domenica 20 novembre 2011

More SEC Reports on IFRS Coming: Will they be Genuine Analysis or Just More Dithering?

The minutes of the latest meeting of the SEC Staff with the CAQ SEC Regulations Committee provide an indication of what may be coming soon on the IFRS adoption front:

"Jill Davis [Associate Chief Accountant in the Division of Corporation Finance] noted that the comment letters provided to the SEC staff on the Staff ["Condorsement"] Paper have expressed overall support for the longer-term objective of moving toward a single, high quality set of standards that are applied consistently on a global basis.

Ms. Davis also noted that the SEC staff plans to issue two additional Staff Papers during 2011 on (1) a principles level analysis of US GAAP as compared to IFRS and (2) an analysis of the application of IFRS in practice. The SEC staff also is considering issuing a report by the end of the year that would summarize observations and information gained through its IFRS Work Plan. [italics supplied]

If you are a regular reader of my blog, you would know that I think that the Staff is either just spinning its wheels, or it has decided that it has come time to spin out yet more propaganda to support IFRS adoption. I italicized those portions of Ms. Davis's remarks that are my particularly hot buttons.

Single set of standards – There isn't even a single set of IFRS, and there still won't be, even if the U.S. swallows IFRS hook, line and sinker. This is due in part because of the multiple carve-outs that could live as long as IFRS lives. But it is also true because even within 'pure' IFRS, the notion of a single set of standards is a fiction: there are far too many free choice and built-in opportunities to manage earnings. Stated another way, there may be a single system accepted by a few countries called IFRS, but it surely is not a single set of standards.

High quality standards –I'm sure that Indian regulators, with its 65 carve-outs utilized by thousands of companies, believe that the Indian version of IFRS is high quality, because it accomplishes policy objectives set for India; and the same goes for China, which regards it abridged version of IFRS to be just as good as the real thing. The EU is pretty close to genuine IFRS, but is it much different from India or China? It has only one carve out utilized by only about twenty companies, but some of these companies are the GIANT banks whose failure could bring the global economy to its knees, yet once again.

I'll have more to say about "high quality" in my next post, when I discuss the concept of "investor protection." But for now, I'll just observe that high quality is context-dependent; and it behooves the SEC to give us at least some hint, finally, as to what "high quality" means forthe SEC's mission to protect U.S. investors.

(Accounting) Principles – This would be a good time to mention the online availability of the text of my remarks at least week's American Accounting Association 2011 Northeast Region meeting (Whither IFRS Adoption: the Answer is in the Details).

During the Q & A afterwards, one professor in the audience asked what advice I had for his doctoral student, who was seeking to write a dissertation on a similar topic to my remarks. I won't go into my response, but it got me to thinking why the SEC has not commissioned academics to undertake some of their research projects – like the two reports Ms. Davis said the Staff is planning to deliver by the end of this year. Or how about commissioning a comprehensive and independent analysis of the comment letters?

For one thing, the SEC Staff has little or no collective background in conducting accounting research, and for another it is known to be extremely shorthanded. Cynical me suspects that the SEC is unwilling to risk losing control of the outcome of their "analysis."

In any case, these reports are going to be too little, and too late. The SEC should have made a U-turn on its IFRS adoption roadmap years ago. But, let's play along, and hark back to the Staff's 2003 report to Congress on a "Principles-Based Accounting System." In many respects, it is a horrible document, but two clear outcomes were: it endorsed a more consistent asset/liability view to standard setting; and it called for a revamped and strengthened conceptual framework. It is undeniable that neither Board has made adequate, or even significant, progress on either front.

The Staff knows US GAAP and IFRS well enough to anticipate the only legitimate conclusion that can come from of an exercise in which IFRS and U.S. GAAP is compared and contrasted – either at a "principles level" or any other level. Both sets of standards contain so many internal inconsistencies and differences between them to dash any realistic hope that convergence to "high quality" (however defined) can occur within a reasonable timeframe. How much of those real differences will the Staff gloss over by some sort of "principles level analysis"? Answer: as much as the Staff wants.

The public interest and investors would be better served if the Staff were to finally acknowledge that IFRS is not clearly superior to U.S. GAAP; and, eight years after its report to Congress, the necessary conditions for principles-based standard setting to occur (especially at the IASB) are still not in place.

I haven't read more than a few of the comment letters to which Ms. Davis is referring, but from the ones I have read, the sense of their references to "a single, highly quality set of standards that are applied consistently on a global basis" is as something distant and desirable, yet for all practical purposes, unattainable. Given the recent track record on convergence, the current state of the economy, the problems with IASB governance and many other factors convincingly argue that it should be put on the back burner for at least a few years.

No future SEC Staff report can controvert the reality on the ground that IASB accounting standard setting and convergence are in a state of chaos, with nothing like "principles" or consistent "objectives" to orient them. The prospects for anything approaching a "single, high quality set of standards that are applied consistently on a global basis" in any of our lifetimes are dim to nonexistent.

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