IFRS Confusion Abounds

In the past few years, much has been made of the plans to merge the accounting standards used in the US with those used by much of the rest of the developed world. In 2002, the US standards setter and the international standards bodies agreed to a framework for convergence of US generally accepted accounting principles (US GAAP) with the International Financial Reporting System (IFRS) in a document known as the Norwalk Agreement.¹ Since then, the US and international bodies (known, respectively, as the Financial Accounting Standards Board, or FASB, and the International Accounting Standards Board, or IASB) have worked to align their respective standards so that, eventually, developed nations will have a homogenous accounting system. One particular point of difficulty in this effort, however, has been the issue of fair value accounting. The economic recession that began in 2007 further complicated convergence efforts as attention was drawn away from reconciliation efforts and focused on both placing blame and reforming the practices that caused the crisis. Then, with the election of President Barack Obama, the entire convergence movement was threatened when the newly-appointed chairwoman of the Securities and Exchange Commission announced that she would not “feel bound”² by the convergence roadmap established by her predecessor.

Under the Bush Administration, SEC Chairman Christopher Cox established a convergence roadmap that set 2011 as the target for determining whether US-listed companies would be allowed to adopt IFRS as their accounting standard. This decision was contingent, among other things, on the successful merging of US GAAP and IFRS. Among the major differences yet to be resolved was the issue of fair value accounting. In particular, the FASB wants all assets, including loans made by banks and other financial institutions, to be recorded at their fair value.³ In contrast, the IASB would like to see loans recorded at amortized cost basis (see glossary below).⁴ Because this difference is so substantial and controversial, the chair of the IASB said earlier this year that the larger issues surrounding financial reform are of greater importance than reconciling US GAAP and IFRS, calling into question the entire convergence movement.⁵ Now, in a move likely intended to calm fears that convergence efforts will fall apart, the SEC announced plans to accelerate by one year its discussions of adopting IFRS.⁶

By advancing its discussions on IFRS adoption, the SEC has more-closely aligned its timetable with that of the IASB as it concerns adoption of a revised standard for financial instruments. Released last month, IFRS 9 covers the many complicated issues related to accounting for loans, investments, and other financial assets and liabilities.⁷ The IASB hopes to complete and adopt IFRS 9 during 2010, which will then allow it and the FASB to begin reconciling their respective proposals for the treatment of financial instruments. If agreement is reached between the two standards setters, the SEC will be in a much better position to permit IFRS usage by US-listed corporations.

Given the wide-ranging implications of selecting a new accounting system for publicly-traded entities, the SEC’s decision to move up its deliberations on IFRS adoption seems a wise response to the current turmoil surrounding financial reporting and regulation. As Congress considers new regulatory bodies and practices in response to the economic crisis, it is important for accounting-standards setters to make their position and plans known lest lawmakers take action that will further complicate convergence efforts. In light of IASB Chair Sir David Tweedie’s remark that he cannot delay releasing a revised financial-instruments standard while the FASB and IASB endeavor to resolve their differences over fair value accounting, a greater impetus was placed on the SEC as it concerns IFRS adoption.⁸ The SEC’s renewed commitment to IFRS adoption is also a promising sign given Chairwoman Shapiro’s comments during her confirmation hearings.⁹