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.
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.