The Securities and Exchange Commission is expected on Friday to formally release for comment its plan for switching publicly traded companies from the accounting standards they have used for decades to International Financial Reporting Standards.
If the commission publishes the plan on Friday, it would be doing so about two months later than originally expected, and the plan will be released into a very different economic and political environment. The SEC originally announced its plan on August 27th.
Since then, beginning with the bankruptcy of Lehman Brothers on September 15, the financial and accounting world has undergone an historic upheaval. Banks and others have sharply criticized fair value accounting rules contained in U.S. Generally Accepted Accounting Principles, claiming they exacerbated the crisis.
At the same time, SEC Chairman Christopher Cox, a Republican who has championed the move to IFRS, was heavily criticized for not doing more to prevent the financial crisis. In September, Republican presidential candidate John McCain said in a speech that, were he president, he would fire Cox. Since then, of course, Democrat Barack Obama has won the presidential election. With Democrats in charge of both houses of Congress and in the White House, it’s likely that a move to IFRS — championed by a Republican and criticized by some as a covert move toward looser financial regulation — will be scrutinized come January as part of a broader look at financial regulation.
Indeed, the $700 billion bailout plan passed by Congress itself authorized the SEC to suspend FAS 157, the fair value measurement rule, if it were “in the public interest” to do so. While the new law confirms a power that the SEC already had, in mandating a study of the possible effects of 157 on the crisis the law took new action. The SEC held one roundtable on fair value on October 29 and has another scheduled for November 21, with the report on the study due to Congress on January 2. Regardless of the SEC’s conclusions regarding FAS 157, Congress seems likely to be skeptical about turning accounting standards over to the London-based International Accounting Standards Board.
Indeed, even as Congress weighed in on U.S. accounting rules, the independence of the International Accounting Standards Board from the European Union was questioned in recent weeks after the IASB set aside its usual due process and issued guidance that critics said moved one of its standards closer to U.S. GAAP.
Yet, because the SEC has not actually opened its plan yet for comment, there has been no way to formally gauge the response from companies, investors, accounting firms, and others who would normally submit their reactions. But critics of a move to IFRS have been increasingly vocal, starting with a speech by Public Company Accounting Oversight Board member Charles Niemeier at a September conference sponsored by the New York State Society of CPAs.
Niemeier repeated many of his criticisms during a panel discussion at the CFO Rising West conference in October in Las Vegas, arguing that the original idea behind convergence meant that the accounting standard-setters would eliminate the differences between their rules. But the meaning of “convergence” has strayed from creating one set of high-quality standards, he contends.
Niemeier supports the convergence work being done by IASB and the Financial Accounting Standards Board, but thinks the boards shouldn’t be hurried into finishing that job. “The emphasis has to be on high quality. [The actions we're] seeing of late, I think, take us down a different path,” said Niemeier at CFO Rising West, adding that the current version of the IFRS is too recent and untested to replace GAAP in the meantime.
Niemeier was joined on the panel by former FASB member Ed Trott, who argued that the SEC had set up “arbitrary” dates in its proposal to move all U.S. publicly traded companies to international financial reporting standards by 2016. Trott and Niemeier both called on the SEC to slow down the pace of its timetable and give accounting standard-setters more time to improve and meld their rules. “My issue is the speed and arbitrariness of the SEC making decisions for . . . political reasons rather than for the benefit of the capital markets,” said Trott.
But defenders of IFRS say that the global nature of the current financial crisis simply underscores the need for a single set of accounting standards. “The current crisis has highlighted the need to avoid any accounting arbitrage and have a level playing field,” Mark Byatt, an IASB spokesman, told CFO.com on October 31.
“Now is the right time to have this debate about IFRS,” agrees D.J. Gannon, a partner at Deloitte & Touche. “We’ve learned that the capital markets are more intertwined than they have ever been. [We need] financial results that are more reflective of reality. We need to have a global solution to these issues. This is more of a necessity now . . . after what’s happened over the past few weeks.”
Similarly, in a response to Niemeier’s speech to the NYSSCPA, SEC spokesman John Nester told CFO.com, “The Commission’s proposal comes directly in response to the fact that more U.S. investors are investing in more foreign companies in more international markets than ever before, which suggests the need for an international language of disclosure and transparency to protect investors and facilitate their comparisons of corporate financials.”
Meanwhile, the credit crisis has resulted in so much criticism of both FASB and IASB that the two boards are putting together an advisory panel to help them evaluate the resulting rulemaking lessons. To that end, the two boards have scheduled three roundtables — one each in London, Toyko, and Norwalk — to gather information and opinions about what the advisory group should work on first. The advisory group membership has yet to be announced.
Assuming the SEC does announce its plan tomorrow, one major question will be whether the timetable it originally laid out would still hold. The 60-day comment period would now stretch into the first few days of the new year. That would make it difficult for the SEC to produce a rule in time for the largest companies to opt to use IFRS by year-end 2009, as originally proposed.
Deloitte’s Gannon agrees, noting that those companies that would have the option would probably not be ready by year-end 2009. But, he says, he still thinks the overall timeline, in which all companies would move to IFRS by 2016, is realistic. “I don’t see that changing too much. I do think the early adoption may be affected. My guess is if [early adoption] slips a year or so, that’s not the end of the world. The bigger issue is the overall timeline for mandatory use. I don’t think that’s going to change.”
Also unlikely to change is the swift pace of accounting developments. Regardless of how the SEC’s plan is received, FASB and IASB have already committed to accelerating their earlier plan of convergence, and have announced an ambitious schedule of new accounting rulemaking intended to be complete by 2011. The schedule would include substantial changes to lease accounting, financial statement presentation, and revenue recognition.