IFRS Back on Track?

The SEC is expected to publish its timetable for switching from GAAP to IFRS on Friday. But the plan, first proposed in August, will be released into a radically different economic and political environment.

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.

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