The Case for U.S. Adoption of IFRS
Tweedie gave three overarching reasons for the U.S. to make the decision to adopt IFRS this year - that is, reach a decision in 2011 to incorporate IFRS in the U.S., with that incorporation to take place over a specified period of time. His points were: (as detailed further in his remarks):
- With over 100 countries having currently adopted or committed to adopt IFRS, it is in the United States’ economic interest to be part of the global system.
- Delaying the adoption of IFRSs imposes unnecessary costs and risks on US companies.
- The window of opportunity will close if a decision is delayed.
On the last point above, that "the window of opportunity" would close in 2011, Tweedie met some of the objections to U.S. adoption of IFRS head-on, including arguments about the cost of changing over the reporting system, and arguments for continued work on convergence as opposed to wholesale adoption of IFRS. He said:
First, on the issue of cost, it is important to distinguish between the decision to incorporate and the date of implementation. It is the unambiguous commitment to IFRSs in 2011 that is essential. The SEC has already indicated that the earliest implementation date when IFRSs would be required for the largest US public corporations will not come until 2015 or 2016 at the earliest. Implementation for smaller companies could come later. In my view, such a commitment would be sufficient. It would also provide ample time for planning, education and training. Change is never easy. The goal is for all of us to work together to implement the benefits of global standards while minimising, as best we can, the costs of getting there. Indeed, many US companies have already begun preparations for IFRSs. What they need now is certainty and a date that they can work towards.
Second, the alternative of delay or further intensive convergence work is not a viable option. The IASB and the FASB have worked together for nearly 10 years on the convergence programme. We have made significant progress in improving accounting and eliminating major differences. The countries that have adopted IFRSs, or that have committed themselves to adopting IFRSs, have already accepted convergence with the FASB as a necessary step to facilitate US adoption. However, there is no appetite internationally for the IASB to work in exclusive partnership with the FASB beyond 2011. Consequently, putting off adoption could impose unnecessary costs in the future. The completion of our joint convergence work provides the moment in history when transition to IFRSs will be easiest. At that moment, IFRSs and US GAAP will be most closely aligned with each other. On the other hand, without an SEC decision, the clear risk is that having once converged, standards could then diverge.
Tweedie also emphasized the roles of IASB oversight bodies such as the IFRS Foundation and the IFRSF's Monitoring Board - consisting of international regulators, including SEC Chairman Mary L. Schapiro - and noted the governance structure of the IASB and its overseers parallels that of the FASB.
After Convergence MOU Complete: The "Calm" (after the Storm?); FASB's Continued Role; IASB's Future Work Programme
Noting that seven of the ten major convergence projects (outlined in the FASB-IASB Memorandum of Understanding) have been completed, with the final three (revenue recognition, leasing and financial instruments) in process (as well as a standard on insurance accounting), Tweedie observed, "We are in the final stretch of our convergence work with the FASB."
As to the June, 2011 'deadline' for convergence set forth in the original MOU and in more recent recommendations of the G-20, Tweedie commented:
"[While] a June 2011 completion target [i.e. target for completion of the convergence program] remains our goal... we will not sacrifice quality in the process. Keep in mind that the two boards have been working on these remaining convergence projects for more than five years. This is no rush job. Both the IASB and the FASB have followed, and will continue to follow, their due process fully.
Regarding implementation of the new standards, he added:
when the convergence programme is finished...[w]e will provide sufficient time to implement the new standards and a period of calm for investors and companies to get used to the new standards resulting from the Memorandum of Understanding
Additionally, as to the potential ongoing role of FASB in a world in which IFRS is the accepted standard for U.S. public companies, Tweedie once more invoked the term 'exclusive' partnership to describe the past and current relationship between the IASB and FASB, but explained how that relationship would have to change (some may say 'evolve') post-2011:
even though the conclusion of the Memorandum of Understanding formally ends the exclusive partnership between the IASB and FASB, we want to retain a strong partnership with the FASB, which we would expect to continue to play a leading role in the international standard-setting process.
(NOTE: the separate issue of private company accounting was not specifically addressed in Tweedie's remarks, as the focus was on formal adoption by the SEC of IFRS by public companies. The IASB has published a stand-alone set of standards available for use by private companies, called IFRS for SMEs, and the U.S. Financial Accounting Foundation (overseer of the FASB) is presently conducting outreach among its constituents regarding the recommendations of the Blue Ribbon Panel on Standard-Setting for Private Companies.)
Regarding the future work programme of the IASB after the completion of the FASB-IASB Convergence MOU - Tweedie noted that, "Later this year, the IASB will launch a consultation on its future work programme. I encourage all with an interest in accounting standards to participate in this consultation."
Principles Rely on Professional Judgment; 'Ring Fences' Possible; Sovereignty
Noting he is set to retire in June, 2011, Tweedie stated "my hope is that the IASB will remain firmly committed to the principles-based approach." He added that is the approach that the two boards (FASB and the IASB) have used in their convergence program.
"I understand that there is some trepidation in the United States about principle-based standards," said Tweedie, in what some corners, not yet comfortable with IFRS, may say is the understatement of the year.
"A principles-based system," noted Tweedie, "relies on judgements." NOTE: The SEC's Advisory Committee on Improvents in Financial Reporting or CIFiR, aka the "Pozen Committee," chaired by Robert Pozen, noted in its recommendations a few years ago that a "professional judgment framework" should be developed by the SEC for registrants, and by the PCAOB for auditors, to support the increased use of principles-based standards.
Indirectly, Tweedie provided his thoughts on what such a framework could include, to shore up (or at least document) those judgements:
Disclosure of the choices made and the rationale for these choices will be essential. If in doubt about how to deal with a particular issue, preparers and auditors should refer back to the core principles. The basis for conclusions should also include, in particular, the question of whether there is only a single view on how to tackle the economics of the situation. Often there are competing views—is one deemed to be more relevant? If so, the reasons for choosing that particular view should be explained in the basis for conclusions and the reasons for rejecting the others should be clearly stated.
My two cents: (please see disclaimer posted on the right side of this blog): as discussed in this blog when CIFR's recommendation for a professional judgment framework first came out, some may argue that, depending how "in the weeds" any professional judgement framework authored by the SEC, PCAOB, or suggested by others gets, the more of a 'check the box' or paper-building exercise it could become, without necessarily providing the promised protection for litigation; in fact, it could potentially provide a more detailed roadmap for a challenge. Relying on a 'professional judgement framework' may seem like a panacea in concept but the flipside is it could potentially be a costly and diversionary excercise that may be challenged in meeting its stated goal; somewhat of a deja vu of the post-Sarbanes-Oxley Section 404 exercise of determining how much and what type of documentation or action is too much or off the mark, in terms of being an efficient - and effective - means of adding comfort to management's certification and the auditor's opinion on the effectiveness of internal control; a regulatory and implementation exercise that was dialed back after implemented at significant cost and effort in practice, to make it more efficient and effective.
Turning to the U.S. legal and accounting environment, Tweedie acknowledged:
is this principle-based approach practical in the United States? My first answer is that we already have it through the new convergence standards.
Even so, I acknowledge that it will be more difficult to implement and sustain a
principle-based system in the United States, given the propensity for litigation. I believe that this challenge is overstated and that it can be mitigated by the careful generation, collection and retention of documentation and by seeking of expert advice and the views of professional colleagues throughout the life cycle of transactions. Above all, those who make such judgements, document them and make an honest and fair attempt to meet the principle should be defended.
I would also make the point that many in the United States believe that the status quo of rule-based systems cannot be maintained. There is a realisation that if a rule-based system is pursued, financial reporting will be governed by the search engine, rather than skilled professional judgement seeking to reflect the economics of a particular situation.
However, if the United States struggles with the degree of judgement applied by other countries that use IFRSs, then the FASB may have to issue requirements in addition to those of the IASB. The IASB would then have to consider ways of ring-fencing the additional US guidance to prevent such guidance being deemed compulsory for other followers of
The issue of reliance on implementation of principles-based standards also relates to the enforcement of application of those standards. Tweedie had spoken earlier in his speech on a related conern voiced by some in the U.S. regarding adoption of standards promulgated by a multinational body (the IASB), specifically, the role of Sovereignty. He noted that the FASB could serve the role of coordinating acceptance or 'endorsement' of IFRS in the U.S., and that the SEC would remain the enforcement body for application of IFRS by U.S. registrants, as it is now for foreign filers that are U.S. registrants.
global adoption of IFRSs does not require an abdication of a country’s sovereignty in the field of accounting standards. In most countries, there is an endorsement mechanism in place to bring IFRSs into national law or regulation. In Australia and Canada, the national standard-setter plays this role, and IFRSs are being introduced without modification. The assumption in both jurisdictions is that standards are to be accepted without change. Without prejudicing the outcome of the FASB’s deliberations, I would expect FASB to play a similar role in the United States.
My two cents on the Sovereignty issue
My two cents (again I remind you of the disclaimer posted on the right side of this blog): in what some may say is a highly choreographed, and others may say improvisational, dance of the accounting standard-setters around the world - with cameo parts played by various legislative and regulatory bodies around the world, including but not limited to the European Commission, the U.S. Securities and Exchange Commission, and the U.S. Congress -there is a careful need to recognize that, as noted at the top of this post, citing Tweedie's remarks, the current focus is on whether the U.S. SEC will "commit itself this year to a clear, defined, workable timetable for the incorporation and use IFRS, as published by the IASB."
That is, as noted in an additional reference Tweedie made in his speech (not in the written text of his speech) - and consistent with SEC policy for the use of IFRS by foreign filers in the U.S. - without any exceptions or 'carve-outs' by jurisdictions adopting IFRS.
I believe one of the most important issues that will receive attention vis-a-vis the U.S. decision whether to permit or require the use of IFRS (vs. U.S. GAAP aka FASB standards) in SEC filings by U.S. public companies, will be this almost Catch 22 situation of the need to accept IFRS without exception or carve-outs, and the right of sovereignty, as expressed through the national accounting standard setters (or others designated to perform this role) to "endorse" the set of IFRS as of the point of adoption by that country, and on an ongoing basis.
This is where the rubber meets the road; one could view it as a carefully orchestrated interplay between and among standard-setters, and the smoothness of this interaction is assisted by the IASB, the IFRS Foundation, and the IFRS Foundation Monitoring Board retaining sufficient input by a representative group from among its worldwide constituencies, both within the formal appointments on those bodies, as well as formal and informal outreach or 'consultation,' and demonstrating good governance and due process, points emphasized in Tweedie's speech.
His bottom line recommendation, or at least implication, given his multiple references to time being up this year (at conclusion of the FASB-IASB convergence MOU) for the 'exclusive' partnership between IASB and FASB, is that the IASB is going to continue to expand its dance card, and that the time is now for the U.S. to ensure that, potentially through the FASB, it will continue to have a prominent role on that card.
FASB Chairman, Others on Webcast
I highly recommend direct reference to Tweedie's speech in its entirely; for observers of international accounting standard-setting, this is a seminal speech. (And, if you can listen to the webcast of the program, you'll receive the added bonus of hearing Tweedie's well-known sense of humor in some unscripted jokes. For example, you can hear about some concerns he had about what was growing in his garden, and his performance as a soccer player.)
Also speaking at the U.S. Chamber program, as noted on this agenda, who you can see on the webcast of the program, were FASB Chairman Leslie Seidman, and a concluding panel featuring Deloitte Touche Tohmatsu CEO Jim Quigley, U.S. Chamber Center for Capital Market Competitiveness Chair Richard H. Murray, CFA Institute former President and CEO Jeff Diermeier, and GNAIE Executive Chair Jerry de St. Paer.
FEI Comment Letters
Read FEI's comment letters to the FASB, IASB, and SEC on matters relating to convergence with international accounting standards, the potential timetable for implementation thereof, on the SEC's 'roadmap' and 'workplan' for its decision whether to permit or require IFRS by U.S. public companies, as well as other matters.
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