NYSSCPA Issues Comment Letter on IFRS Roadmap
A single set of high-quality global accounting standards? Yes.
Getting there with the Securities and Exchange Commission's (SEC's) proposed International Financial Reporting Standards (IFRS) roadmap? Let's talk.
The NYSSCPA filed on March 5 its response to the SEC's proposed IFRS roadmap, released on Nov. 14, which would require, if approved, all U.S. public companies to file their financial statements in IFRS by 2016. It would also allow approximately 110 U.S. companies to file their financial statements in IFRS as early as this year (for 2010 filings).
The SEC would reconvene in 2011 to evaluate whether a series of milestones included in the roadmap were achieved. If so, the commission said it would make a decision to adopt IFRS as promulgated by the International Accounting Standards Board (IASB).
In its response, the Society's IFRS Roadmap Task Force, comprised of members form the Financial Accounting Standards, International Accounting and Auditing, and SEC Practice committees, told the SEC that it supports the "goal of establishing a single set of high-quality global accounting standards in order to enhance the comparability of financial information," however, the SEC's motivation for replacing U.S. Generally Accepted Accounting Principles (GAAP) with IFRS should be "based on the quality of the accounting standards and not just on the desire to conform accounting standards worldwide."
The Society also believes the proposed roadmap does not present in sufficient detail the methodology and criteria expected to be applied to the milestones in assessing the adequacy of IFRS in meeting the needs of preparers, users and auditors.
The Society suggests a possible alternative approach would be to delay the mandatory conversion to IFRS and instead "vigorously continue" the Financial Accounting Standards Board's and the IASB's convergence efforts, which began in 2002 with the Norwalk Agreement.
"Regardless of the approach, the Commission must include substantial convergence progress as an explicit milestone in support of its decision process in 2011," according to the Society. "Continuance of the convergence efforts will help produce the best quality global accounting standards and will help minimize convergence costs for U.S. entities when IFRS adoption becomes mandatory."
The Society comment letter also addresses issues of standards quality, comparability, limited early use of IFRS, education and training, disclosures required in IFRS financial statements and provides answers to specific questions posed in the SEC's proposal.
Click here to read the comment letter.
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SEC IFRS Comment Letter and Private Entities
I would like to commend the drafters of this comment letter for a very comprehensive response to a very complex issue. I would also like to commend the FASB for the leadership they have shown in pushing ahead with convergence. In my eyes the SEC would do well to harness the knowledge and abilities of the FASB to figure out the best way to get us to that single set of high quality global accounting standards.
As a member of the working group to the IASB on GAAP for private entities, or as they have now decided “Non-publicly Accountable Entities”, I need to point something out which I believe is incorrectly implied in the letter and appears to be causing a lot of misunderstanding. This is that the standards the IASB has created for non-publicly accountable entities are the standards all private companies are supposed to follow. This is not correct and in the United States I suspect most private companies who need to prepare GAAP financials will eventually switch to full IFRS and not the standards for non-publicly accountable entities.
The background to the need for the creation of this separate set of stand alone standards by the IASB is that in many countries around the World there is a legal requirement for every limited liability entity to file some form of GAAP based financial statement as a matter of public record. Most such entities are small businesses like single stores and repair shops that in the US would not produce GAAP financial statement at all. In the US we would be much more likely to provide a copy of the tax return if requested by a lender or other party.
These standards for non-publicly accountable entities are designed to simplify the reporting for these very small and simple entities while insuring that they use a consistent set of standards that are recognized by that country as GAAP. In turn this will both reduce the cost to the entity and reduce the burden to the outside accountants, who cannot charge what they need if they are to go through the process of making sure full IFRS is followed. There is no business size criteria defined in these standards but from my recollection in the early discussions amongst the working group, the size was considered to be for companies with sales under $1M and with less than 50 employees.
I must also question the statement that the US has rejected big gap/little gap. The last AICPA study, of which I was a part, concluded that there was a place for a simplified GAAP for certain private companies but who was going to create it? The IASB is to be commended for the huge amount of work done to develop these standards for countries in the World that need them. I believe there is a place for them here too. The requirement for private companies to produce GAAP financial statements is driven in the US by the users. In certain cases a lender is going to accept these simplified standards for certain entities. In other cases where the company is larger, has significant outside debt, outside investors or is building to be sold or go public, they will be required by the users to provide statements under full IFRS.
I don’t see how the SEC sets the timetable for any private company to move to this. My belief is that in true US style, it will again be the users. CPA’s will want one set of standards and lenders will to. If the FASB continues to lead us to convergence, we will all eventually find ourselves there.
political influences on IFRS
I have read the Society's comment letter dated March 5, 2009 to the SEC concerning the SEC's roadmap for the adoption of IFRS. Regardless of whether I agree or disagree with the recommendations in the comment letter, I am writing to take issue with one of the arguments made therein.
On page 2, it is stated: "One area of concern is the influence of various national regulators, users, and others who promote the interests of their specific constituencies, as opposed to the needs of the worldwide community." The example given was the pressure from the European Commission last October that verily forced the IASB, without due process, to amend IAS 39 and IFRS 7, backdated to July 1, 2008.
One can easily agree that the setting of accounting standards should not be influenced by the narrow self-interests of "specific constituencies." But who has ever argued that, since the launch of U.S. standard setting in 1939, the setting of U.S. accounting standards has not been frequently influenced by such self-interests and politics? Who are we to avow that U.S. accounting standards have all been precisely as the standard setters (currently the FASB) preferred them to be, free of political interference? Let me give you some examples.
From 1962 to 1973, the U.S. Department of the Treasury, in the mistaken belief that this would promote its fiscal policy, on three occasions prevented the Accounting Principles Board from issuing its preferred standard on accounting for the investment tax credit. Between 1968 and 1970, industry built up a large lobbying campaign which was so powerful that it prevented the APB from getting rid of "pooling of interests" accounting. In 1971, the oil and gas industry, the leasing industry, and the mutual property and casualty insurance industry all successfully pressured the APB not to proceed with improved standards affecting their three industries. In the 1970s, the banking industry prevented the FASB from issuing its preferred standard to account for the restructuring of troubled debt. The resulting FAS 15 was perhaps the worst standard ever issued by the FASB, and it played a role in exacerbating the savings and loan crisis in the 1980s. In 1978-80, various vested interests, including the Departments of Energy and Justice as well as a powerful sector of the oil and gas industry, effectively conspired to prevent the FASB's standard on accounting for oil and gas exploration from going into effect. In 1990-92, the banking industry forced the FASB to partition marketable securities for accounting purposes into "trading" and "available for sale" in order to enable banks to avoid having to report unrealized gains and losses in their financial statements every year. In 1992-95, the high tech industry mobilized Congress into preventing the FASB from issuing its preferred standard on accounting for stock options. In 1997, industry forced the FASB to allow the reporting of comprehensive income in the statement of changes of shareholders' equity instead of in performance statements, such as the income statement. In 2000-01, industry mobilized Congress to force the FASB to withdraw its exposure draft that required the mandatory amortization of goodwill over a period of no more than 20 years. These U.S. examples dwarf in number the few such experiences already endured by the IASB. And the IASB sets accounting standards for more than 100 countries, not, as in the case of the FASB, for only one country.
All of these examples, plus others, were discussed in my article entitled "The Evolution of U.S. GAAP: The Political Forces Behind Professional Standards," which appeared in the January and February 2005 issues of the Society's journal, The CPA Journal.
Why, then, should the Society raise a "concern" about one or two instances so far of political interference in the IASB's standard setting?
political influences on accounting policy
(1) Zeff gives 8 troubling U.S. examples in 75 years. If Selling's examples are sound, troubling deviations from accounting principle by IASB occur, it seems, more frequently than once per year. And that's while everyone's on good behavior.
(2) In his very interesting contributions to the CPA Journal (Jan, Feb 2005), it seems to me that Zeff fails to distinguish two different types of override by the SEC of standards proposed by the private sector (CAP, APB, or FASB). (a) One type is where it would be in the public interest to adopt that standard, but the SEC adopts another and ultimately indefensible standard, because it bows to partisan pressure. (b) In the other type, although one standard looks best when considered solely from the point of view of accounting criteria, the SEC, when it takes into account the bigger picture, and the public interest (as it is charged to do in the Securities Acts) opts instead for another standard, which is less satisfactory but nonetheless defensible. The SEC's pressuring of FASB not to expense stock options seems an example of the first type, but the SEC's intervention in SFAS 69 seems an example of the second (or, at least, arguably it was, or was intended to be).
Zeff conflates these two cases and calls both of them "political reasons, not accounting reasons" for adopting a standard.
(3) What makes the SEC's mistaken interventions seem far less troubling-- even if arguendo they were more frequent -- is that they are ostensibly undertaken for the "public interest", that is, for the benefit of U.S. citizens, and even if not they are correctible by democratic means available to American citizens.
Political influence on IFRS
Just because NYSSCPA has only provided "one or two instances so far of political interest interference in the IASB's standard setting," that should not taken to imply that there are not (many) more. Off the top of my head, here are a few other examples to make this crucial point:
--In its recent revision of IAS 23 on interest costs, IFRS abandoned its "benchmark" alternative of expensing interest to require the formerly "allowed alternative" of capitlization. The fact that any substantive basis for conclusions for changing the standard was absent can only mean that political pressure (probably by extractive industries) was brought to bear.
--IFRS 3 (revised) on business combinations was not fully converged with SFAS 141R with respect to measuring non-controlling interests even though the FASB was led by representatives of the IASB that if the FASB held their ground on this controversial issue, the IASB would too. Here is a case where the FASB withstood political pressure and the IASB caved. (I do concede, however, that accounting for minority interests can be a more sensitive topic in Europe than the U.S.; nevertheless, it is another recent case of the IASB sacrificing principles for politics.)
--IFRIC 15 on contruction contract accounting was finalized just a few months ago, It is clearly provides discretion to the construction industry to manage their earnings. The same loopholes were closed in U.S. GAAP decades ago. The IASB could have easily converged to GAAP here, but political interests again won the day.
--The Chinese are putting pressure on the IASB to supress required information about related party transactions, and all indications are that they are carrying the day.
But even granting that there could be equal if not more pressure on standard setters in the U.S., if I could not eliminate political pressure on standard setters, I would at least like to limit the sources. I say this not out of chauvinism, but out of a belief that the U.S. stakeholders in accounting standards are better off in the long run competing with the IASB than forming a cartel to limit the supply of standards, even if political pressure mitigates some of our effectiveness.