IFRS Blog

IFRS or U.S. GAAP – Scenarios for the Future

In developing its comment letter to the SEC on its proposed roadmap, the Financial Accounting Standards Board used the report "Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors." The research was conducted by professors from Wharton, the University of Chicago and MIT's School of Management.

The research study outlines several scenarios for the evolution of financial reporting standards in the U.S. The report notes that the scenarios presented are neither exhaustive nor mutually exclusive. The scenarios include:

• Maintain U.S. GAAP with acceptance of IFRS from foreign firms
• Maintain U.S. GAAP with continued convergence between IFRS and U.S. GAAP
• Allow choice between IFRS and U.S. GAAP, but require reconciliation
• Allow unrestricted choice between IFRS and U.S. GAAP
• Adopt "U.S.- Specific IFRS"
• Set conditional timetable to fully Adopt IFRS
• Create international U.S. GAAP (I-GAAP)

The study does an excellent job summarizing tradeoffs between the scenarios. Based on comment letters received by the SEC on its roadmap, it appears many individuals and organizations support maintaining U.S. GAAP with continued convergence between IFRS and U.S. GAAP. Cooperation between the U.S. FASB and the IASB has led to improvements in both sets of standards. Continued convergence will result in even more improvements.

One concern about adoption of IFRS in the U.S. is that it would eliminate competition between standard setters and grant monopoly status to the IASB. The research study lists a number of potential problems this could create which includes lack of incentives to innovate and mounting political pressure as consensus must be reached across a wide range of political regimes and interests.

The discussion regarding creation of an international U.S. GAAP (I-GAAP) is very interesting. Under this scenario, the U.S. would develop a set of standards that would compete directly with IFRS. Whether this idea has legs is debatable.

The idea of allowing unrestricted choice between IFRS and U.S. GAAP - perhaps after a period of time to allow for more convergence of the standards - may have merit to some observers. Both standards are considered high-quality. Why not let market forces drive the decision? Doing so keeps competition alive between the standard setters and would result in a more orderly transition to IFRS for U.S. companies.

What do you think about the scenarios outlined in the study, the importance of competition between standard setters and the need to allow for more time for convergence?

- Paul Parks|www.IFRS.com

Fair Value, Political Pressure and Independence

Tired of the fair value debate? Hope not, the International Accounting Standards Board is about to enter another round.

On April 2, the day FASB announced their new guidance on fair market measurements and impairments, Trustees of the IASC Foundation said that while they acknowledge the desire to achieve commonly accepted positions between US GAAP and IFRS, they urged the IASB to avoid piecemeal approaches. The Trustees support the IASB announced plan to undertake a comprehensive proposal on accounting for financial instruments that will result in a proposal within six months.

European Finance Ministers were not happy with the IASB’s announcement and released a statement saying it is critical that the IASB change its rules to conform to the U.S. rules so European Banks are not put at a competitive disadvantage. The finance minister from Italy said he would “just download the U.S. text with Google and adopt it with a European blessing”. EU Internal Market Commissioner, Charlie McCreevy said, “This issue has to be addressed immediately”.

The IASB responded by saying that reports that the new FASB guidance will create new differences with U.S. GAAP appear to be overstated but promised to closely review the final FASB staff positions when released. Regarding guidance on other-than-temporary impairments, the IASB noted that the concept does not exist in IFRS and that aligning the differences between the different impairment models will be a major undertaking. Regardless, the Board promised to address the need for additional guidance at their April 20-24 board meeting.

The IASB seems to have diffused the need for immediate action for now. Hopefully, the Board will decide to address accounting for financial instruments in a comprehensive manner after its April meeting. Doing so will help repair damage created the last time EU politicians called for immediate action – and the IASB responded. The IASB has another challenge brewing. How do you think they should respond?

Regarding the FASB’s new fair value guidance, Chairman Robert Herz said that while the 15 day comment process was accelerated, they received more input than normal and asserted due process was followed. In the end, the proposals were modified to incorporate input received and the new guidance was issued with a formal vote. One concern is that this event will open the door to even more industry and political pressure in the future.

Given the extreme political pressure and turmoil over this issue, do you believe that the FASB should have responded differently?

 

- Paul Parks|www.IFRS.com