The United States will pay a high price for failing to adopt International Financial Reporting Standards within the next five years, an international accounting rulemaker told a European Commission conference audience last Thursday.
“I believe it is in the interest of the United States to adopt IFRSs in the next five years,” International Accounting Standards Board member John Smith told attendees at a conference in Brussels last week organized by the European Commission. Noting that Brazil, Canada, China, India, Japan and Korea are committed to adopting IFRS, and the European Union already using IFRS, Smith said “the cost to the United States of failing to adopt IFRSs will be high.”
“If it doesn’t adopt,” he warned, the United States “will be the outlier and those countries already adopting and committing themselves to IFRSs will not accept a situation where the United States remains outside the system indefinitely, yet has a seat at the table.”
Smith’s remarks came at a May 7 conference called “Financial Reporting in a Changing World,” and most of his speech focused on how the IASB had responded to the financial crisis.
“The IASB is acutely aware of the attention that political leaders have given to accounting standards in recent months,” Smith said. Indeed, both the IASB and its U.S. counterpart, the Financial Accounting Standards Board, have been under enormous political pressure. Last October, the IASB hastily amended its accounting for financial instruments under threat of legislative action. More recently, in April, IASB members were critical of pressure put on FASB that resulted in the American accounting standards setter issuing new guidance on fair value. The new guidance urged companies to use “significant judgement.”
Although FASB argued that the amendments did not constitute a substantial change, EU ministers worried that the move had given U.S. banks greater flexibility than European banks in valuing assets. That, in turn, put more presssure on the IASB, which announced on April 24 that it would accelerate its review, though that response has not satisfied European politicians.
Just two days before Smith’s speech, EU finance ministers threatened to summon an IASB representative to a June meeting to explain its position on fair value accounting, according to CFO’s sister publication, European Voice. Charlie McCreevy, the European commissioner for the internal market, said at the time that “there is a real concern among ministers that there is insufficient appreciation in the IASB of the huge impact on financial stability that fair value accounting has caused.”
In his speech on May 7, Smith noted that the IASB has already concluded that GAAP and IFRS share an identical emphasis on judgment, and added that “to reduce any continuing fears,” the exposure draft we shall be publishing soon on Fair Value Measurement will include the FASB FSP language.
For the most part, however, Smith’s speech emphasized the IASB’s push to eliminate confusion over accounting standards by making IFRS the world standard. “The financial crisis has emphasized the relevance of the IASB’s mission,” he said. “More than ever, there is a need for a single set of worldwide accounting standards.”
Smith reiterated that the FASB and IASB are working toward converging many major accounting issues by 2011. “The completion of our joint work with the FASB will result in significant convergence with accounting standards in the United States. This will reduce the cost of transition,” he said. “But,” he added, “will that be enough to get the United States over the line?”
Smith then laid out his belief that failing to adopt IFRS would prove costly for the U.S.