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05 Jan. 2010 | Comments (0)

While many of my posts have focused on corporate governance reform and executive compensation, I thought it made sense in the new year to touch upon an issue all public U.S. companies will have to deal with sooner than later: international financial reporting standards. A piece in the December edition of CFO magazine (IFRS: Convergence vs. Conversion, December 2009), points out that no matter what the SEC decides on mandating the switch from U.S. GAAP to IFRS, U.S. companies are going to move toward “overarching principles and away from more easily manipulated rules.” Quoting Financial Accounting Standards Board (FASB) Chair Robert Herz, the CFO article goes on to differentiate between convergence and conversion. For the most part, convergence allows some form of U.S. GAAP rules to exist in a hybrid form that is similar to IFRS. However, most of the convergence (FASB-IASB convergence project) is done on a rule by rule basis (i.e. lease accounting, fair value measurement). Conversion is the adoption of principles-based IFRS by companies using rules-based U.S. GAAP. Since the height of the international financial crisis in late 2008, many U.S. companies (including the Big 4 accounting firms) have stopped exploring efforts to adopt IFRS for the time being. In fact, a survey of CFOs at oil and gas exploration and production companies by BDO Seidman released Tuesday found that 59 percent of respondents are “not thinking about IFRS at all” in 2010 and 33 percent intend not to do anything with IFRS until things become clearer or a changeover from U.S. GAAP is mandated. By the way, 3 percent are actively planning a transition to IFRS. That doesn’t necessarily mean U.S. public companies shouldn’t be thinking about IFRS. The issue is among the Top Challenges for Financial Executives, according to Financial Executives International. Here’s a sample of what I am reading on the topic of IFRS:
  • SEC: No IFRS Yet, Marie Leone, CFO.com, Dec. 9, 2009 http://www.cfo.com/article.cfm/14460972/c_14461841?f=home_todayinfinance. Key findings: The SEC's chief accountant isn't dropping any hints about whether the regulator favors a move to international reporting standards. SEC Chief Accountant James Kroeker said issuers will hear more from the SEC about international financial reporting standards in the near term. CFO.com took that to mean it will be early next year when the SEC will decide as promised whether to require U.S. public companies to file financial results using IFRS.
  • Abuse of Revised IFRS Standards ‘Inevitable,’ Laurie Carver, Life & Pensions magazine, Jan. 5, 2010. www.risk.net/life-and-pensions/news/1567422/abuse-revised-ifrs-standards-inevitable. Key findings: The new International Financial Reporting Standard (IFRS) 9 for financial instruments' accounting will "inevitably lead to abuses and accounting arbitrage", according to Jim Leisenring, a member of the International Accounting Standards Board (IASB). The new directive, approved at the end of 2009, would allow the valuation of financial products at amortised cost, rather than fair value, in management of businesses whose "objective...is to hold [it] to collect the contractual cash flows", regardless of whether they sold it before term.
  • Market Reaction to the Adoption of IFRS in Europe, Chris Armstrong, University of Pennsylvania; Mary E. Barth, Stanford Graduate School of Business; Alan D. Jagolinzer, Stanford Graduate School of Business; Edward J. Riedl, Harvard Business School. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=903429. Key findings: The authors found an incrementally positive reaction for firms with lower quality pre-adoption information, which is more pronounced in banks, and with higher pre-adoption information asymmetry, consistent with investors expecting net information quality benefits from IFRS adoption. The authors find an incrementally negative reaction for firms domiciled in code law countries, consistent with investors’ concerns over enforcement of IFRS in those countries. Finally, the authors find a positive reaction to IFRS adoption events for firms with high quality pre-adoption information, consistent with investors expecting net convergence benefits from IFRS adoption.
  • Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors, Luzi Hall, University of Pennsylvania – The Wharton School; Christian Leuz, University of Chicago – Booth School of Business; Peter D. Wysocki, Massachusetts Institute of Technology – Economics, Finance and Accounting. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1357331. Key findings: The authors’ analysis shows that the decision to adopt IFRS mainly involves a cost-benefit tradeoff between (1) recurring, albeit modest, comparability benefits for investors, (2) recurring future cost savings that will largely accrue to multinational companies, and (3) one-time transition costs borne by all firms and the U.S. economy as a whole, including those from adjustments to U.S. institutions. They conclude by outlining several possible scenarios for the future of U.S. accounting standards, ranging from maintaining U.S. GAAP, letting firms decide whether and when to adopt IFRS, to the creation of a competing U.S. GAAP-based set of global accounting standards that could serve as an alternative to IFRS.
  • FASB Chair Calls for New Approach for Bank Regulators, Tammy Whitehouse, Compliance Week Accounting and Auditing Update, Dec. 8, 2009.  http://www.complianceweek.com/blog/whitehouse/2009/12/08/fasb-chair-calls-for-new-approach-for-bank-regulators/. Key findings: Robert Herz, chairman of the Financial Accounting Standards Board, made perhaps his most detailed and impassioned plea yet that the regulation of financial institutions needs to be “decoupled” from U.S. Generally Accepted Accounting Principles that are meant to serve investors’ needs. He all but pleaded with those attending the American Institute of Certified Public Accountants conference on current financial reporting issues to help him spread the religion that investors need different information than banking regulators do.
  • About the Author:Gary Larkin

    Gary Larkin

    Gary Larkin is a research associate in the corporate leadership department at The Conference Board in New York. His research focuses on corporate governance, including succession planning, board compo…

    Full Bio | More from Gary Larkin

     

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