Set-level convergence occurs when countries and/or companies stop using country-specific financial reporting standards and start using the same set of country-neutral standards, as has been the case with the adoption of IFRS outside of the United States. But standard-level convergence has also occurred in parallel with set-level convergence. Since 2002, the FASB and IASB have been working together to converge U.S. GAAP and IFRS at the standard level, and the global financial crisis has brought even greater pressure on the Boards to make further progress.
For the most part, the boards are developing new, common standards designed to replace existing standards in U.S. GAAP and IFRS. And in most cases, the standards under development differ significantly from the standards in either U.S. GAAP or IFRS today.
Many U.S. CFOs have been led to believe that their companies, at some point in the relatively near future, will be forced to switch from using U.S. GAAP, as we know it today, to using IFRS, as we know it today. On top of being concerned about the cost and effort that would likely accompany such a switch, U.S. CFOs have been bothered by the seeming uncertainty with regard to the timing of such a switch.
The responses of U.S. CFOs about their beliefs have been mixed. Some have invested time and money in voicing opposition to such a switch. Others have demanded more certainty in the timing, assuming that they’ll commit resources to the switch once they get a “date certain.” Still others, sensing both inevitability and imminence, have begun to study current IFRS and assess the impact of converting from current U.S. GAAP to current IFRS. But all of these represent responses to imagined risks, not real ones.
Having devoted a significant portion of my career to understanding the impact of IFRS and the phenomenon of convergence from a U.S. perspective, I am convinced that the likelihood that any U.S. company will be forced to switch from using today’s version of U.S. GAAP to today’s version of IFRS is absolutely zero. So to me, protesting such a switch is pointless. Insisting on knowing when the switch will take place is pointless, too. And preparing for such a switch-well, that “takes the cake” in terms of pointlessness.
What’s the Evidence?
What evidence is there that U.S. companies will never be forced to switch from using U.S. GAAP as we know it today, to using IFRS as we know it today? Consider the following:
• For more than 99% of the companies in the United States (i.e., private companies), no individual, organization, or governmental agency can unilaterally require them to use any particular set of financial reporting standards. Many of those companies don’t even use U.S. GAAP now. So will private U.S. companies be forced to switch from U.S. GAAP to IFRS? Absolutely not.
• For the less-than-1% of U.S. companies that fall under the jurisdiction of the SEC, the SEC has made it crystal clear that they won’t even consider such a switch until there are fewer differences between U.S. GAAP and IFRS — that is, until the FASB and IASB make further substantial progress on converging the two sets of standards at the standard level. So will public U.S. companies be forced by the SEC to switch from current U.S. GAAP to current IFRS? Absolutely not. And if the SEC eventually decides to require public U.S. companies to switch from future U.S. GAAP to future IFRS, the switch will be a relatively trivial undertaking in contrast to a switch today.
•In the United States, we’ve generally been content to adhere to standards that everyone else in the world adheres to — as long as we set the standards. The thought of ceding global standard-setting authority to an organization that we can’t “control” is, to most Americans (especially American politicians), unthinkable. So will any U.S. company be forced to follow standards set by the IASB as it is currently governed? Absolutely not.
•Investors, lenders, and other principal users of the financial statements of U.S. companies have expressed no interest in seeing those companies switch to IFRS. So are “market forces” suddenly going to compel a switch? Absolutely not.