10 December 2012

Compliance Week: Read between the lines - A farewell to IFRS adoption

Matt Kelly reports on a speech given by Julie Erhardt, deputy chief accountant at the SEC, at the AICPA's annual conference on why countries might adopt the IFRSs, and whether the United States will ever get around to adopting IFRS.

First, Erhardt gave the example of countries with primitive standards of financial reporting that need “a domestic upgrade". Why waste time dickering over accounting rules, she mused, when a country can simply latch onto the IFRS bandwagon and get a fully loaded financial reporting regime? That approach is faster and cheaper, and brings a respectability that developing nations might not otherwise have with the rest of the world. “If the country anticipates a better standard-setting outcome under ‘buy' than under ‘make'”, Erhardt said, “then it is motivated to pursue the upgrade by incorporating IFRS into its national accounting standards".

The opposite is true here in the United States. US GAAP have existed for decades, and the biggest complaint about GAAP is that its rules are too precise—a wholly different problem than IFRS, which many still dismiss as imprecise. Nobody would describe GAAP as slovenly or immature (“exhausting” is more like it), and in this era of failed audits and financial meltdowns, Erhardt doesn't believe too many will say that a principles-based system such as IFRS is going to achieve better outcomes than GAAP gives us now.

Erhardt's second point was that countries might adopt IFRS if they want to encourage more investment from overseas. Another excellent reason, to be sure, but the United States is awash in capital. Corporations are hoarding cash both at home and abroad; the corporate bond market is fine; and the government bond market is so good that Treasurys are selling at historic lows. Cheap capital is nowhere near short supply. Again, her words:

“If in the aggregate the public companies in a country are big attractors of foreign capital... then what factors into IFRS policy decisions is whether, all other things being equal, the cost of this foreign capital will be reduced if the issuers report using national accounting standards based on IFRS, versus continuing to use national accounting standards that are not".

The cost of capital in the United States is already cheap despite the labyrinth of US GAAP; IFRS isn't going to improve that situation because, frankly, the situation is already as good as it's likely to get. Perhaps in a world of higher interest rates IFRS might be a more compelling option, but the Federal Reserve has all but etched into its doorways that interest rates will stay near zero for years to come.

Erhardt's third reason for adopting IFRS was “foreign access”—that is, simplifying the movement of capital across various markets. Well, most publicly traded U.S. companies still transact almost all of their business within US borders. As to multi-nationals expanding into foreign markets, what's the real friction and lost business caused by maintaining US GAAP? How much profit is lost for that reason, especially compared to the enormous costs smaller companies will face if they must switch to a new accounting system they don't need? The external friction that adopting IFRS might eliminate will pale in comparison to the internal friction most filers would suffer. And that fact neatly leads into Erhardt's most telling comment:

“A country's decision about whether to incorporate IFRS... is not just about the standards themselves. Countries have also focused on the role that those accounting standards serve in the capital markets, and in turn how those capital markets serve their functions in society, and ultimately under which approach their society would be better off.”

Under none of Erhardt's three criteria could you argue that the United States would be better off by adopting IFRS. Critics would point to the costs of adoption as proof that we'd actually be worse off.

“Remember that the SEC started this journey of IFRS introspection all on its own in the mid-2000s, under different leadership and different economic circumstances. Congress never ordered the SEC to consider IFRS, nor did the vast majority of businesses that constitute Corporate America. Now, converging IFRS and US GAAP—that's a great idea and we should let the accounting rule-makers here and in Brussels have at it.” But as Erhardt telegraphed to the financial reporting world last week, the SEC has no pressing need to adopt IFRS any time soon, and the United States doesn't either.

Press release

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