Wednesday, October 5, 2011

IASB’s Hoogervorst Makes Case For IFRS Adoption in US; Goldschmid Warns of ‘The Dark Side’ if SEC Says No

With a decision looming by the U.S. Securities and Exchange Commission on whether to permit or require U.S. public companies to file with the SEC using International Financial Reporting Standards, the Chairman of the International Accounting Standards Board, Hans Hoogervorst, called upon the SEC to reach a positive decision in support of IFRS. Hoogervorst’s remarks were in a speech delivered earlier today at an AICPA-IASB conference.

Reasons in favor of one set of global accounting standards, noted Hoogervorst, included ’commercial advantages’ for international companies. Citing a joint comment letter filed with the SEC earlier this year by Ford Motor Company, Archer-Daniels-Midland, the Bank of New York Mellon, Kellogg, Chrysler, and United Continental Holdings, Hoogervorst noted the letter “call[ed] for the adoption of IFRSs in the United States,” adding, “Clearly, this is an important issue to them, as it is to other major preparers that share similar views. Note: see the comment letter filed with the SEC earlier this year by FEI’s Committee on Corporate Reporting.

Hoogervorst also made the case that a move to IFRS would benefit U.S. investors. Observing that, “The US’s current share of global market capitalisation now stands at just over 30%,compared to an average of 45% between 1996 and 2006,” Hoogervorst cited a comment letter by one of the largest ‘investors,’ public pension fund CalPERS (the California Public Employees’ Retirement System, in which CalPERS said: “the SEC has the opportunity to effectively improve accounting standards, and to regain and increase investors’ trust in financial reporting.” Hoogervorst added, “To me, that says it all. US investors, preparers and capital market providers recognise the substantial benefits that come from everyone speaking the same financial language, while securities regulators understand that, without it, opportunities for regulatory arbitrage will remain. That is why I believe that the case for global accounting standards, and with it the case for US adoption of IFRSs, remains compelling.”

Here are some excerpts from Hoogervorst's speech, as to why he believes the US should adopt IFRS: 

Quality: Citing academic studies and the progress of convergence work between IFRS and U.S. GAAP, Hoogervorst said: “While I am not dismissing [there are] differences, I am not convinced by the arguments that one set of standards is clearly superior to the other.”

Actual Usage of IFRS: Hoogervorst spoke of the high degree of adoption of IFRS worldwide, and countered arguments about the extent of usage of opt-outs in Europe, saying, “I have heard it argued that few major economies actually use IFRSs. Some even say that Europe does not use IFRSs due to the optionality of nine paragraphs of IAS 39 Financial Instruments. Yet this option is used by less than 30 companies. That is less than 1% of listed companies in Europe. The other 99%, some 8,000 listed European companies, all use full IFRSs.”

Consistent application: Hoogervorst acknowledged, “A more compelling criticism of IFRSs is that inconsistent application of the standards makes international comparison more difficult. However,” he added, “the same is true when you have different accounting standards… A major comfort to the United States should be that if you adopt IFRSs the SEC will remain in full control of enforcement.”

Preparedness and costs: Hoogervorst said: “Many American companies worry about the costs of adopting IFRSs. Let’s not beat about the bush; these are real costs. Therefore it would be reasonable that a relatively long transitional period is provided, particularly for smaller publicly traded companies. An option to allow early adoption of IFRSs also seems sensible for those companies that can already see substantial net benefits of IFRSs” As to preparedness in the U.S., he noted: “Convergence has brought IFRSs and US GAAP much closer together. There is already a lot of IFRS knowledge in the United States. The SEC has built-up a substantial IFRS competence, overseeing the financial statements of a growing number of foreign private issuers listed in the United States. Many large preparers already have IFRS expertise within their organisations through international subsidiaries. The CFA Institute now teaches IFRS financial statement analysis to all CFA Program students studying in the United States and elsewhere. From this year, students sitting the  AICPA’s CPA exam will be tested on IFRSs.”

Sovereignty: Another argument used against US adoption of IFRSs is the perceived loss in sovereignty. The SEC Staff Paper specifically addresses this point. It makes it clear that the FASB and the SEC will continue to have ultimate responsibility for accounting standards regardless of whether the United States moves forward with IFRSs. Obviously, participation in any international agreement, whether it is the World Trade Organisation or IFRS standards, requires negotiation and cooperation. The United States will continue to have a great deal of input into the standard-setting process. The knowledge base within the FASB is too valuable to the IASB to be excluded. In addition to the role of the FASB, the United States has, and will continue to have, a great deal of influence within the IASB. Four out of the fifteen board members are American and they certainly play a significant role

Independence of the IASB: Hoogervorst said: "I have never worked in an organisation that is so transparent in its activities, and that consults so widely. As for political pressure: I can only admit that it can be there. But this is not unique to the IASB. In the heat of the financial crisis, both the IASB and the FASB were put under intense pressure to relax our rules. It was not a pretty picture. Pressure on the boards is a fact of life. Our work affects many business interests that often find the willing ears of politicians. But I think that, as the IASB grows and diversifies, it will become much more difficult for special interests to force their issues onto the board. On a more personal note, I did not leave politics to make accounting political. Quite the opposite; I will use all my political skills to keep accounting as apolitical as possible.

Of interest particularly regarding sovereignty, see also Hoogervorst’s remarks made earlier this week at a meeting of the Economic and Monetary Affairs (ECON) Committee of the European Parliament, Hoogervorst noted the support the IASB has received from Europe – both from the government sector and the private sector, and called for continuing support, telling the European group: We will continue to increase the sense of trust and buy-in among those who have adopted our standards. We will continue to strengthen the institutional relationships between the IASB and Europe, in the same way as we are doing in other parts of the world. That is how we, as an independent standard-setter, must reciprocate your trust. This will continue to be a priority of the IASB as the organisation evolves into a global standard-setting authority.”

Goldschmid Warns of ‘The Dark Side’ If SEC Says No

IFRS Foundation Trustee (and former SEC Commissioner and General Counsel) Harvey Goldschmid, whose remarks followed those of Hoogervorst at today’s AICPA-IASB conference, supported Hoogervorst’s call for the SEC to vote in favor of a move to IFRS.

Goldschmid outlined in detail why he believes (as his speech is titled): U.S. Incorporation of IFRS is a National Imperative.

My two cents (I remind you of the disclaimer posted on the right side of this blog): I found the section of Goldschmid’s remarks entitled ‘The Dark Side’ to be of the most interest, in which he relates the potential negative impact if the SEC decides not to permit or require IFRS in the U.S.

Goldschmid provided a disclaimer early in his remarks, saying, “Today, particularly if I say something with which my Trustee colleagues disagree, I am speaking only for myself.” He also expressly emphasized that his remarks on this point were not meant as “any kind of threat.” However, I personally don’t recall seeing these arguments laid out in such specific terms before, as to how the U.S. (SEC, FASB, etc.) could get shut out (my words, not his) of the international accounting standard-setting community if we don’t take a seat at the table among adopters of the IFRS standards. Here is what he said:  

What if the SEC fails to commit to incorporation in the next period of months or simply says “no”? I see two basic scenarios; one would be bad for the U.S. and the other far worse…..

In my first scenario, the coalition of nations supporting IFRS would break apart. Rather than two sets of accounting standards, IFRS and U.S. GAAP, we would have a number of regional GAAPs, or we would go back to pre-2000 fragmentation. At a minimum, a number of national or regional accounting systems would exist. The cost of fragmentation, in terms of lack of transparency and comparability, higher accounting expenses, inefficiency, etc., would be extremely large.

The second scenario is far worse from a U.S. perspective. The coalition in support of IFRS would hold together, and the U.S. would become isolated in this area. There would be few, if any, U.S. members of the International Accounting Standards Board or U.S. Trustees. The SEC would be removed from the Monitoring Board. The U.S. would no longer play the large and constructive role it now plays in IFRS development and oversight.

I believe that without active U.S. participation the overall quality of the international accounting standards would deteriorate. Remember, there is less concern about transparency and investor protection in some other parts of the world.

I also believe that the U.S. could not remain out of a global system forever.

In a year like 2020 or 2030, the U.S. would be forced to adopt international accounting standards, but I predict, it would be adopting weaker IFRS standards than now exist. The U.S. would then - - as opposed to now - - have only a very small seat at IFRS drafting and governance tables.

In other action today, the IASB posted an updated version of its IFRS Learning Resources (aka IFRS Resources List), containing links to places on the IASB’s website, and the websites of accounting firms and others providing information relating to IFRS.

Awaiting SEC Decision

The SEC announced in its Work Plan for the Consideration of Incorporating IFRS Into the U.S. Financial Reporting System, published Feb. 24, 2010 that it anticipates making a decision in 2011 on whether to permit or require use of IFRS by U.S. public companies. There is a little bit of wiggle room in the 2011 decision target, in the formal terminology, which states: “Following successful completion of the Work Plan and the FASB-IASB convergence projects according to their current work plan, the Commission will be in a position in 2011 to determine whether to incorporate IFRS into the U.S. domestic reporting system.”

The IFRS Foundation’s Goldschmid noted in his speech earlier today how uncompleted convergence projects could be handled in a world in which the SEC decides favorably to move to IFRS.

Goldschmid said: “[T]he SEC, in its planning, has prudently focused on minimizing disruption and cost. The SEC Staff Paper, titled “Exploring a Possible Method of Incorporation,” dated May 26, 2011, sets forth a phased approach to adoption of IFRS through an incorporation mechanism. The SEC’s framework is realistic and sound. Basically, if I understand the approach correctly, existing IASB/FASB converged standards would be incorporated into U.S. GAAP. Not yet completed convergence projects (e.g., leasing and revenue recognition) would be completed and incorporated. FASB would stop writing new standards to prevent confusion and divergence. FASB, which would continue to play a critical role as the U.S. national standard setter, would endorse and incorporate remaining, non-converged IFRS standards over five to seven years. Similarly, FASB would continuously evaluate and endorse new IFRS standards. As a result of this process, U.S. public corporations would be complying with both U.S. GAAP and IFRS.”

Separately, the SEC states in its IFRS Work Plan that: “The staff will provide public progress reports on the Work Plan beginning no later than October 2010 and frequently thereafter until the work is complete.”

Personally (I remind you again of the disclaimer posted on the right side of this blog), I wouldn’t be surprised if another progress report on the SEC’s IFRS Work Plan is published sometime this month, since I believe the last one was published last October (see SEC Progress report on Work Plan, published 10.29.10), although some may consider the SEC staff paper published 5.26.11 to effectively incorporate a progress report as well.  

Whether the SEC Commissioners actually meet and decide on IFRS in October, November, or December of this year (or later), a critically important point is that this step would solely be a decision on whether or not to permit or require IFRS. Within that decision lies a separate decision as to the effective date for adoption (incorporation) of IFRS in the U.S.

Goldschmid addressed this point as well, in his speech earlier today, saying:

The largest concern I have heard from the U.S. business community is that Dodd-Frank implementation, and other changes caused by the financial crisis and the current economic downturn, make 2011 and 2012 the wrong years to create new burdens. The basic answer to this concern is that an SEC decision to commit to IFRS in the coming months will not be disruptive. The effective date - - when IFRS would be required for the largest U.S. public corporations - - will not come until 2016, at the earliest. (An even later date, in my view, makes sense for small public corporations.) The year 2016 or 2017, for large public corporations, would provide ample time for planning, education, training, and retooling. The SEC is already used to reviewing IFRS filings, which now come from foreign private issuers. It is an unambiguous SEC commitment to incorporation that is essential in the coming months. That would create the certainty and incentives for our large issuers, investment analysts, accounting firms, and business schools to be ready by a year like 2016.”

Personally, (you read the part about the disclaimer on the right side of this blog, right?) I think 2017 or even 2018 has a pretty good ring to it, as far as any earliest mandatory effective date, starting with the largest public companies, phasing in at a later date for smaller public companies, if a decision comes down from the SEC in 2011 or 2012.

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Alexander Shekaroff said...

Awesome post about their work plan and etc.

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