Jeffrey Ishmael said...
Although you are focused on the Canadian IFRS impact, I have been watching the pending U.S. transition to IFRS. I was part of an implementation in 2005 being part of a French company. With the insight that we received, and following the subsequent updates, I have a hard time believing that the U.S. will simply adopt these new standards and allow GAAP to go away, as some are suggesting. Most of the significant changes in GAAP have come about from crisis-type situations that have necessitated increased rules. Now we're going to abandon those and move back to principles based accounting? Why do I have a hard time believing this?
It is an interesting comment and many are wondering if the move to IFRS in the US is for real. For a long time the US rule has been "if you want to play in my sandbox" you have to play by our rules namely US GAAP. US GAAP has evolved over many decades and is in part at least in response to various financial crises. A recent example is the reporting of special purpose entities in response to the Enron debacle.
There are a lot of rules embedded in US GAAP and it is by far more voluminous than IFRSs. There are of course disadvantages as well as advantages to this.
- It is impossible to cover every situation
- The more words to explain an accounting measurement/disclosure situation the more words that are required to interpret the rules.
- Following the rules may lead to "not seeing the forest for the trees" - it is better to get an overall picture than get wrapped up in a swamp of details.
- Students of accounting become Philadelphia lawyers. If there is no rule covering a situation what do you do? Where is the teaching of professional judgement?
- Transactions are often structured to achieve an accounting result that may be counter to the substance. Lease accounting is an example both in the US and Canada.
Of course, the counter to all of this is that there could be a plethora of approaches without detailed guidance. Comparability could be lost if preparers are permitted to use their independent judgement?
IFRS is principles-based and many believe that this is preferable to rules based. (Of course it is also claimed that US GAAP is also principles based). The reality is that in IFRS jurisdictions many look to US GAAP to fill in gaps in GAAP when IFRS is silent or not as comprehensive. One is permitted to do this under the IFRS heirachy provided that the US rule is consistent with IFRS. What will happen there if US GAAP is not in place as a "safety net" or a crib sheet? I believe that that is a good question and one that needs to be resolved. The IASB has been very reluctant to provide detailed implementation guidance and it certainly has an antipathy to local interpretations. It's understandable given a desire for the "holy grail" of international conformity. In reality we are quite a long way away from that objective still.
Is the move to IFRS in the US for real?
It is my belief that the move to IFRS in the US is for real. There are over 100 countries adopting or converging with IFRS worldwide and the US. The world is becoming a smaller place. Surely it is better for the US to be part of this process. Indeed there is US representation on the IASB Board and there are several joint projects between the FASB and the IASB to converge the two sets of GAAP. The deadline for this has been set very ambitiously as 2011.
The SEC has been very proactive on IFRS in the USA and as I have noted before there has been a lot of work done in the last few years on their Roadmap proposals. Last year there was a groundbreaking development eliminating the US GAAP reconciliation requirement for IFRS reporting foreign issuers. Chairman Cox recently reported that some 100 companies are affected by this exemption. There will be more of these foreign IFRS issuers as other countries such as Brazil, India and Canada come on stream with IFRS reporting. Last week the SEC announced more details on the Roadmap that may lead to a mandatory conversion to IFRS in the USA starting in 2014. A note of caution that the SEC requires the achievement of certain milestones before this will come to pass. The progress will be reviewed in 2011. Clearly the SEC remains cautious, but the caution is understandable. I have not seen the detailed proposal yet but when it is available. I will be doing a review of it.
My conclusion is that the US accounting standard setters are serious about converting to IFRS, or at minimum converging with IFRS. A lot of work is being put into making this a reality. Kudos to the SEC and the FASB for recognizing the international realities. Giving up a degree of sovereignty is difficult but evolution is inevitable. The SEC would in any event be left with the Regulatory big stick of review of reporting by issuers. This is a very big stick indeed and size does matter!