The slowest Band-Aid-ripping exercise in U.S. financial regulatory history is finally coming to an end: the Securities and Exchange Commission has said it will decide this month whether U.S. companies may abandon GAAP for the accounting rulebook the rest of the developed world uses — International Financial Reporting Standards.
No one will be surprised if the SEC blows its self-imposed yearend deadline, but some people will be very upset.
Take Hans Hoogervorst, the new chairman of the International Accounting Standards Board, which sets IFRS.
While we were eating turkey leftovers, he said he has no interest in continuing the game of "convergence," a euphemism to describe 10 years of compromising to bring GAAP and IFRS into closer alignment.
"Convergence…has served its purpose, but now it is time to move on," Hoogervorst said at an IFRS Foundation conference in Melbourne, Australia, on Nov. 25.
"Our international stakeholders have supported the current convergence process between the IASB and the FASB as a way to facilitate improvements in financial reporting and global adoption. At the same time, many have already indicated that they will not support an indefinite continuation."
Hoogervorst, who took the helm of the London-based IASB in July after holding several key posts in the Netherlands government, reminded his audience that the U.S. is on record as a supporter of global accounting standards.
"It is SEC policy, it is U.S. Government policy and it is the policy of the G-20, in which the U.S. is a key player," he said.
[Anyone who has read this far probably knows what FASB is, but just in case: the Financial Accounting Standards Board is an independent body that has been setting U.S. accounting policy since 1973. The SEC, by law, gets to set accounting standards for public companies, but it delegates this work to FASB. Since the Sarbanes-Oxley Act was passed in 2002, the SEC has more control over FASB, including how much it spends and input into who gets a seat on its board.]
The debate over moving from GAAP to IFRS has been brewing since 2002 but it really heated up in early 2008 when the SEC decided to allow foreign companies operating in the U.S. to simply follow IFRS with no reconciliation to GAAP.
That opened the door to full adoption because it gives foreign firms an advantage over international companies based in the U.S., which still have to comply with both sets of rules. The SEC could allow U.S. companies that want to move to IFRS to do so voluntarily without requiring it for everyone else.
A single set of global accounting standards would make comparisons among competing firms simpler and smooth the path toward raising capital worldwide. Going to a global accounting rulebook would echo similar moves by the world's regulators on bank capital standards.
SEC Chairman Mary Schapiro is firmly on record endorsing "a single set of high quality accounting standards." In a video on the SEC's website, she says the SEC remains "on a steady path" to make a decision by the end of 2011.
And "convergence" has been working. Most experts agree that over the past 10 years international accounting standards have been brought into closer alignment with GAAP.
That's not to say the standards are in sync. There aren't, and many of the remaining disagreements directly affect banks. The two thorniest: standards for offsetting assets among counterparties and for determining loan losses.
U.S. bank regulators want to see more convergence before the SEC signs on to IFRS. And even if the SEC lets banks voluntarily adopt IFRS, they will probably still have to follow GAAP when filing quarterly Call Reports until more differences between the two standards are ironed out.
But the pressure on the SEC to go along is mounting.
"The majority of G20 members now require the use of IFRS," Hoogervorst said in his speech.
The European Union is on board while Australia, New Zealand and Israel have "essentially adopted" IFRS, he said. Brazil started using it last year and Canada adopted it this year. Mexico will require adoption of IFRS for all listed entities starting next year, and Japan allows companies to voluntarily use IFRS and will decide next year whether to make it mandatory.
Hong Kong, he said, adopted national standards that are equivalent to IFRS and China is converging its accounting standards with IFRS.
That leaves the U.S. as the single biggest holdout, at least from Hoogervorst's perspective.
"Wherever I go in the world I am asked one question more than any other. Will the U.S. come on board with IFRS, and if so, when and how?"
He says he doesn't know what the SEC will do but notes, "The SEC has repeatedly said that it intends to make a determination this year."
Like everyone else, Hoogervorst realizes that uniform adoption and enforcement of a global standard is an ideal, not a reality.
But he notes: "You can only work towards consistent application if you have one single language, and IFRS is the only candidate. Moreover, if the SEC is an active enforcer of IFRS for U.S. companies, as well as foreign private issuers, they will be in a position to drive consistency."
What Hoogervorst is really saying is: give up GAAP; embrace IFRS and gain a seat at the international table of standard setters.
But the sheer size of our capital markets has provided the U.S. with a de facto seat at that table, so it may be in the SEC's best interest to continue down the current path of gradually bringing GAAP and IFRS into sync.
Realizing its international counterparts are sick of "convergence," the SEC has coined a word to describe an incremental next step: condorsement. In other words, that would mean the U.S. would come to agreement on a standard with IASB and then endorse it.
"All of the signals suggest the SEC is considering this condorsement approach, which really means not switching over to IFRS in place of U.S. GAAP, but instead having IFRS get incorporated more into U.S. GAAP over a period of time," Dan Noll, director of accounting standards at AICPA, said in an interview Wednesday.
"This middle-ground approach does not abandon IFRS on the one extreme or say the U.S. will switch over to IFRS at the other extreme. Instead it's this middle ground of condorsement, which is how can we better bring in IFRS into U.S. GAAP."
If that's where the SEC comes out, the IASB will howl.
But is it really that different from other countries who have signed on to IFRS?
While most have scrapped their national standards, and that is a step beyond what the SEC is likely to do, these countries ultimately reserve the right to decide not to implement an IFRS standard domestically.
So let the Band-Aid rip. Give U.S. companies that want to move to IFRS the green light, embrace IFRS as a worthy goal and keep on working to bring the two standards closer.