A concept released

Colette Steckel talks to FASB chairman, Bob Herz, about the business benefits of global reporting standards

The adoption of International Financial Reporting Standards (IFRS) as a single reporting language is gaining acceptance worldwide: more than 12,000 companies in almost a hundred countries currently use IFRS. Yet the US remains one of the largest capital markets where IFRS is not currently widely used. For now.

Last year, the Securities and Exchange Commission (SEC) issued a Concept Release seeking public comment on allowing US public companies the option to use IFRS, which followed its landmark ruling in July 2007 eliminating the requirement for foreign private issuers to reconcile to US Generally Accepted Accounting Principles (US GAAP).

With the SEC potentially ushering in a period of significant change during which IFRS could be adopted and US GAAP abandoned for some US companies, the US Financial Accounting Standards Board and the Financial Accounting Foundation hosted a forum in June in which panellists debated whether and how to make a transition to IFRS.

FASB chairman, Robert Herz, says that the SEC's consideration of IFRS reporting is an important and positive development although US opinion remains split. 'The reaction of most of the commentators both in the submissions to the SEC and the roundtables in November was somewhat mixed. [The transition to IFRS] was popular among large companies and large accounting firms yet among smaller companies and investors it was less welcomed. But the one thing that almost everyone rallied around was this idea of a common set of high quality global accounting standards.'

In its response to the SEC Concept Release, FASB argues that investors would be better served if all US public companies used a high-quality financial reporting framework achieved through moving US public companies to an improved version of IFRS. 'We've said that in order to move to IFRS in this country, we need a national plan or blueprint; one that addresses issues of education, training, state laws, tax…not just the accounting standards. The forum was the first step in bringing the right parties together and saying, ok if this is the way we are going to go, what are the issues and how are we going to address them?'

Momentum has been gathering pace since 2002 when FASB and the International Accounting Standards Board (IASB) expressed interest in converging their standards, culminating in the so-called Norwalk Agreement. 'We said that as an organisation we intend to work with IASB, aligning our agendas and eliminating differences particularly focusing on major areas where current accounting needed improvements,' adds Herz. Topics earmarked for collaboration between the two standard-setters included revenue recognition, pension accounting, financial instruments, leasing, and consolidation, all of which are subject to contentious accounting treatment.

Since then, the two Boards have placed greater emphasis on convergence, co-publishing a Memorandum of Understanding in 2006 that formalised the commitment to fix problems in the short term and to work together on future common standards. Herz notes that the aim is not full convergence but an attempt to develop an improved IFRS, which could then be adopted in the US. 'There are people in the US who would say, let's adopt IFRS now but that would mean changing twice - once now and then again when new, improved standards are introduced by IASB. Then there are those who are in favour of full convergence in ten or fifteen years time when all the differences are resolved. We're in favour of a middle ground: let's work with the IASB and get IFRS to an improved state which we can then adopt and work on over time.'

The joint technical work programme is expected to be achieved within the next three years with completion of goals set out in the MoU by 2011 followed by a short period which will serve as a stable platform or quiet period to allow companies to prepare for IFRS reporting. Thereafter, IFRS may be rolled out on a staggered basis, for example, according to company size, as was witnessed with section 404 of Sarbanes-Oxley. It's an ambitious timetable, agrees Herz, but one that recognises that major parts of the world are reporting using IFRS. 'We have to contemplate the possibility, and this would be up to the SEC of course, that the US would start moving to mandatory IFRS reporting around 2013.'

Herz agrees that the transition to IFRS could, potentially, bring myriad benefits to US business including increased comparability for investment analysis, reduced accounting complexity, cost efficiencies, and the increase in competitiveness of US companies and capital markets by eliminating barriers such as costly requirements to report or reconcile to other GAAPs. He notes that the benefits will arise if a common financial reporting language is applied consistently and rigorously worldwide; a lack of commonality with regional carve-outs would undermine that goal. 'The idea of national or regional variations, like those published in Europe, are certainly not acceptable to us in the US; that is not our vision. What we need is a single set of high quality standards that are interpreted in a common way.'

The first step was taken in January this year with the release of a joint IASB-FASB standard on acquisition accounting, which represents a significant change in how to report and measure the details of business combinations. The standard, which requires transaction costs to be expensed, and runs counter to US GAAP, will have an obvious impact on the bottom line. Naturally, it received a lukewarm response in the US. 'People are generally in favour of moving to a high-quality set of accounting standards but when it means they have to change what they are doing, when it gives them a reporting result that makes their business look less favourable, they will be opposed,' sighs Herz. 'Many think we are absolutely nuts asking for transaction costs to be expensed. That's the cost of doing the transaction, they say, so why wouldn't you capitalise it? But investors say yes, you should expense the cost. You spent the cash, it's done, why would you capitalise it?'

What has been made clear from the new joint standard is a greater focus on principles; IFRS will herald the end of more detailed and prescriptive accounting standards. 'I certainly would hope so,' retorts Herz. 'But the jury is out in this country yet as to whether we can handle it. FASB tells you what to do on almost everything; it's a cultural thing. We have to accept that major improvements are needed in financial reporting that would make it less complex and more useful to investors. We need to move away from the proliferation of guidance and the demand for more rules, particularly if we are to contemplate moving into a global system of reporting.'

Challenging accountants to rethink the way in which they approach an issue using judgement will not be easy, concedes Herz. 'Accountancy training in the US has got to incorporate a solid grounding in how to use sound judgement. That kind of skill needs to be taught because unfortunately, and this is a broad generalisation and it's not true of everybody, we have created in this country a generation of rule-seekers and template-hunters.' He acknowledges that accountants will be out of their comfort zone but that US businesses and investors, which are demanding more transparent and understandable reporting, will benefit from a more principles-based accounting framework.

Not surprisingly, national pride plays its part in constituent resistance in the US where some businesses will balk at the notion of abandoning US GAAP and handing responsibility for standard-setting to the IASB. 'I think there is an issue in coming to grips with the fact that we are still the largest capital market in the world but our relative size and influence is declining,' remarks Herz, adding that the globalisation of business and finance means that change is inevitable. But what will this will mean for the role of FASB in the future? 'We may become important for input to the global process, which has happened with other national standard-setters. There may be some form of US GAAP for smaller companies and not-for-profits so we may have a role there. My personal belief is that the IASB of the future may need to have physical presence and resources in some of the major capital markets of the world. The US would be one of those places and FASB has a lot of established standard-setting capability.'

Speculation aside, the ambitious goal of completing the MoU in the next few years is well underway with FASB and IASB last month issuing a consultative document on a conceptual framework, which underpins the development of future accounting standards and, in its way, marks a milestone on the journey undertaken by the two dominant standard-setters. To get to this point, notes Herz, has been an arduous task although from here on in, the US can expect a steady flow of releases on forthcoming joint standards. 'The progress on some of our projects has been slow and tortuous but I think things are going to accelerate because major discussion papers will emerge over the next few months. It has been a heck of a challenge, not only because of two boards and staffs working together but because we started off from different places with resistance from some constituents. We kept pursuing our goal.'

He remains upbeat about the future of a single reporting framework worldwide and confident that the US will publish IFRS reports before long. 'Ten or fifteen years ago, people in the US would have said a common set of high quality accounting standards would be a great idea; everyone should use US GAAP. What we've seen is a cultural shift. Today, more people understand that an improved version of IFRS is a worthy pursuit and there is a reasonable chance of achieving it.'