FASB, IASB union fragile amid SEC indecision on IFRS

BY KEN TYSIAC
December 4, 2012

The difficulties the world’s most prominent accounting standard setters face in convergence were unmistakable as FASB Chairman Leslie Seidman and International Accounting Standards Board Chairman Hans Hoogervorst spoke on the same stage Tuesday.

During a speech at the AICPA Conference on Current SEC and PCAOB Developments in Washington, Hoogervorst pushed for the SEC to adopt IFRS for U.S. public companies. Seidman, meanwhile, said U.S. financial reporting needs more precise, clear guidance than the IASB’s broad, principles-based approach offers.

The SEC has been largely silent on IFRS in the United States since it issued a report on IFRS in July. The report made no recommendation on whether adoption should be allowed or mandated for U.S. public companies.

Advocates of international accounting standards were disappointed with the lack of a recommendation in a long-delayed report that originally was supposed to be released by the end of 2011. Instead of the suggestion of IFRS adoption that the IASB had hoped for, the report discussed the pros and cons of IFRS in the United States, listing many obstacles to adoption.

Now, the impending end of key convergence projects leaves the future of cooperation between the boards in question.

“There is much concern about strong and continued U.S. leadership in our work and processes if the U.S. is not going to come on board in some shape or form,” Hoogervorst said.

The decision on IFRS in the United States rests with the SEC commissioners, not with Seidman or FASB. But inconsistent implementation across the world due to cultural, business, and economic differences in different countries and regions is a challenge for true comparability within IFRS, Seidman said.

For example, China has adapted the IFRS related-parties standard to address a unique situation with its government-controlled entities, Seidman said. And U.S. preparers frequently need implementation guidance delivered in a timely fashion even after a standard is issued, she said.

Precise guidance is necessary in the United States, which has a more litigious culture, Seidman said. The U.S. financial reporting system can’t function over the long run with accounting standards that provide only broad principles, she added.

“This apparent need for some adjustments does not mean that IFRS is flawed,” Seidman said. “It simply suggests that a goal of 100% comparability such as a single set [of standards] is not achievable in the near term, for very legitimate reasons, in some of the world’s largest capital markets.”

Frustrations for both boards

New frustrations with standards that already are the focus of FASB-IASB convergence projects have emerged in recent months, heaped on top of the IASB’s disappointment with the SEC’s failure to decide on IFRS.

The uncertainty about the SEC’s decision has not been a good backdrop for the convergence projects as the boards attempt to reach consensus on revenue recognition, leases, and financial instruments, Hoogervorst said.

AICPA Chairman Richard Caturano on Monday advocated for IFRS in a speech at the conference.

“Anticipating some form of IFRS incorporation into the U.S. financial reporting system, the AICPA has been educating and preparing its members for years,” Caturano said. “In fact, the CPA Exam contains questions on IFRS. The AICPA continues to support the goal of one set of high-quality global accounting standards for public companies worldwide.”

But Paul Beswick, the SEC’s acting chief accountant, didn’t offer much clarity on the SEC’s position during a speech Monday. He said only that he was hopeful that in a year, the SEC would have a better indication of its direction on IFRS. “The best advice I can give you is to stay tuned,” Beswick said.

In recent months, that indecision has been accompanied by some unraveling in the convergence projects. After initially tentatively agreeing to a “three-bucket model” for expected credit loss in the impairment of financial instruments, FASB developed its own “Current Expected Credit Loss” model. As justification for the change, Seidman cited complaints from stakeholders who had trouble understanding the three-bucket approach.

On Tuesday, Seidman expressed concern over what she perceives as the IASB’s lack of urgency with regard to lack of implementation guidance in the developing revenue recognition standard. She said there are times when FASB sees the need to interpret something, but the IASB doesn’t, and she sees that as a threat to convergence.

“We need to proactively monitor the need for clarification on the [revenue recognition] standard, and we have to have a protocol with the IASB to deal with these issues so we can stay converged,” Seidman said.

Looking for commitment

Meanwhile, the IASB is looking for tangible evidence of a U.S. commitment to IFRS, Hoogervorst said.

Growing adoption of IFRS worldwide shows that the standards are strong and not in danger of unraveling, according to Hoogervorst. But there are concerns about continued U.S. leadership in IASB work and projects if the United States is not going to come on board, Hoogervorst said.

Those concerns have not been reflected in the IASB’s makeup yet. One-fourth of the IASB membership and one-third of its trustees are Americans. Departing U.S. board member Paul Pacter is being replaced by KPMG’s Mary Tokar, who also is from the United States. Heidi Miller, formerly of JPMorgan, is joining the IFRS trustees as a U.S. representative.

“I find it hard to imagine IFRS without a leadership role for the United States and SEC,” Hoogervorst said. “But leadership requires vision, mettle, and tough decisions. All of these qualities should be in ample supply in the United States.”

Hoogervorst expects FASB to be a full partner in a global forum of national and regional accounting standard setters the IASB is forming.

Without a commitment from the United States on IFRS, the future of cooperation between the boards is uncertain. Seidman, who is scheduled to step down in June, said that in the early days of convergence, FASB and the IASB narrowed a number of differences with a less formal approach to convergence. She said each board leveraged the work of the other with periodic meetings.

“That approach could work again, and it could include other standard setters from major capital markets,” Seidman said. “Simply put, even though the relationship is bound to change, that does not mean we think convergence is over or that divergence will occur.”

But Hoogervorst wants more. He explained at the beginning of his speech that he traveled 27 hours from Katmandu, Nepal, to attend the conference. Seidman said she was fortunate to get to Washington with a 35-minute flight from New York.

Their views were almost as different as their paths to the stage they shared.

“Already, on some issues, it is getting increasingly hard to find common solutions,” Hoogervorst said. “If we cannot achieve converged outcomes within a convergence program, then how will we maintain convergence once the program has ended? The risk of increasing divergence will be enormous. What a waste that would be.”

Ken Tysiac ( ktysiac@aicpa.org ) is a JofA senior editor.

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