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A single set of global accounting standards seems like a dream, but there’s a sliver of hope

During my time in public accounting in Canada and throughout my experience in the U.K., differences between various countries’ generally accepted accounting principles were often front and center. There were continual discussions of a shared GAAP around the world—a utopian world for accountants, auditors and investors alike.

Initially, given the seemingly insurmountable challenges of converging disparate approaches, I was among the skeptics who thought reconciling differences between GAAPs would take a lifetime. I knew international standards were in the works and had spent enough time reconciling Canadian to U.S. GAAP for SEC filings to see the complexities of converging standards. Over the years, my outlook for converged GAAP has grown more optimistic. The challenges (politics, prioritization, variances in application and enforceability, cost and so on) continue, but the need for an international approach is greater than ever. Canada adopted International Financial Reporting Standards (IFRS) for most public companies for financial years beginning Jan. 1, 2011, and companies whose securities are publicly traded in the U.S. have the option of using U.S. GAAP. Canada does not get the benefit of a single accounting system until U.S. GAAP and international GAAP converge.

Fast-forward to 2013, and it is a time for celebration. The FASB has voted to move forward with the long-awaited final revenue recognition standard. (For details, read Diana Gilbert’s How the New Revenue Recognition Rules Should Help Global Businesses.) Joint FASB-IASB standards are expected in the areas of financial instruments and leasing.

IFRS has been adopted by 14 of the G20 countries for all or most companies in their public capital markets. The U.S. permits, but does not require, IFRS for foreign issuers. Investors and other stakeholders still need to know if U.S. GAAP or IFRS has been adopted, depending on the capital market. This makes things very complex: investors need to reconcile adjustments and disclosures for investments and subsidiaries, but also account for local variations in interpretations, applications, enforceability and audits. When implementation of aligned revenue standards is complete, that will be real progress, as investors will have confidence that they are comparing apples with apples on the top line.

Will this progress continue? How long will it take? The revenue standard was 11 years in the making, and priorities constantly shift. However, there is a new model for collaboration going forward. In April 2013, the creation of the Accounting Standards Advisory Forum (ASAF) was announced. This group of national accounting standards boards (including FASB) and regional bodies with an interest in financial reporting will provide both technical advice and feedback to the IASB. The ASAF had its fourth meeting Dec. 5 and 6. The agenda items included the 2013 Lease Exposure Draft (IASB) and the 2013 FASB Accounting Standards Update. ASAF received over 600 comment letters, and there are some significant differences in opinion. Leases will need to be re-deliberated, and there is skepticism about the chances for agreement on a converged approach.

Still, I am hopeful that the new ASAF will be successful in improving alignment. FASB Chairman Russell G. Golden has outlined a vision for more common and comparable financial standards, which he describes as a “new, decentralized, multi-lateral model of international standard setting that is consistent with the goal of promoting greater convergence in global financial accounting standards.” It is going to take time to find the right model, and hopefully the next 10 years will be more successful than the past 10.

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Enforcement and executive comp top list at SEC conference

The economy must be picking up, judging by the attendance at last week’s 27th Annual Reporting and FASB forum put on by the SEC Institute. It was a packed house. The two-day seminar was not for the claustrophobic because every chair was taken and we were elbow-to-elbow at lunch.

They covered a lot of information during the two days, but as we head into 10-K season what I found most interesting were the current developments at the SEC and recent hot buttons with SEC comment letters.

The SEC continues to consider new ways to disclose executive compensation in proxies, so we need to review the latest rules when preparing them later in the year. They suggested that there is heightened SEC oversight and enforcement, particularly as it pertains to disclosure of revenue recognition, contingencies, income taxes and warrants.

Who knew? Non-GAAP disclosures
It was surprising to me that several speakers suggested that you shouldn’t be afraid to disclose non-GAAP measures in your 10-K. I had always believed that the SEC disapproved of these disclosures, but the speakers said that this wasn’t the case; in fact, the SEC often looks to earnings releases, and if the company had non-GAAP measures in its 8-K, they would expect the same type of disclosure in the 10-K.

I found the MDA discussion interesting because the speaker was good and he had a thoughtful presentation, but I also wonder how many companies will follow the suggestions. The speaker suggested starting with a blank piece of paper every three years to keep the information fresh, and not to be afraid to disclose forward-looking statements rather than just reciting the same old historical information. He suggested that you could discuss the same type of information that is in some of your risk factors and, unlike the risk factors, you can use qualifying language. (Good luck with getting everyone to sign on for more disclosure.)

How dumb can people be?
I don’t plan to ever have to worry about how to stay out of trouble, but the session on enforcement was entertaining. People never cease to amaze me: the regional director of the SEC said that recently someone under investigation for insider trading continued to deny that he knew anyone in the company—even the person with the same last name. It was his brother, and he was convicted.

There were several discussions on the U.S. convergence with IFRS, as there were when I attended the conference two years ago. The timeline is longer, with some speakers suggesting five to six more years. Everyone has finally acknowledged that it is going to be a lot harder than anyone thought. It shouldn’t be surprising; I am still waiting for the United States to adopt the metric system as I was promised when I was in the sixth grade.

Overall, it was an informative two days. Even if you closely follow new accounting literature, you will still hear a few things you can’t get from just reading recent pronouncements.

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On the menu: IFRS and “diet” IFRS

Ever thought moving to International Financial Reporting Standards (IFRS) would make financial reporting easier for small private companies? Think again. In 2009, after several years of due diligence, the International Accounting Standards Board issued a less-robust set of accounting guidance—kind of a “diet” IFRS—for small and medium-size entities (SMEs). Just recently, the IASB requested feedback on draft implementation guidance on IFRS for SMEs. Progress.

As for the United States, it’s a slow grind. We have long been considering whether there should be a separate set of accounting guidance for private companies, sometimes referred to as “baby GAAP.” The FASB established a Small Business Advisory group in 2004 and a Private Company Financial Reporting Committee in 2007, both of which were supposed to help develop new standards, giving consideration to private companies. Neither has been very successful. In 2009, the Blue Ribbon Panel was formed, composed of members of the FASB, American Institute of Certified Public Accountants, and National Association of State Boards of Accountancy to address private company reporting needs. The panel issued a formal report last January, and based on those recommendations, the FASB has been taking steps to further address the need. Earlier this month, the Financial Accounting Foundation published a plan for addressing private company financial reporting, but the proposal doesn’t include establishing a separate board for private companies, as suggested by the Blue Ribbon Panel. And so we wait. Ho-hum.

But now (at last) the much-anticipated SEC decision regarding incorporating IFRS into the U.S. reporting structure is expected by the end of the year, which may have private companies heaving a sigh of relief. What’s different about the less-robust IFRS guidance? For one, they’ve eliminated topics that aren’t relevant for smaller entities, including EPS guidance, quarterly financial reporting and operating segment disclosures. In addition, where full IFRS guidance allows accounting policy choices, IFRS for SMEs allows only the easier option. Probably the most notable difference is simpler standards for recognizing and measuring assets, liabilities, income and expense items, such as amortizing goodwill and expensing all borrowing and R&D costs. Along with simpler standards come fewer disclosures too! And to further reduce the burden to smaller companies, the revisions to these IFRSs are limited to once every three years—an accounting guidance sabbatical, if you will. Nice.

IFRS transition guidance for SMEs is still a work in process, and that guidance may limit some of the options, but nonetheless would still mean less accounting and reporting rigor by private companies. So for U.S. private companies, relief may come from the incorporation of IFRS, before “baby GAAP” ever comes to fruition … and unexpected benefit of IFRS.

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Global accounting standards need more than just U.S. adoption

Everyone supports a single set of global accounting standards, and there is a big spotlight on the United States and its pending decision process to adopt or incorporate IFRS into its reporting structure. However, there is a lot more to achieving global accounting standards than just adoption of standards.

The United States does not hold the key, as many indicate in their comments to an SEC staff paper (PDF) that proposes one possible method of incorporation of IFRS in the United States. (The paper was released in May; the comment period officially closed July 31.) Respondents point out that ensuring that the principles-based accounting guidance is consistently applied is up to regulatory agencies and others responsible for oversight of the financial reporting in jurisdictions around the world.

“Among other things, differences in language (and translation), culture, reporting cycles, legal and tax systems will unavoidably affect how global accounting standards are interpreted and applied to some degree,” Financial Executives International (FEI) comments point out.

PricewaterhouseCoopers responded with concerns regarding consistent application. Its comments state, “achieving the vision requires both the adoption of IFRS in all significant capital markets and enhanced cooperation and coordination among national regulators, the International Accounting Standards Board (IASB) and its interpretive body, preparers, and auditors in order to facilitate the consistent application of IFRS.”

The American Institute of Certified Public Accountants sounded a similar note in its response, encouraging the Public Company Accounting Oversight Board (PCAOB) to pursue greater harmonization of auditing standards with its international counterpart, the International Auditing and Assurance Standards Board.

Even the IASB itself acknowledges this issue. In April, the IFRS Foundation issued its Trustees’ Strategy Review report (PDF) on its ongoing strategy as a global accounting standard setter, in which they identified steps to help ensure the consistent application of IFRSs. These steps include:

  • Provide additional application guidance and examples.
  • Work with securities regulators, audit regulators and other standard setters to identify divergence in practice and consider improvement to standard or interpretative guidance.
  • Enlist IFRS Foundation to education and content services aimed at promotoing consistent application.
  • Indentify jurisdictions where IFRSs are being modified and encourage transparent reporting of divergence.
  • Seek assistance from other public authorities to assist in achieving this objective.

So while the world sits and waits for the United States to hurry up and make a decision about incorporation of IFRS, there is still a lot that could be done by other agencies to promote a single set of global accounting standards.

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A mismatched set of semi-global accounting standards—was that our goal?

Conceptually, a single set of high-quality global accounting standards sounds great: every company in every country follows the same rules and reports financial information in the same light. And with a growing number of countries adopting International Financial Reporting Standards (IFRS), it’s no wonder that IFRS is touted as “the” set of standards that can help us accomplish this goal. But the design and execution of this concept has presented insurmountable challenges, and the solutions being offered up leave much to be desired in terms of accomplishing the original goal … a single set of standards.

Adoption turns to endorsement. The SEC’s proposed roadmap issued in late 2008 considered adoption of IFRS, while the most recent SEC staff paper issued last May is considering an endorsement protocol, which would allow the FASB and SEC to cherry-pick the standards issued by the Internal Accounting Standards Board (IASB) and possibly supplement them with additional guidance.

Convergence becomes less converged. The FASB and IASB have been working together to converge the guidance of newly issued standards since they entered into the Norwalk agreement in 2002. However, some of the boards’ first major joint projects, including stock-based compensation and purchase accounting, resulted in substantial convergence upon issuance of the final standards—most of the guidance is the same but key differences remain. While their respective drafts of the proposed revenue recognition guidance are very close (after more than 10 years of effort, I might add), there are a number of differences of opinion in terms of other standards in the works, including leases, consolidation and insurance contracts. Speculation is that the best we’ll get here is also substantial convergence … if that.

Input adds to confusion. In early July, the SEC held a roundtable session to help evaluate the possible incorporation of IFRS into the U.S. reporting structure. The roundtable consisted of three panels of investors, smaller public companies and regulators. The result: a very mixed bag of reactions. The investor panel generally supported incorporation of IFRS but raised concerns about consistency in the application of the IASB’s principles-based standards. The panel of small public companies said the costs of such a substantial change outweighed the benefits. And then there was the regulatory panel, which ranged from cautiously supportive to very much against IFRS incorporation.

The SEC is still expected to make a decision by the end of this year about whether to incorporate IFRS and if so, how and when. Although nothing has been decided yet, it appears we are headed toward IFRS—International Financial Reporting Sometimes.

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