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‘Nostalgia Accounting’ a threat to IFRS Adoption

Is it time to abort IFRS adoption in the United States?

As recent as 2010, the accounting community was looking at the issue of IFRS adoption in the U.S. as a fait accompli. The regulators had said that International Financial Reporting Standards would replace Generally Accepted Accounting Principles (GAAP) in the U.S. around 2015. Then, somewhat suddenly, the U.S. Securities and Exchange Commission (SEC) backed off its commitment and developed the idea of “condorsement.”

Under condorsement, the U.S. transition to worldwide accounting standards would occur through a continuation of “convergence” projects, and then through gradual Financial Accounting Standards Board (FASB) endorsement of IFRS in those areas where FASB and the International Accounting Standards Board (IASB) still differ. U.S. GAAP would continue to exist under this scenario, and the FASB would still retain its authority.

One problem with IFRS-adoption in the U.S. is rule-making duties of the SEC related to federal legislation have prevented the SEC from devoting time to deciding on the future of IFRS in the United States, SEC Chief Accountant Paul Beswick said Monday.

Another concern is that condorsement is an on-going approach and no one really knows where it will lead and when the process will be completed. Tom Selling, an outspoken writer about this issue, has characterized the whole matter this way in his piece published in the Accounting Onion. “The SEC has finally conceded that its efforts to adopt IFRS have failed. Damage control has begun in earnest, but the ship is still taking on water.”

The problems facing IFRS adoption have been ratcheted up one level because the commitment of some 120 countries to follow IFRS is being questioned. The issue is whether the standards are fully supported or are the accounting boards cherry-picking which standards, and which parts of standards, will be followed. The result is there is a lack of commitment to IFRS mainly in Europe that brings into question whether the U.S. should go forward with condorsement. Why tinker with GAAP when other countries are veering away from IFRS?

According to a study in 2011 by the Association of Chartered Certified Accountants (ACCA) titled International Variations in IFRS Adoption and Practices, there are many opportunities for IFRS practices to differ from company to company or from country to country. One example for different versions of IFRS is that most countries introduce delays or changes when implementing IFRS. Another is that options exist within IFRS. The study also notes that it can be expected that a company will continue with many of its previous accounting policy choices when it first adopts IFRS.

The concerns raised by the ACCA are not likely to go away any time soon. Just last month  Michel Prada, chairman of the IFRS Foundation Trustees, cautioned against individual countries trying to influence IFRS standards to match their specific needs, saying they must accept that adopting IFRS means commitment to a single set of global standards and will not be able to maintain their own local GAAP.

Speaking at the Financial Accounting Standards Foundation in Tokyo, Prada said while he acknowledged that adhering to a single set of global standards was ‘difficult and sometimes unpopular’, he stated ‘there really is no alternative.’ Prada described the desire to ‘tweak’ the IFRS standards to better reflect local preferences or accounting traditions within a particular jurisdiction as ‘a form of nostalgia accounting’. He said that while individual IFRS jurisdictions might well like to choose from what he termed ‘the à la carte menu’, by doing so they would endanger the benefits of having one set of standards and everyone will lose.

Prada identifies a critical concern from a U.S. perspective when he points out that ‘If the IASB and the FASB could not come up with the same standards for the netting of derivative contracts, and has struggled to find a common loan loss impairment model, despite years of sitting around the same board table, then what chance is there for multiple boards to independently reach the same outcome?’

Additional concerns about IFRS have been raised by the European Commission that is planning to review the EU regulation on the application of IFRS at the end of 2014. The issue here is that the accounting profession and its governing bodies have raised concerns about the reliability of financial statements produced using IFRS.

The whole issue of whether IFRS are superior to U.S. GAAP in light of exceptions, carve-outs, and other deviations from IFRS-implementation, has just gotten murkier because a special adviser appointed to review the European Union's role in formulating international accounting standards will make recommendations on how the EU can boost its influence in the standards setting process.

Philippe Maystadt, former president of the European Investment Bank and former Belgian deputy prime minister, was chosen to examine the EU's contribution to IFRS. Maystadt’s proposed recommendations give me great pause about the whole issue of IFRS adoption in the U.S. in any form including condorsement.

Maystadt praised the goal of a single set of standards, but said Europe needs to do more to present a consolidated, stronger position. He is concerned about the diffusion of influence in the community and recommended setting up a structure that is able to carry out a strategic analysis of the economic impact of the standards and better coordinate the European positions on this matter.

Maystadt suggests that the EU should maintain a so-called “standard-by-standard adoption procedure,” which would allow lawmakers the ability to accept or refuse specific standards issued by the IASB. However, amendments or other changes to alter a standard or make it more flexible would be strictly controlled so as not to undermine the goal of a uniform set of standards. Maystadt believes the EU should amend its IFRS regulation to add adoption criteria, including not endangering financial stability and not hindering the economic development of the region. Alternatively, Maystadt said the commission could clarify the regulation by specifying that standards should “contribute to the public interest.”

This sounds like a wish list, or pie-in-the-sky proposal, that will ultimately doom IFRS. Maystadt was no doubt greatly influenced by the SEC’s proposed condorsement approach by suggesting an “adoption criteria.” Moreover, it should be a given that IFRS ‘contributes to the public interest’ in the first place. If not, what in the world are we doing by suggesting IFRS should be ‘condorsed’ with U.S. GAAP?

Blog posted by Steven Mintz, aka Ethics Sage, on December 11, 2013

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