Wednesday, March 07, 2007

Specter of Inconsistent Interpretation Haunts IFRS

By James Hamilton, J.D., LL.M.

There is no turning back from the roadmap to eliminate the need to reconcile international financial reporting standards (IFRS) with US GAAP, emphasized SEC Chairman Christopher Cox in remarks at a roundtable on IFRS. The roadmap will not be refolded, he said to the gathering.

But he expressed fear that IFRS may be risky, not because of the quality of the standards, but because of the lack of consistent and uniform interpretations of the standards. A differing Babel of interpretations of IFRS would mean that financial statements prepared under IFRS could not be compared to one another. In my opinion, Chairman Cox has quite accurately pointed out the primary fear of IFRS both in the US and EU. There is a specter haunting IFRS, and it is the specter of differing interpretations by many different national authorities, leaving us no better off than when we started.

IASB officials also worry that individual authorities will publish their own interpretations of IFRS, just as they did under their national GAAP. If regulators find it absolutely necessary to issue implementation guidance, said IASB trustee Samuel DiPiazza, they must ensure that such guidance is consistent with global interpretations. He emphasized that the goal is compatibility, equivalence and comparable results, not necessarily wholesale uniformity.

Similarly, EU Commissioner for the Internal Market Charlie McCreevy has emphasized that the great challenge of IFRS is to achieve the consistent application of standards and interpretations. Principles-based standards will not always give the same result in all situations, he reasoned, but they should give similar results in similar situation. With consistency in mind, the EU strongly believes that difficult interpretive issues should be timely addressed by the IASB’s International Financial Reporting Interpretations Committee (IFRIC).

For his part, Mr. Cox also recognizes that there may be more than one reasonable interpretation or understanding, but he said it must be susceptible to explanation. He also assured that comment letters from the SEC staff reviewing IFRS-driven filings asking for more detail or greater explanation do not mean that the SEC is trying to impose its own interpretation of a standard.

He noted that the SEC and the Committee of European Securities Regulators (CESR) have entered into a joint work plan to further the consistent application of the accounting standards. The Work Plan provides a forum in which the SEC and EU securities regulators can discuss questions about the application of accounting standards.