Following up on my previous thoughts on the adoption of the International Financial Reporting Standards (IFRS), I searched for an article on the Security and Exchange Commission's (SEC) decision, if any. As it turns out, Accounting Today in their February issue, discussed exactly that.
According to Paul Miller and Paul Bahnson of Accounting Today, in their article, The Demise of the Drive to Bring International Standard-setting to the U.S., the SEC's announcement in December that the commission would not in fact make a decision on this topic by the end of the year was not just a a setback but its death knell. Miller and Bahnson explain this opinion to be based on of their understanding of the issue as well as the actual wording used in the SEC's Chief Accountant Jim Kroeker's statement. Some of the points they present are reminiscent of last week's article, and some are new and previously, at least for me, not considered.
They start off by explaining the differences in what was expected and what was said. Kroeker's announcement was "I'm encouraged for the prospect of incoporation of IFRS." Obviously incorporation is not the same same as adoption. The largest difference is that incorporation is not using the IFRS in whole, but instead it would integrate acceptable pieces into the U.S's existing system, Generally Accepted Accounting Principles (GAAP). Adpotion on the other hand would use IFRS exactly as it is without a single change.
Miller and Bahnson believe this soft wording with no pre-determined date of an answer is a way to introduce the idea to IFRS's die-hards that the SEC will never adopt IFRS. Their reasoning for this is:
1. Adopting IFRS is legally impossible. I had not considered that the SEC can't give up its legal obligation to set the accounting standards for the U.S. Adoption of the IFRS would remove the SEC's power and give it to International Accounting Standards Board (IASB).
2. Allowing U.S. companies to choose between GAAP and IFRS is ridiculous. The entire point was to create a single accounting standard, not confuse the issue more.
3. Expecting the IASB and the Financial Accounting Standards Board (FASB) to agree on key issues is optimistic at best.
This is further complicated by the IASB's recent political tilt. The newly appointed chairman of the IASB was a career politian with Master's degrees in history and international relations, not accounting or even business. The IFRS Foundation then followed up the politician's selection with the selection of a French lawyer with extensive political experience. In the U.S. it is hard to fathom how political knowhow could surpass the need for accounting or business qualification for a board that wants to set international accounting standards. But as David pointed out in last week's article, many European countries see financial reporting as a political tool instead of an investor's.
I must then, under the weight of such well thought out and persuasive arguements, change my previous assessment that IFRS is something acheivable with the correct application of want and will. As an accountant, I want my accounting standards to be set by men who understand the struggles of accounting for the myriad of different customers I will face upon graduation. I want the accounting standards that I follow be set in place by men knowing the difficulties companies face competing in the expansive global market. And much like the FASB I am not ready to hand over the power to decide what these rules are to politicians.
References:
Bahnson, P. R., & Miller, P. R. (2012). The demise of the drive to bring international standard-
setting to the U.S. Accounting Today, 26(2), 16. retrieved from http://wichita.edu.
Tuesday, February 21, 2012
Tuesday, February 14, 2012
Is IFRS the global dream we hoped it be?
This week I read an article, Convergence Flaws, by David Reilly on the problems or "flaws" with the adoption of International Financial Reporting Standards (IFRS). It is David's perspective that achieving a functional adoption of IFRS is not a realistic goal for the U.S. or the global community.
On the surface, a single, binding international accounting standard is a provocative and lofty goal. It would allow accountants, companies, and investors world wide to speak a common accounting language where the rules of reporting structure were known and followed by everyone. It would easily allow comparability between companies the world over. And it would make the accounting for multinational companies much simpler by eradicating the question of which nation's accounting principles to use during the reporting process. However, in his commentary against the practicality of the U.S. adopting IFRS, David brings up a number of valid points that, as a fledgling member of the accounting community, I had not considered.
It seems, as with many of the global issues that all nations now face, cultural context is an important factor of the reporting standards that different nations now use. Unbeknownst to me, not all countries view the purpose of markets in the same light. In some European countries, it is believed that the point of markets is to help companies, which is often another way to further national policy while the Anglo-American view believes the purpose is investors. With these different consumers in mind, David asks us, how does one create a singular reporting system that caters to both?
Another reason that he believes IFRS may be more pipe dream than reality is who is going to police or watchdog companies and ensure they are meeting the IFRS's standards? Auditors, whose internal and legal structure hampers such behavior? The countries themselves? There is no system set up to ensure that all participants of the IFRS are actually doing the things they are supposed to with equal quality across all nations.
In academia, where the concept of international standards was first introduced to me, the adoption of IFRS appears like an obvious choice. It's a fairly elementary decision. All of us doing different things and generally making accountants lives more difficult or everyone doing the same thing and easing the lives of corporate accountants everywhere? In reality, however, the adoption of IFRS is a more complicated implementation that I originally considered it.
While David brings up very good points, ones that the international accounting community will have to address if IFRS is to work, I still feel that a singular accounting system shouldn't be a pipe dream. We should be able to come together, the change the global rules and find common accounting ground. We should be able to find ways to regulate, adapt and police global accounting practices. And after reading David's article, I also believe we may be a long way from that eventual dream come true.
References:
Reilly, D. (2011). Convergence Flaws. Accounting Horizons, 25(4), 873-977.
On the surface, a single, binding international accounting standard is a provocative and lofty goal. It would allow accountants, companies, and investors world wide to speak a common accounting language where the rules of reporting structure were known and followed by everyone. It would easily allow comparability between companies the world over. And it would make the accounting for multinational companies much simpler by eradicating the question of which nation's accounting principles to use during the reporting process. However, in his commentary against the practicality of the U.S. adopting IFRS, David brings up a number of valid points that, as a fledgling member of the accounting community, I had not considered.
It seems, as with many of the global issues that all nations now face, cultural context is an important factor of the reporting standards that different nations now use. Unbeknownst to me, not all countries view the purpose of markets in the same light. In some European countries, it is believed that the point of markets is to help companies, which is often another way to further national policy while the Anglo-American view believes the purpose is investors. With these different consumers in mind, David asks us, how does one create a singular reporting system that caters to both?
Another reason that he believes IFRS may be more pipe dream than reality is who is going to police or watchdog companies and ensure they are meeting the IFRS's standards? Auditors, whose internal and legal structure hampers such behavior? The countries themselves? There is no system set up to ensure that all participants of the IFRS are actually doing the things they are supposed to with equal quality across all nations.
In academia, where the concept of international standards was first introduced to me, the adoption of IFRS appears like an obvious choice. It's a fairly elementary decision. All of us doing different things and generally making accountants lives more difficult or everyone doing the same thing and easing the lives of corporate accountants everywhere? In reality, however, the adoption of IFRS is a more complicated implementation that I originally considered it.
While David brings up very good points, ones that the international accounting community will have to address if IFRS is to work, I still feel that a singular accounting system shouldn't be a pipe dream. We should be able to come together, the change the global rules and find common accounting ground. We should be able to find ways to regulate, adapt and police global accounting practices. And after reading David's article, I also believe we may be a long way from that eventual dream come true.
References:
Reilly, D. (2011). Convergence Flaws. Accounting Horizons, 25(4), 873-977.
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