Tuesday, November 29, 2011

IASB Chair Recounts Global Acceptance of IFRS, Says IASB-FASB Convergence Has Served Its Purpose

IASB Chair Hans Hoogervorst believes that the move towards global accounting standards is an essential element of the global financial reform agenda, providing the bedrock on which to build a better, more resilient global financial infrastructure. In remarks at the IFRS Foundation seminar, he noted that successive G-20 communiqu├ęs have supported the work of the IASB and called for a rapid move towards global standards. In doing so, the G-20 has emphasized that the IASB must meet the needs of both developed and emerging economies.

The majority of G-20 members now require the use of IFRSs, he said. In particular, China has come a substantial way in a very short period of time. Chinese accounting standards are now very similar to IFRSs. The Chair noted that the IASB has a very good relationship with Chinese authorities, an example of which is China’s agreement to provide the Secretariat for the newly-formed IASB Emerging Economies Group. The IASB also has technical staff seconded from the Chinese Finance Ministry.

Indian authorities are in the process of revising Indian accounting standards substantially. On the way to full adoption, India still has quite a few obstacles to overcome. Nevertheless, the IASB Chair believes that there is a shared desire on both sides to help India become a fully committed member of the IFRS family.

The IASB and the Accounting Standards Board of Japan have worked together for many years to bring about convergence of IFRSs and Japanese GAAP. Earlier this month the Boards met for the 14th time to discuss how to eliminate the remaining differences.
In recognition of this work, Japan now allows certain Japanese companies to report using IFRSs as issued by the IASB. Several Japanese companies have already done so, and many more are planning to follow suit. Furthermore, Japan is expected to decide next year whether to mandate a national transition from J-GAAP to IFRSs, and if so, when.

There has been some debate about the transition period should Japan decide to fully commit to IFRSs, noted the IASB Chair, but this is secondary to the actual decision to switch.

Regarding the United States, Chairman Hoogervorst noted that the pace of events appears to be picking up. The SEC has repeatedly said that it intends to make a determination this year regarding the possible incorporation of IFRSs, he noted, adding that he recognizes the many practical challenges facing the SEC in making that decision.

The US is the single largest and most liquid national capital market in the world, he remarked, and has already developed a sophisticated set of financial reporting standards over many decades. Therefore, transitional concerns have to be carefully considered.

The SEC staff has nearly completed its comprehensive assessment of the issues related to US adoption of IFRSs. Two recent SEC staff papers examine how well the standards are being applied by companies reporting using IFRSs and the remaining differences between IFRSs and US GAAP.

While the first paper concluded that the financial statements analyzed generally complied with IFRSs, there were inconsistencies observed, mainly due to a lack of disclosure of accounting policies and how individual standards had been applied. The Chair pointed out that the problem of inconsistent application exists whether companies use IFRSs or US GAAP.

Moreover, standard-setters and securities regulators know that they have to improve consistency of application. The preliminary conclusions of the IASB strategy review are that the IASB should play a more active role in matters related to application of the standards. The Board will achieve this by working in close cooperation with national and regional standard-setting bodies, securities regulators, and the accounting profession.

The important point is that you can only work towards consistent application if you have one single language, said Chairman Hoogervorst, and IFRS is the only candidate. Moreover, if the SEC is an active enforcer of IFRSs for US companies, as well as foreign private issuers, the Commission will be in a position to drive consistency.

The second paper, which examined the differences between IFRSs and US GAAP, contained no major surprises. The paper recognized the tremendous progress that the IASB and FASB have made in bringing IFRSs and US GAAP into alignment. However, the paper also revealed that quite a few differences remain. Many of these differences are not very important, said the Chair, but getting rid of them through a process of convergence could take many, many years. The SEC staff analysis reinforced the IASB Chair’s conviction that ongoing convergence is not the answer.

Indeed, in 2006, the SEC urged the IASB and the FASB to stop eliminating narrow differences and focus on the big picture. It is not in the best interests of investors in the US or anywhere else to spend another ten years seeking to eliminate ever-smaller differences, reasoned the IASB head, which entail significant costs for change without much incremental benefit.

The convergence process has been extremely useful in getting to a point where IFRSs and US GAAP are much improved. These standards are now much closer together. In the long run, however, a dual decision-making process is a very unstable way to work. In practice, it can lead to diverged solutions or sub-optimal outcomes at the very end.

In the Chair’s view, when you have two independent, highly competent Boards, sometimes they will agree with each other, and other times they will not. It’s not that one is right and the other wrong, he said, they just reach different conclusions. He posited that convergence does not always result in the highest quality outcome. It has served its purpose, but now it is time to move on. International stakeholders have supported the current convergence process between the IASB and the FASB as a way to facilitate improvements in financial reporting and global adoption. At the same time, many have already indicated that they will not support an indefinite continuation.

Whichever way the SEC goes, noted the Chair, what is needed more than anything is clarity. The transition to any new set of accounting standards is a major challenge. Chairman Hoogervorst pledged that, if a commitment is given, the IASB will carefully consider issues associated with transition in the United States, as it has for other jurisdictions throughout the world.