As expected, the SEC staff released a report on IFRS that does not contain a recommendation on whether to adopt IFRS or when to adopt.
I have not read the full 137 page report, and don’t plan to. As I browsed the first 28 pages, what struck me is the large number of observations in the report that are actually fairly major criticisms of IFRS and reasons not to adopt it.
Here’s a small number of examples:
The SEC is not pursuing IFRS as the sole source of GAAP for several reasons:
…very few jurisdictions provide for the use of standards issued by the IASB without measures to ensure the suitability of those standards. Rather, most jurisdictions generally rely on some mechanism to incorporate IFRS into their domestic reporting system.
In other words, most countries reserve the right to adopt those portions of IFRS that fit their country.
Huge conversion cost:
U.S. GAAP is embedded throughout laws and regulations and in a significant number of private contracts. The effort that would be required to change the references from U.S. GAAP to IFRS as issued by the IASB would be significant, if not nearly impossible, at least in any near-term time horizon.
Diversity of application by country:
However, in order to derive many of the key benefits of a single set of accounting standards, it is critical that those standards are applied and enforced on a consistent basis. The Staff conducted a review of financial statements prepared in accordance with IFRS to assess the consistency in application. The results of the Staff’s review were consistent with its expectations and confirmed that, while the financial statements reviewed generally appeared to comply with IFRS, global application of IFRS could be improved to narrow diversity.
In other words, each country can omit those portions of IFRS they choose.
The IASB does not have a mandate to consider the specific needs of particular countries:
As is typical with a global organization, the IASB does not have a mandate to consider the establishment of standards with the focus of any single capital market. As it relates to considering the needs of U.S. investors and the U.S. capital markets, the Staff believes that it may be necessary to put in place mechanisms specifically to consider and to protect the U.S. capital markets—for example, maintaining an active FASB to endorse IFRSs.
That means there is a method needed to protect those unique aspects of the US market that would not otherwise be addressed by IFRS.
Let me rephrase the previous two points: Most countries reserve the right to omit those portions of IFRS that they wish to avoid and the U.S. needs to make sure we can do the same. Therefore the goal of a consistent, world-wide set of accounting standards that applies to all industries in all countries is not something most countries want and is not even the goal of most countries. Isn’t that the point of IFRS?
Funding for the IFRS Foundation is uncertain:
However, the IFRS Foundation is a private not-for-profit organization and ultimately has no ability to require or compel funding. Further, while the IFRS Foundation indicates that IFRS is used on some basis in more than 100 countries around the world, currently funding is provided to the IFRS Foundation by businesses, not-for-profits, and governments in fewer than 30 countries.
Looks like there’s yet another argument here against IFRS that I’d not thought of before.
Section II discusses how well-developed IFRS is for application to the US reporting needs. I think it is fair to say the inference from the report is there’s still some more work to do on IFRS before it is sufficient for the US market.
The biggest issue that jumped out at me is something I had not thought about before. That is the large amount of industry-specific guidance that has been developed in the US. We would lose all of that with a jump to IFRS.
U.S. GAAP is a mature body of standards that has been specifically tailored to the needs of the business, reporting, and regulatory environment in the United States over its development. By contrast, the IASB has not historically issued industry-specific guidance, preferring instead that issuers use its generally-applicable (i.e., industry-neutral) principles.
They are probably some very sophisticated ways to describe my concern and complex words I should use. However I think the major point can be summarized quite simply: adopting IFRS would represent a serious deterioration in the quality of accounting guidance compared to where we are now.
U.S. GAAP has many weaknesses, issues, and places that need to be improved.
We could make US accounting far, far worse by adopting IFRS. And that’s essentially the argument from the SEC staff!
The staff report lists four industries that have well-developed guidance in U.S. GAAP, where IFRS has nothing:
- utilities that engage in rate-regulated activities;
- oil and gas;
- investment companies; and
They left out nonprofit accounting, which is another large portion of the US economy.
I don’t have an easy way to quantify the amount of economic activity in those five industries, but that is a fairly large portion of the US economy.
I think I’ll stop there.
If I had the time I could make an extensive, detailed argument against IFRS by quoting from the SEC staff report that presumably is trying to advance the argument for IFRS.
Can we bury IFRS convergence?