By James Hamilton, J.D., LL.M.
In an interesting development, the UK Financial Services Authority is concerned that the costs of convergence between US GAAP and international financial reporting standards (IFRS) may outweigh the benefits. In particular, the FSA believes that a converged set of accounting standards acceptable to the SEC will need to be more like US GAAP and more detailed and prescriptive than current IFRS, which are principles based, albeit increasingly underpinned with more detailed rules. The FSA’s positions on convergence, as well as on threats to IFRS, were set forth in its recent report on risks to the financial system.
While acknowledging that the roadmap for the SEC to determine that IFRS are equivalent to US GAAP could potentially lead to a more transparent and lower-cost global capital market, the FSA emphasized that the progress made over the next 18 to 36 months will be critical in determining whether the potential benefits of convergence are realized or whether the costs connected and the ultimate outcomes experienced are potentially disproportionate or even negative.
Regarding the first full year of reporting under IFRS across the European Union, the FSA identified two major risks to the continued success of IFRS. The first risk is inconsistent interpretations of IFRS across national economies. The true benefit of IFRS can only be realized, reasoned the FSA, through enabling a better comparison of similar entities across national boundaries, which, in turn provides enhanced market transparency.
The second risk to IFRS is the potential direction of the future development of the IFRS framework. In this regard, there is a growing concern that IFRS will be interpreted and audited in a more prescriptive and rules-based way than was typically the case under UK GAAP.