them.
But if we leave the US to its own devices, what about the point that its lack of participation undermines the cause of IFRS elsewhere? Former Chair David Tweedie raised this in April, as summarized by the Journal of Accountancy: “He said nations with significant economies such as Japan, China and India might not adopt IFRS if the U.S. doesn’t. He said the U.S. holds the key to the future of international standards as the SEC considers its options on IFRS. ‘The world is waiting,’Tweedie said. ‘And waiting. And waiting.’” Others have speculated that European opt-outs and other dissention within the IFRS tent might increase if the US goes its own way, and some Canadian commentators (such as Al Rosen) have suggested that Canadian entities – despite our own seemingly successful transition to IFRS – might start to agitate for reopening the conversation about aligning with US GAAP.
But maybe it was only because of Tweedie’s quirky genius, and a rare alignment of circumstances, that a relatively quick path to global harmonization ever seemed to exist; even then, it may have been a mirage. I don’t think jurisdictions and cultures can be talked into adopting IFRS, any more than they could be talked into switching to driving on the other side of the road. Accounting is a practical discipline, or else it’s nothing; either it plays a meaningful role in facilitating the movement of capital, in a way that reflects the prevailing risks and the needs of investors, or else it’s just a hollow compliance exercise. Of course it would be more efficient if we never had to bother with reconciliations or other barriers between jurisdictions, but the major benefit (again, if one exists) of financial reporting takes place within borders. If US preparers and users don’t judge with sufficient unanimity and confidence that adopting IFRS would make their domestic circumstances any better in the aggregate, it’s frivolous to suggest they should go ahead anyway and take one for the global team. And it’s not irrelevant that these are grim times, with no real end in sight: even if adopting IFRS brought the US some incremental benefits, it would also bring years of distraction and bickering and all the rest of it. Can you really criticize them for not having the heart for it?
If you ask me, the best way to turn the US around - if one possibly exists – would be to generate persuasive evidence that IFRS contributes to better-functioning capital markets than they have there, and that any concerns about the IASB’s governance and the consequences of inconsistent regulation and interpretation and all the rest of it are overblown: that’s right, the old cliché about actions speaking louder than words. And whose actions could speak more eloquently than its immediate neighbour and largest trading partner? Or maybe, after a few years of this, we’ll decide there isn’t any such evidence, in which case we’ll still be doing the US a favour, as a conclusive cautionary tale. Not sure where that’d leave us though…
The opinions expressed are solely those of the author