Sunday, March 13, 2011

IASB Chair Says US Must Commit to IFRS This Year if There Is Ever to Be Global Accounting Standards

The United States must commit itself this year to a workable timetable for the incorporation and use of IFRS, said IASB Chair David Tweedie, since there cannot truly be global accounting standards without US acceptance of IFRS. In remarks to the Chamber of Commerce, he said that despite the fact that over 100 countries have adopted IFRS, they are not yet a global standard because the United States still does not formally accept IFRS for its domestic companies.

The SEC must make a decision this year to allow the use of IFRSs, Chairman Tweedie emphasized, because the window of opportunity will close if a decision is delayed. At the same time, a decision this year will provide US companies, auditors and educators with the necessary certainty and time they require to prepare for IFRS. While recognizing that accepting standards from an international body is a difficult one, the IASB Chair assured that the global adoption of IFRSs does not require an abdication of a country’s sovereignty in the field of accounting standards.

In most countries, there is an endorsement mechanism in place to bring IFRS into national law or regulation. In Australia and Canada, the national standard-setter plays this role and Chairman Tweedie expects FASB to play a similar role in the United States. Furthermore, the SEC would retain full control of enforcement of accounting standards in the United States. This is particularly important for those concerned with the consistency of application of IFRS. The SEC will be able to require the same level of consistency within the United States as it has today with US GAAP. Moreover, by making a firm commitment to IFRS, the SEC will be better positioned to influence consistent enforcement globally.

Delaying the adoption of IFRS imposes unnecessary costs and risks on US companies, said the IASB Chair, since US-based multinationals need to maintain multiple sets of accounting books and file statements prepared in accordance with US GAAP with the SEC while reporting under IFRS for their international subsidiaries. But their foreign competitors can use IFRS for all purposes, even for filing with the SEC, now that the reconciliation requirement has been removed.

In the Chair’s view, delaying an unequivocal US commitment to adopt IFRS so that further IASB and FASB convergence can be pursued is not a viable option. The IASB and the FASB have worked together for nearly 10 years on the convergence program, he pointed out, and, there is no appetite internationally for the IASB to work in exclusive partnership with the FASB beyond 2011. The countries that have adopted IFRS, or that have committed themselves to adopting IFRS, have already accepted convergence with the FASB as a necessary step to facilitate US adoption. The completion of the joint convergence work provides the moment in history when transition to IFRS will be easiest, he reasoned, since IFRS and US GAAP will be most closely aligned with each other. On the other hand, without an SEC decision, there is a clear risk that, having once converged, the accounting standards could then diverge.

Chairman Tweedie said that IFRS Foundation Trustee, and former SEC Commissioner, Harvey Goldschmid has posited two problematic scenarios if there is either a negative decision on IFRS in 2011 by the SEC or a decision to delay an adoption commitment. First, the coalition of nations supporting IFRS could break apart, causing a fragmentation in accounting standards leading to many incompatible national or regional accounting systems. Second, the coalition supporting IFRS could hold together but the pressure to remove US interests from the IASB and its oversight body would be overwhelming. The absence of any formal convergence program would almost certainly lead to divergence between international and US financial reporting standards, warned the Chair, leading to lower quality standards internationally.

More broadly, the Chair said that global accounting standards will make it easier for investors to make comparisons between companies operating in different jurisdictions. Global accounting standards will enhance the drive towards the free trade of capital internationally. By adopting a globally accepted set of standards, all companies will be able to attract capital from a larger pool of investors, driving down the cost of capital and facilitating cross-border mergers and acquisitions activity and strategic investments. Finally, a common set of standards eliminates opportunities for regulatory arbitrage and permits regulators to develop more consistent approaches to global supervision.

The Chair assured that the IASB will remain an independent standard-setter, committed to writing standards aimed at investors, with a governance model based upon the FASB’s governance model. Like the FASB, the IASB has a three-tier structure. The Monitoring Board plays a similar role to that of the SEC in the United States, and the chair of the SEC is a member of the Monitoring Board. The Memorandum of Understanding governing the relationship between the Monitoring Board and the IFRS Foundation incorporates much of the language of the policy statement that governs the relationship between the SEC and the FASB.

In a similar way to how the Financial Accounting Foundation oversees the FASB, the IFRS Foundation Trustees are responsible for the governance and oversight of the IASB and are responsible for appointments and financing arrangements. And, like the FASB, the IASB is composed of full-time professionals, subject to similar independence and due process requirements.

The IASB’s oversight body, has made much progress in financing the IASB in a way that enhances the independence of the standard-setting process. The Trustees have established national financing regimes, proportionate to a country’s relative Gross Domestic Product, that establish a levy on companies or provide an element of publicly supported financing.