Issuance of the SEC’s proposed IFRS roadmap has done a good job focusing arguments about the benefits of a global set of accounting standards. While many commentators of the roadmap had concerns about various aspects of the proposal, the majority believed the ultimate goal should be one set of high-quality, globally accepted accounting standards. However, there is disagreement on how to get there. Some say that adoption of IFRS is the only way to achieve the goal. Others believe that much more convergence between the standards is needed before the U.S. should consider adoption. More convergence will make adoption easier and less costly and may even make adoption of IFRS unnecessary.
Supporters of adoption believe that convergence of U.S. GAAP and IFRS without adoption will fall short of the benefits that accrue from adoption of the international standards. Convergence alone will never eliminate all of the differences between the two sets of standards. These differences create forces that try to push a standard setter to adopt the other’s rules that are more flexible in order to eliminate disadvantages for their constituents. This is the race to the bottom problem that needs to eliminated.
Other advantages of adoption include reduced reporting costs for multinational companies, better comparability with other companies around the world and improved capital allocation by investors. IFRS are high quality. This has been validated by use of IFRS in more than 100 countries and acceptance by the SEC of its use by foreign filers without reconciliation. If the U.S. is the only IFRS hold out, it will be at a disadvantage.
Those who support continued convergence over adoption say adoption supporters have not shown that the net benefits of adoption outweigh those of convergence. They believe adoption is just not right for the U.S. now. The U.S. is the largest capital market in the world and unique in critical ways. Giving up significant control of the standard setting process and throwing a U.S. regulatory and litigation system out-of-balance is too risky.
Conceding that not all differences will ever be eliminated, there are those who believe that the comparability argument has been oversold. There can be country and company specific differences in application of IFRS. While convergence without adoption will not eliminate all differences, we need to weigh having some remaining differences against the costs and risks associated with a change in standards. Convergence results in improvements in both sets of standards and most of the benefits that come with adoption also come with convergence. U.S. GAAP is the gold standard and abandoning them would be giving up a competitive advantage.
The decision regarding IFRS in the U.S. will be a long process. Should the U.S. focus on continued convergence of its accounting standards and table adoption, maybe even indefinitely? Alternatively, should adoption of IFRS be the ultimate goal? Let us know what you think.