Time for the U.S. to to move to IFRS, says this member.
Indeed, it is difficult to imagine a credible argument for two accounting regimes in a world in which capital flows freely and investors seek returns globally. The costs of having two such regimes are consequential. Most important, it is presently impossible to compare with confidence two otherwise similar entities reporting under different regimes.
Investors also incur unnecessary costs when multiple systems are necessary to report information about a single event reported under different regimes. For example, it is currently necessary for a U.S. multinational to keep local statutory books in accordance with IFRS in much of the world and to capture those same results in U.S. GAAP for consolidated reporting.
Rigorous academic comparison of information content between U.S. GAAP and IFRS (notably the work of professors Barth, Landsman and Lang) shows the two are essentially equal for similar entities in similar environments. Even if one system were "better" than the other, that superiority should be short-lived, since in competitive markets, superior information is rewarded with a lower risk premium (that is, higher prices), and the inferior standards would be motivated to catch up quickly.
Quality Conversion By Steps
I emphatically believe that U.S. conversion to IFRS must not be attempted in a massive "big bath," the approach employed by the European Union in 2005. This conversion must be step by step, standard by standard, with the utmost care for transition and effective dates.
Accounting changes in the U.S. have become almost routine, with literally hundreds of such changes in FASB's four-decade history. Every accounting change is costly, requiring the reporting entity, overseen by the board of directors, to evaluate to understand the new requirements; to investigate its affected practices; to select among any alternatives in a new standard; to educate those who will be affected in preparing, auditing and using the affected financial statements; and to implement, a step that always affects the accounting and audit functions and usually affects one or more nonaccounting functions.
Changes to pension accounting, for example, generally are implemented by a very small cadre of specialists, often from outside the enterprise. Changes to revenue recognition usually affect a significant cross-functional group of front-line employees in many countries and business environments, some of whom have no meaningful historic relationship with the finance function.
Central oversight and coordination is necessary to achieve quality controllership for any accounting change, and the finite capacity of that controllership function sets a very real limit on the number of simultaneous accounting changes.
Standards setters are obliged to weigh the costs of making a change against the expected benefits, best thought of as the hard-to-quantify reductions of yet another cost--the cost of inferior information.
It would be foolhardy to expect to achieve quality financial reporting if we change everything at once in transitioning to IFRS. The EU's experience is instructive. It faced significantly diverse practices and needed immediate comparability. Affected entities, of necessity, applied triage in adopting IFRS, using their available resources for the most significant principles.
One useful example is the peculiar IFRS requirement to depreciate components of assets, a requirement that necessitates heroic changes to what are often legacy IT systems. Anecdotes indicate that this IFRS requirement was essentially ignored during the EU's big bath. The U.S. is not faced with the EU's burning platform, and needn't tolerate this sub-optimal transition.
Virtually every discussion of IFRS transition I've been involved in mentions the "insurmountable" problem of U.S. LIFO conformity--that is, a condition for LIFO in tax returns is its use in financial reporting. The best solution, clearly, is IRS waiver of the conformity requirement. Failing that, accepting a qualified accountant's report for non-GAAP inventory accounting seems an easy path for the SEC to achieve the objective of substantial conformity.
In non-inflationary times, LIFO is surely an expensive anachronism, and cannot be permitted to block the far more important goal of robust financial statement comparability.
Some, like King, simply assert the superiority of U.S. GAAP, and believe that a better outcome would have resulted from the world's transitioning to U.S. GAAP. That was never an option, but not for King's reasons. U.S. GAAP is simply not viewed globally as superior to IFRS.
In truth, strengths of the two regimes are different and weaknesses common. Both boards have, to their ongoing frustration, constructed their Conceptual Frameworks on asset/ liability definitions rather than the cost/benefit or matching questions that underlie every financial--or resource allocation--decision. Both rely on staff and boards whose members have little experience in, or apparent curiosity about, the process of allocating resources or evaluating those allocations.
Both are dominated by auditors, whose salient skill is verification, not evaluation or communication. Both have diminished the roles of those who have experience in actually making and evaluating economic decisions--management and users.
In fact, the two similarly constituted boards, working together, often reach answers to the same questions that are only marginally different. As one would expect, neither produces reliably superior final statements.
GAAP And IFRS Differences
For brevity, I will follow common practice in referring to U.S. GAAP "rules" and IFRS "principles." While U.S. GAAP seeks to answer everything, IFRS seeks to frame a process. U.S. GAAP strives to be a "check-the-box" exercise that tolerates no diversity. But the rules label should not camouflage the fact that U.S. GAAP are indisputably principles based.
I think it more important that U.S. GAAP, however detailed, will always be incomplete, and will always be subject to those errors that arise from checking the wrong box, which often happens despite best efforts.
All is good when rules fit precisely and are applied perfectly. But rules accounting is attractive to those who, uncomfortable without a box to check, are badly equipped for a changing financial world, and who sometimes are paralyzed pending receipt of more rules. Preparers in this world can sleep, comfortably, knowing that everything fitting the rule is "okay." Regulators are comfortable because they aren't obliged to consider complex questions about fairness and economic substance.
But novel transactions are problematic in this rules world. More important, rules-based accounting is unattractive as a profession to those who approach questions by first understanding economic implications, then seek to communicate those implications. Real economic understanding of transactions by accountants is consequently unnecessary in this world, and increasingly infrequent. The process of box-checking has failed to live up to its promise of unambiguous precision, and management frustration with the process is extreme. Long term, this world seethes with communication failures and threatens financial reporting irrelevance.
To date, IFRS have, to date, generally succeeded at publishing only principles, broadly defined. Practicing IFRS professionals must use judgment. Consequently, as one would expect, IFRS are shorter than U.S. GAAP and require entirely different skills.
King and others would have us believe that principles are but transitory and that global accounting will inevitably evolve to look like U.S. GAAP as standards setters and regulators document the answers they reach for specific cases. I can't speak to the regulatory perspective except to observe that shared regulatory responsibility seems to have diminished the ardor any single regulator might otherwise have for specific answers. In the case of EU regulatory objection to IFRS 39, IASB argued for, and ultimately upheld, its principle.
As a standards setter, I have spent sufficient time with IASB to be confident that, at least as that board is currently constituted, questions that don't rise to the level of "principle" are simply not answered. The IASB committee on which I served, the International Financial Reporting Interpretations Committee, repeatedly rejected questions that we deemed answerable from existing principles. U.S. GAAP serve as a chilling reminder to IASB of the consequence of answering everything.
It is true that the U.S. accounting profession will need to approach its role under IFRS differently, both during the transition, when important elections must be made, and afterwards, as new circumstances arise. Upon completing this transition, the U.S. profession will be more robust and its role in the business decision processes will have grown materially.
Some accountants who are comfortable in the U.S. profession today will not make it, like many who were comfortable in the profession before decisions were reduced to checked boxes. Most will be exhilarated when they, like the French in 2005, become immersed in the economic activities of the enterprises whose results they were reporting.
The transition to IFRS that I am endorsing does not mean that the financial statements of U.S. entities will soon be identical to those of European entities. I am bewildered, for example, about how one could transition from U.S. goodwill accounting, which has distributed goodwill fragments across U.S. balance sheets in essentially a random, if opportunistic, fashion, to the IFRS approach, which logically associates goodwill with acquired businesses.
It does mean that at a date, not far in the future, we have an opportunity to report routine transactions under identical accounting principles by essentially every capital-seeking entity in the world.
U.S. GAAP codification has paved the way for IFRS transition. It is unnecessary to do more or less than replace chapters of codified U.S. GAAP with the appropriate provisions of IFRS (again, with very careful transition and effective dates). It is foolish to do this too quickly because haste will lead to errors and omissions. But it is also foolish to delay and thus to deny ourselves and our users the significant benefits of a single, global accounting language.
Editor's Note: The following is in response to the July/August Financial Reporting column opinion feature by Alfred King, "Adopt IFRS? Not in the Best Interest of the U.S., Says This FEI Member." Phil Ameen, the author here, disagrees and provides us a different perspective on IFRS transition.
PHIL AMEEN retired in 2009 as VP comptroller of General Electric Co. and SVP controller of GE Capital. He served as chair of FEI's Committee on Corporate Reporting and as member of the FASB's Emerging Issues Task Force, the AICPA's Accounting Standards Executive Committee and IASB's International Financial Reporting Interpretations Committee.
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|Title Annotation:||International Financial Reporting Standards|
|Date:||Oct 1, 2010|
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