I have always felt like the ideal of one set of global accounting standards made sense. If business is global and accounting is the language of business, we need one language, not several different ones. The ideal of a single set of global standards took on a hard reality with the creation of the IASB, the adoption by all of Europe as its single source of accounting standards and the famous or infamous Memorandum of Understanding between the FASB and IASB last decade. With country after country adopting IFRS as its accounting standards and the SEC allowing foreign companies to file financial statements under IFRS unreconciled to U.S. GAAP and poised to tell U.S. public companies they would have to file under IFRS as well, it seemed the path to a single set of international standards was set and inevitable.
Then something happened.
I don’t know if the SEC got cold feet, had legitimate concerns or simply got distracted by its many other duties, but for whatever reason, the SEC stopped the push toward requiring domestic U.S. companies to adopt IFRS. Then the camaraderie of the FASB and IASB working on standards together started to crumble; first with differences on financial instrument impairment, then deciding to go their own ways on insurance and finally taking completely different directions on the income statement presentation of leases. Even the crowning achievement of a single revenue standard is starting to show the cracks in the relationship with the Boards taking different positions on the need for additional guidance on revenue related to licenses and more guidance on how to determine performance obligations.
Through all of this, I still thought that global standards made sense, if only we could work together. Then an IASB Board member opened their mouth and changed my opinion, maybe forever. In discussing potential additional guidance on the revenue standard the IASB Board member said (I paraphrase) “I never thought you would actually have to do this revenue accounting on a contract by contract basis.” The worst part was no IASB Board member called him out for such a statement.
In the U.S. when a standard says “the objective of the guidance on this topic is to establish principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows from A CONTRACT WITH A CUSTOMER” as ASC 606-10-10-1 states, that means the standard is intended to be accounted for on a contract by contract basis. That fact is made even clearer by ASC 606-10-10-4 which states “this guidance specifies the accounting for an individual contract,” but says we can use a portfolio approach if the results “would not differ materially from applying this guidance to the individual contracts.” For those of you saying I am quoting the FASB codification and not IFRS 15 which the IASB member would be referencing, IFRS 15 says the exact same thing.
The rest of the world is clearly a very different place legally and regulatorily than the U.S. If members of the IASB can say the standard wasn’t meant to do what it says in plain English and not be called out, then my only conclusion is that the rest of the world views accounting standards very differently from the SEC and the U.S. Courts and we dare never subject ourselves to a standard setting body that doesn’t recognize and help preparers and auditors deal with such differences.
I attended the AICPA SEC and PCAOB Developments conference last week. For those CPAs in the public company or prospective public company accounting, reporting and auditing area, this is a must-follow conference. You can attend the conference in person or online, but even if you don’t do that, you can follow the conference via news releases, press stories, twitter feeds and lots of other ways on the internet. If you don’t follow the conference, you do so at the peril of your career because you need to understand what has happened in the past year and what will happen in the future in order to keep your knowledge current and relevant. With that in mind, I wanted to share my overall thoughts on the conference in this blog and then follow up with specific issues in subsequent blogs.
The theme of this year’s conference seemed to be Transparency. This term was used by the SEC Office of Chief Accountant (OCA) and Division of Corporate Finance (Corp Fin) extensively to explain why they publish speeches and why they are communicating the messages they communicate. This is to differentiate it from “rule-making” by speech. The point they tried to make is that speeches are not making the rules; they are explaining the process behind the SEC use of the rules. Another example is the 5 year shelf life on speeches expounded on by Dan Murdock, Deputy Chief Accountant, saying that as a speech gets old, you should put less and less credence behind what was said as the rules may have changed or the SEC staff’s thoughts may have evolved. It is clear the SEC is sensitive to the charge that they are making rules by speech which avoids rule setting requirements.
Segment reporting was again a focus of comments from the SEC. The OCA staff pointed out that reports provided to the Chief Operating Decision Maker (CODM), while an important factor in understanding segments, was not solely determinative of the segments of a business. They mentioned that just changing the report to not include a separate segment doesn’t mean that the segment doesn’t exist. The OCA also pointed out that the CEO is not automatically the CODM. In organizations where the CEO deals with strategy and a COO or an operating board makes decisions on current day-to-day operations, the CODM may be the COO or the operating board. Corp Fin brought up the point that preparers need to disclose their basis for determining their segments.
The final development I want to address in this blog is the potential for adoption of IFRS in the US for domestic filers. Keep in mind that the SEC already allows over 500 foreign issuers to file IFRS based financial statements without reconciliation to US GAAP. James Schnurr provided more insight on a potential new path forward on IFRS in the US. The idea is to allow US domestic filers to include as a non-GAAP disclosure IFRS based financial statements. This would be a voluntary disclosure and would have no impact on US GAAP, but it would allow the market to essentially decide if and when IFRS based financial statements are desired. It’s an interesting idea that will need to be fully fleshed out, but expect to see more from the SEC on IFRS in the coming year.
There was so much more talked about at the three day conference, but I can’t possibly include it all here. Check out future blogs and other resources you use for more discussion of the scores of issues discussed at the conference.
The on again off again battle on the potential U.S. adoption of IFRS took a couple of interesting turns last week. The first interesting turn was the nomination of a former prosecutor to head the SEC. All the stories talk about how the appointment of Mary Jo White is sending a clear signal about bolstering the SEC reputation for enforcement. I’m not here to dispute that, but if the focus is going to be on enforcement then I am guessing IFRS will continue to be down the list of SEC priorities for at least a while which means we will continue down the path of U.S. GAAP for U.S. public companies, IFRS for Foreign Issuers filing with the SEC and lots of continuing rhetoric about the U.S. not adopting IFRS from everybody.
The second interesting turn was a study released by the U.K. that showed how IFRS Impairment rules were being used inconsistently across Europe. This supported a similar SEC finding in its work plan report. The lack of consistency puts a major dent in the argument that the U.S. needs to adopt IFRS so that everyone will be reporting results the same way. If IFRS is not being used consistently then what difference does it make if there are also a few differences between U.S. GAAP and IFRS, or so the anti-IFRS argument goes.
But that wasn’t what really bugged me about the whole issue. The part that bugged me was what Hans Hoogervorst, Chairman of the IASB said in defense of IFRS. I agreed with his statement “that even an unevenly applied global standard provides much more global comparability than an equally unevenly applied multitude of diverging national standards,” but I disagreed with his next statement strongly. He went on to say 735 restatements required by the SEC in 2010 show that even U.S. GAAP has issues with consistent application of standards. I say that statistic is at best totally irrelevant to the issue of comparability and at worst, might prove just the opposite of what Mr. Hoogervorst was trying to say. By requiring restatements the SEC was, in fact, forcing consistency in the application of the standards. What the U.K. and SEC studies found were inconsistent application of standards that were apparently perfectly acceptable to the various regulatory organizations responsible for enforcing consistency in IFRS.
So, a statistic is used to purported prove that application of U.S. GAAP is just as inconsistent as the application of IFRS, but it actually may prove just the opposite if you are really informed about the subject. It certainly brings to mind that old saying about statistics being the biggest lies of all.
It seems the fissures in the IASB-FASB relationship have continued to grow and risk becoming so fractured that the U.S. movement to IFRS may be put off indefinitely.
The latest salvo game from IASB chairman Hans Hoogervorst. His statement that the IASB has “broken deadlines so often that nobody believes in them anymore” seems to be purely a self assessment at first blush, but in standard setting, like politics, nothing is ever that simple. The IASB Chairman also referred to “dysfunctional working processes and dysfunctional decision making” in his recent self assessment of the IASB. Considering the FASB is part of that decision making process and the only standards singled out as issues where joint projects, one has to believe at least some of the criticism was squarely aimed at the FASB.
Mr. Hoogervoorst also laid down the gauntlet that the IASB would finish its conceptual framework project by September 2015. Given that aggressive time frame, it is clear the IASB won’t have time to work with the FASB on any convergence projects once the big three – revenue recognition, leases and financial instruments are complete. In fact, one has to wonder if the IASB will continue to work closely with the FASB to work out a single solution on those projects – in particular the leasing project – or if they will simply go their own what and effectively tell the FASB you can come along or not; we don’t care which you do.
And the IASB also seems to be getting the backing of the EU with comments from officials referring to stakeholders impressions that “we are going backwards” on accounting standards. The EU has even raised the idea of kicking the SEC off of the monitoring board providing oversight to the IASB. While that has not happened, if it ever does, it will be very interesting to see the SEC response. Given the SEC’s mandate through law about accounting standards, would the SEC be willing to continuing accepting financial statements based on accounting standards they have no oversight on whatsoever?
So it increasing looks like we may have a world of two or three (never count out the Chinese) major sets of accounting standards. A friend on mine from Canada mentioned this is increasing starting to look like the adoption of the metric system. The U.S. initially puts out plans to adopt the metric system, but never really gets on board with the rest of the world. That leaves business stuck in the middle dealing with users of both systems and muddling through as best they can.
A few months ago the FASB and IASB made an announcement that didn’t make many headlines, but it now seems to be significant statement about the future of “a single set of global accounting standards.” The statement essentially said that the Boards were not seeing a lot of benefit, and were seeing increasing costs, in continuing to work jointly on new standards. It went on to state that when the current list of convergence projects was complete, no new projects would be undertaken by the Boards working as a single unit. On the one hand, if all of the convergence projects were completed, one could come to the conclusion that there really wouldn’t be many differences left to work on anyway. On the other hand, this might have been seen as a prophetic statement of the inability of the Boards to see eye-to-eye on what the appropriate accounting standards should be.
In isolation, this announcement might not seem like much, but since then two more events have occurred to put that announcement in new light. First, the SEC staff issued its final work plan with no recommendation of how or when to transition the U.S. (public company reporting) to IFRS. Second, the FASB made several tentative decisions on the accounting for impairments of financial instruments that will take the U.S. in a different direction than the current proposal from the IASB.
Looking at the work plan report, it seems clear there are several layers of concern with IFRS that the FASB seems to be latching onto in its renewed assertiveness. First, the notion that U.S. standards are somehow prescriptive and IFRS’s are principle based was somewhat debunked by the SEC. Sure the U.S. standards tend to come with a lot more guidance, but that has the benefit of reducing diversity in practice and isn’t that the point of a single set of standards. Second, the SEC hinted that IFRIC (the IASB equivalent of the EITF) isn’t doing a job good enough for the U.S. market and would need to be much more active if the U.S. were to ever adopt IFRS. In a document as politically sensitive as the work plan report, that hint was the same as you or me yelling something at the local town square.
The work plan report also pointed out that IFRS continues to be underdeveloped in several critical areas (e.g. regulated industry and investment company accounting) and effectively said going pure IFRS and eliminating standards in these areas would be a major step backwards for U.S. investors. The work plan seems to suggest a major role for the FASB if the U.S. were to ever adopt IFRS by apparently promoting an endorsement process as the best way to eventually incorporate IFRS into the U.S. market.
With this renewed support from the SEC, the FASB appears to have decided that they don’t have to get along with the IASB if they don’t want to. The first salvo is the aforementioned decisions on financial instrument impairments, but I am wondering what is next. We’ve already seen cracks in the unified solution to leasing. Will a single standard in that complicated area also disappear like a balloon in the wind? And what about revenue recognition? The re-deliberations on that standard have just begun. Is more contention on that final standard coming as well? I sure don’t know the answers to those questions, but like fans flocking to a NASCAR race, many of us will be looking on not to see the results of the race but to watch the wrecks happen along the way.
The long awaited SEC staff report on IFRS was finally released on 7/13. Somehow releasing the report on Friday the 13th seemed appropriate. There are those that believe IFRS is like Jason ready to cut key appendages off of critical accounting rules. Then there are those who believe all of the blood curdling screams are really just a bunch of hype for a make believe issue. Of course all of this horror depends on buying into the theme that the SEC Commissioners decision on the use of IFRS (which has not come yet and is likely not to come for some time) is the point at which the U.S. will start using IFRS, but like the people living on Elm Street, those people need to wake up because IFRS is already here.
While the few thousand U.S. public companies cannot file IFRS financial statements to meet their SEC reporting requirements, with the addition of Canada to the IFRS hold, several hundred foreign issuers already do file IFRS financial statements with the SEC. In addition, thousands more subsidiaries of foreign companies operating in the U.S. use IFRS for their day to day accounting. That means your colleagues working for Siemens, BMW, Mercedes Benz, and T Mobile are already using IFRS as their accounting standards and the number of such companies grows every day.
The public side of the profession as well as academia has also adopted IFRS in mass. It’s not just the big 4 or even the top ten national firms that have significant IFRS practices; regional and local firms are finding thriving practice niches around IFRS accounting. Colleges and Universities are offering and requiring courses in IFRS as well as U.S. GAAP because they realize their graduates need to know IFRS; not five or ten year from now, but the day they graduate.
The reality is that if you are in B&I and following the typical job path of today by working for multiple companies over your career, you will probably end up working for a company that uses IFRS at some point. The use of IFRS in the CPA profession is not something the SEC will decide. It is something the market has already decided and at some point the politicians in Washington and rest of the world focused solely on the SEC will figure that out.
The AICPA Board of Directors met January 18 – 20 and continued to explore a number of areas critical to the future of the CPA profession. Major topics included such diverse subjects as the CGMA Launch, Private Company Financial Reporting, IFRS for Public Companies, Standards for CPE programs and the three-year strategic plan for the AICPA. Let’s hit a few of these.
The Board received an update on the FAF proposals on Private Company Financial Reporting. 7,700 letters have been sent to the FAF with a vast majority supporting the position that the Blue Ribbon Panel recommendations need to be implemented in full. That would mean a separate Board from the FASB that would result in differential standards for private companies. The comment period has closed and the FAF is now conducting a series of 4 roundtable sessions across the country to gather even more detailed feedback. The first session already took place in Atlanta and the last session will take place in Boston. We should hear more from the FAF on the impact of this input on their proposals sometime in March. I know this is a very important issue to many of you so I will continue to keep you updated as additional information becomes available.
We spent most of Friday morning reviewing, discussing and providing feedback on the AICPA’s three year strategic plan. As I discussed in last weeks blog, the AICPA really does turn the strategic plan into concrete actions and goals. Those actions and goals and then assigned out to various direct reports to the CEO of the AICPA. They are then measured, rated and compensated based on the achievement of those goals. The strategic plan is the starting point for a whole performance management process.
The Board heard a proposal from the Personal Financial Planning Executive Committee on the possibility of granting standard setting authority to the committee. With increasing regulation in this area, it is more important than ever to show that CPAs already have the right standards and processes in place and don’t need any additional regulation. This topic will be discussed further at the regional council meetings in March and then again at a future Board meeting so there is plenty of time to give your input on the idea. And if standard setting authority is granted, any standard would go through a full exposure and comment process before it was adopted. Please feel free to share your thoughts with be directly or as a comment to this blog.
Next week the AICPA and CIMA will be launching the Chartered Global Management Accountant (CGMA) credential. This credential will be a game changer for CPAs working in the B&I space. It will be a way for you to build on your CPA designation in differentiating yourself from other accountants and finance professionals in the workplace. In conjunction with the launch, the AICPA-CIMA JV will issue a number of thought leadership papers and tools covering a variety of topics from risk and innovation to business models to the skills and talents needed to continue to be successful in your career. In addition, the AICPA and CIMA will be there with practical ways to help your business and therefore your career. Please look for a blog covering the CGMA after it is launched.
The variety of issues the profession is dealing with can be mind boggling, but with the help of a great staff and great volunteers, the AICPA will continue to be there to serve you no matter what part of the profession you are in.
I just had the privilege of attending the AICPA IFRS Conference in Boston last week. There was an awesome lineup of speakers. Topics ranged from SEC enforcement of unreconciled IFRS financials to detailed discussion with FASB and IASB staff members on the leasing and revenue recognition proposals. I wanted to take a moment to highlight a few of my observations from the meeting.
- No one seems to think that SEC convergence/endorsement proposal is the best way to implement IFRS, but everyone seems resigned to the fact that it is probably the only political way to get the U.S. to IFRS over time.
- The Chairs of the IASB and FASB are not ivory tower purest. One of the highlights of the meeting was when Hans Hoorgervorst stated he really wasn’t sure what OCI (Other Comprehensive Income) was and Leslie Siedman said she did know what it was and proceeded to explain that OCI was the place to offset changes in the balance sheet that weren’t part of net income. Not exactly a principles based answer – but it is honest.
- The slow down of the MOU projects will not impact the timing of a decision from the SEC on IFRS. This was repeated several times by many speakers including representatives of the SEC, the FASB and the IASB.
- IFRS is already here in the U.S. There are many foreign subsidiaries that are already reporting and being audited under IFRS. In addition, many companies still reporting under U.S. GAAP are dealing with lots of subsidiaries (IBM reported their number is 57 and growing) keeping their books under IFRS. Users are comparing U.S. GAAP based companies with IFRS based companies every day when making investment decisions.
- Converting to IFRS will not be a simple exercise for U.S. companies. Our accounting processes are just that – very processed based. How to account for something is decided at a high level and the rest of the staff often then just does what they are told. Under IFRS, judgment will have to pushed down much further into finance organizations. This has implications on internal Controls (can we say SOX 404), the need for training on how to make decisions, not just how to process transactions, and documentation of decisions which will be much more extensive under IFRS.
- After almost 40 years, the future of the FASB is very cloudy. What will be there role in private company standards? What will be there role in public company standards? Do they even have a reason for continued existence 5 years from now?
There were many other topics covered, but I think this gives you a flavor of what was covered. One of the great things about speaking English is it is the language of business across the world. We don’t have to learn French, German, Chinese or Japanese to conduct business in the world. IFRS is no longer becoming – it is – the world wide financial language for business. While sharing many “words” with U.S. GAAP, it is a different language and even if the U.S. takes a slow road to adoption, learning the language is a must for any CPA that wants to be able to converse in the business world.
Anyone who has been following the SEC’s decision process on allowing/requiring U.S. public companies to use IFRS has heard time and again how adopting IFRS is critical to enhance the comparability of financial statements across the world. It seems likes comparability is a given – one set of global accounting standards means everyone will be accounting for the same transaction the same way – all over the world. Who can argue against the benefits of that to the investor community?
The problem is that the dream – everyone accounting for the same transaction the same way – is just that, a dream. I put forth as exhibit A, the nightmare of accounting in Europe over the value of Greek Bonds. As you know, Greece is in a little trouble and there is serious doubt about their ability to pay-off all of their debt. As a result, the level of trading in the bonds has diminished since the crisis began, but there still is trading in the bonds. That trading however indicates a price that is at a substantial discount, even lower than what some “experts” say Greece will eventually be able to pay off.
So, what should companies (mostly banks) value the Greek bonds at in their interim financial statements? Should they be valued at what they are trading for today or should they be valued at what the (experts and the) bank thinks they will eventually get back? I will be the first to tell you that there are a lot of variables in that decision, but the part that concerns me the most is that the value of the bonds seems to be determined by the country the bank is located in, not the accounting standard followed by the bank.
Yes, different banks, both using IFRS, have reported substantially different values for the bonds – and it’s not because one bank lists the bonds as held to maturity and another bank lists them as available for sale. It’s also not because the banks have different auditors – at least by name. Several of the banks with starkly different values appear to be clients of the same auditing firm. As a CPA with an understanding of how firms work, I know that a “firm” using the same name in different countries is really not the same firm. It is two (or more) firms – one from each country – that are bound together at some level internationally, but ultimately, each country (even office) of those firms has some, potentially significant, level of autonomy. Unfortunately, most investors don’t understand the intricacies of audit firm structures. If they see two opinions signed by the firm Jones & Smith, they assume that at least those financial statements should have things accounted for consistently.
So this Greek (Bond) tragedy, besides showing cracks in various aspects of the European Union, may also be showing us that moving to IFRS is not the comparability nirvana for investors that it is touted to be. There have been a lot of good debates about U.S.GAAP vs. IFRS, but until now, those on the U.S. GAAP side did not have a good response to the comparability argument. The soft underbelly of IFRS comparability has been shown for the tough old gut it is I for one am glad we didn’t rush into adopting IFRS before we had a chance to see how the supposed wonderful comparability of a single set of accounting standards really works.