On August 27, 2008, the SEC decided to propose a roadmap to a requirement for U.S. public companies to prepare their financial statements in accordance with IFRS. That roadmap begs the question, “When the destination is reached, what should become of the FASB?”
There are many scenarios that could unfold as the U.S. financial reporting system, at least for public companies, moves toward IFRS. But the most basic cut is: should the FASB remain in existence as an independent body or should the FASB actually or effectively cease to exist?
Before sitting down to write this, I was convinced that the FASB should remain in existence no matter how IFRS unfolds in the United States. There were two primary reasons. First, I know how instrumental the FASB has been in the development of IFRS and think IFRS would be better for having continued input from the FASB. Second, and perhaps larger in my mind, I thought that, without an FASB, American views would be under-represented at the IASB. But putting pen to paper changed my mind.
I still believe the FASB, or a similar body, should remain in existence if a consensus develops that IFRS do not adequately fill the needs of the constituents to private company and not-for-profit organization financial reporting. But otherwise, I can find little justification for the FASB’s existence far beyond the date IFRS become mandatory for public companies.
It’s pretty clear that, for a variety of reasons, many other developed countries—for example, most of the European Union—have no intention of seeing their national standards setters disappear. Those other countries’ bodies will continue in existence, doing work such as setting national standards (for use by privately held companies or in statutory financial statements) or vetting individual IASB standards for use in their countries. And those bodies will continue to work with the IASB, in many cases providing research for the early stages of IASB projects, staff for IASB projects, or opposing views. My concern was that the United States would go from holding an elevated place among national standards setters vis à vis the IASB—with the FASB having a strong influence on every IASB standard—to having no representation similar to other countries.
But I don’t think we need representation that looks just like the representation other countries have. First, the International Accounting Standards Committee Foundation (IASCF) Trustees are proposing, as part of their Constitution Review, to change the way IASB board members are appointed. Seats would go to areas of the world, with North America getting four of the sixteen seats. That’s roughly the same level of representation North America has had on the board up until now, but that level of board representation would become enshrined in the IASCF Constitution. Board members would still be independent of their constituencies, but board members inevitably bring with them a certain national perspective. Second, the U.S. would be represented—by the SEC—on an IASCF Monitoring Group, being created in connection with the IASCF Constitution Review. And third, if the FASB ceases to exist as an independent body, the only scenario I can see is that a sizeable chunk of the FASB becomes a U.S. branch office of the IASB. Bob Herz has suggested the need for a U.S. branch office of the IASB (as well as branch offices in a couple of other countries), and I think the IASB’s U.S. constituents will demand one and the IASB will need one in any case.
Other roles I had envisioned for the FASB, such as providing independent research, making recommendations, and voicing concerns, could reasonably be filled by the profession.
Let me know what you think.