Is FASB Fading Away?

In its response to an SEC proposal that could quicken the demise of GAAP, FASB suggests it'll have to cede its standard-setting power.

In the days leading up to a critical vote by the Securities and Exchange Commission, accounting experts are wondering whether the regulator is rushing to open the floodgates for more widespread use of International Financial Accounting Standards.

On Thursday, the SEC will decide whether to eliminate its requirement for international companies to reconcile their IFRS-prepared financial statements with GAAP. In the meantime, the regulator has been collecting feedback on its idea of giving U.S. companies the same choice. By giving global firms the option, the SEC’s thinking went, U.S.-domiciled businesses — particularly multinationals — would surely want the same treatment.

However, that concept has scared some observers into worrying that the SEC is moving too fast with its push for IFRS. They wonder if enough thought has been put into the future of GAAP, the ongoing GAAP/IFRS convergence project, and the Financial Accounting Standards Board’s role.

In fact, FASB itself isn’t confident about its position in a world where IFRS dominates. “As the king of GAAP, it’s like contemplating your own mortality,” Robert Herz said of his role as FASB chairman during a roundtable discussion on international accounting standards at New York University’s Stern School of Business on Monday. “But you have to move on.”

In a letter written by the board and its trustees, FASB suggested it may lose its standing as the official standard-setter of the accounting rules that U.S. public companies use. Instead, the 34-year-old group could turn into either a standard-setter just for private companies and nonprofits, an IFRS educator, or a far-flung adviser to the International Accounting Standards Board.

Those scenarios for FASB’s future role were also brought up by other commentators. For example, KPMG said the board could become a liaison between IASB and U.S. companies. PricewaterhouseCoopers figures FASB could offer the SEC recommendations when IFRS standards are modified and could at least continue to be the standard-setter for private companies.

For the most part, the major accounting firms seem in favor of the SEC’s proposal. They consider it an inevitable move on the SEC’s part to eventually require companies to adopt IFRS. The Center for Audit Quality, which speaks on behalf of more than 800 firms, told the SEC that the current version of IFRS is already a “reputable” set of standards.

To be sure, with so many questions left to be answered, critics of the SEC’s so-called concept release for allowing the IFRS choice are concerned about timing. Would allowing a dual report system in the U.S. wreck the convergence efforts to create one set of strong global accounting standards? Or should that concern be pushed aside in favor of competitive concerns between U.S. multinational companies and their overseas counterparts?

For the near future, the SEC commissioners’ decision on Thursday could introduce a tiny preview into what a dual reporting system would look like in the United States, possibly as early as 2009. At the most, it could affect 180 foreign private issuers. On the other hand, giving U.S. companies the IFRS option — the idea explored in the SEC concept release — would obviously have much broader implications.

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