Herz: U.S. Convergence Ball Is in SEC’s Court

The decision about whether the nation's corporations should report under international accounting standards has foundered amid a change of Presidents and a corresponding change of leadership at the Securities and Exchange Commission.

“The $64,000 question,” said Financial Accounting Standards Board chairman Robert Herz, is: where is the United States headed as far as converting from U.S. generally accepted accounting principles to international financial reporting standards?

His answer: “the ball is mostly with the [Securities and Exchange Commission] at this point.” Speaking at Financial Executives International’s annual Current Financial Reporting Issues conference in New York City on Monday, Herz noted the SEC has yet to rule on the “roadmap” for U.S. compliance with IFRS it proposed a year ago.

In that time line, the commission slated 2011 as the date for its decision about whether to move to mandatory adoption of international accounting standards starting in 2014, when large accelerated filers (those with market capitalizations of $700 million or more) would be required to start using global standards. They would be followed by accelerated filers (those with market caps above $75 million) in 2015 and by smaller companies in 2016.

The proposal also would let about 110 companies use the international rules as early as 2009, depending on their size and their industry. The comment period for the SEC’s roadmap plan ended in April 2009; since then, the decision has foundered in the face of a change of Presidents and a corresponding change of leadership at the SEC.

When newly nominated SEC chairman Mary Schapiro said at her Senate confirmation hearing in February that she would have to study the SEC’s roadmap and would not be bound by the prior administration’s proposal, that was “immediately misinterpreted by some folks as pouring cold water over the whole idea” of U.S. adoption of IFRS, said Herz. All Schapiro was doing was stating fact, he added.

Probably referring to the financial crisis and the Bernard Madoff affair, the FASB chairman acknowledged that “there has been a kind of hiatus at the SEC, and that’s kind of understandable given what the agency has had to deal with over the past 9 to 10 months.” Nevertheless, Herz noted, both Schapiro and SEC chief accountant James Kroeker have said they would focus on the issue by “the end of the fall” — which, he quipped, might be “around 9 am on December 21.”

Herz said that views on whether the nation should adopt IFRS are mixed. “Accounting firms all think it’s a good idea to move to IFRS very quickly. If you’re an international firm with operations all over the world, it’s a good idea,” he said. “If you’re in a company in the tier below that, you’re ambivalent about it, to say the least, [and] investors are a little wary at this point.”

He stopped short of saying that FASB was working toward the previously stated SEC roadmap. The board is “just going to continue working” on convergence with the International Accounting Standards Board on such projects as those involving accounting for financial instruments, fair-value measurement, and off-balance-sheet financial reporting, he said, “and try to get them done in the high-quality, preferred way.”

Still, while both boards are focused on working together, “we both have to maintain our existing literature[s],” said Herz. In the United States, the demand for changes in board interpretations, accounting rules, and deadline extensions “has not abated at all,” he added, noting that FASB receives at least one such demand every week.

During a question-and-answer period, Herz was asked: if you could start over, what would you do differently in terms of convergence? “If we had started over, I would think we would have started to do things in unison from Day 1,” he answered.

In any event, that wouldn’t be possible because FASB is at the beck and call of volatile government imperatives that tend to throw convergence out of sync, according to the standards-setter. Herz spelled out two instances in which FASB’s overseers ordered the board to act without considering convergence. Concerning uncertain tax positions, the SEC ordered FASB to take action, and so it did, he said.

In the case of FAS 166 and FAS 167 — which starting in January 2010 will change the way banks and other financial institutions account for securitizations and special-purpose entities — the President’s Working Group on Financial Markets “explicitly said, do what you need to do in terms of U.S. GAAP, and then work with the IASB on global solutions,” said Herz. “It was very specific.”

That way of operating “proves inefficient from a standards-setting perspective,” added Herz. “But more importantly, I don’t think that’s the best way to proceed from the viewpoint of any constituency.”

 

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