Are Critics Against the Adoption of IFRS So Compelling?
Lending departments of financial institutions are showing more interest in IFRS. Can this be a sign that financial institutions are more inclined to finance U.S. companies applying IFRS?
June 21, 2010
International Financial Reporting Standards (IFRS) was the hot topic in accounting areas for several years, but it appears to have faded away. Various reasons explain this swing. We can mention the state of the economy or the readiness of the financial community in the United States (U.S.). Several articles provide examples and illustrations on why the adoption of the IFRS is probably not such a good idea.
Our view is that most of critics focus on the current situation only, whereas we believe that analysis should be looked forward.
Status of IFRS in the USA
Since May 2008, privately held companies are authorized to prepare their financial statements in accordance with IFRS. Furthermore, smaller entities can apply a simpler version of IFRS, following the issuance of the standard IFRS for Small and Medium-size Entities (SMEs) (July 2009). It is difficult to assess how many US private companies have adopted IFRS. However, we have noted that lending departments of financial institutions are showing more and more interest in IFRS. Would this be a sign that financial institutions become more incline to finance US companies applying IFRS?
Domestic public companies cannot use IFRS for their filings with the U.S. Securities and Exchange Commission (SEC). Following the issuance of its Roadmap to IFRS in 2008, the SEC reiterated several times that no decision will be announced before 2011. In February 2010, the SEC presented its Work Plan to complete its analysis. Another factor of importance is the completion of the convergence projects of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) (scheduled for 2011). The SEC clearly indicated that the Work Plan (see Appendix) has to be executed and the convergence completed before a decision is made.
Most of common critics against the adoption of IFRS focus on areas similar to those identified by the SEC. The difference being that critics consider that the mere fact these issues exist today should be sufficient to stop the process toward IFRS, whereas the SEC has a dynamic view.
Common Critics to the Adoption of IFRS
One aspect rarely mentioned by critics to the adoption is the difficulty, under IFRS, to structure a transaction just to meet a certain accounting objective. The recent debate on the “Repo 105” would not exist under IFRS, since the substance of a transaction would take preeminence over its form to decide the proper accounting treatment.
Another concern raised by commentators is that initially U.S. GAAP were principle-based as well, but they moved to rules over time (principally due to the U.S. legal environment) and there is a risk that IFRS will follow the same path. IFRS are probably less likely exposed to this risk than US GAAP. Countries applying IFRS have very diverse legal systems and therefore, this diversity should provide effective protection to the principle-based approach.
The independence of the standard setter is a key factor to ensure the high quality of the standards. The recent changes on the IASB structure and the ones to come should provide additional comfort that the IASB is independent from political pressures, at least as much independent as the FASB is immune from such pressures. Debates on fair value accounting following the financial crisis early 2009 generated high pressures on the FASB and on the IASB from various authorities and it is not clear which Board was the most effective in resisting to them.
Actually, the real concern is not so much the potential lack of independence than the fact that the IASB is not a US organization, and therefore not under US control. By definition the IASB is an international organization, but one cannot ignore the strong presence of the USA at various levels of the IASB: approximately one fourth of the members are US citizens and the SEC is an active member of the Monitoring Board. Therefore, the USA are in the unique position to be active in the making of IFRS, despite having not committed to apply IFRS.
Overall, a lot of arguments put forth against adoption of IFRS in the U.S. focus on the situation as of today. We believe that to fairly address these concerns, one should look at the foreseeable situation at the time of transition (probably 2015), which is exactly what the SEC tries to achieve in its Roadmap and its Work Plan.
Remi Forgeas, CPA, is an audit and assurance partner for Mazars in the U.S. For U.K. IFRS, you can contact Steven Brice who is a technical partner in the financial reporting advisory group for Mazars UK.
* The views expressed in this article are the author’s own and do not necessarily reflect the views of the AICPA or AICPA CPA Insider™.