Paul Hastings lawyer defends IFRS conversion: ‘Even Canada has converted’

What was supposed to be a tipping point in the global harmonization of accounting standards has turned into yet another disappointment.

Last Friday, as reported in Accountancy Age, the Securities and Exchange Commission (SEC) issued a report that many in the financial regulatory community were hoping would finally decide whether — and if so, when — the United States would join the majority of its G20 partners in adopting international financial reporting standards (IFRS).

That report came up decidedly short, making no recommendations and laying out no timetable — and prompting many expert observers to issue vocal criticisms and expressions of frustration.

Legal heavyweight Scott Saks in the New York office of Paul Hasting LLP argued that US conversion to IFRS was way overdue. He even pointed deploringly at Canada’s adoption of the accounting standard as evidence that fears have been overblown.

“It makes no sense that there is not a more immediate roadmap for the US to convert to IFRS as have most major economies,” Saks said. “Even our closest neighbour Canada has converted without issue and one could argue their GAAP is about as close to US GAAP as one could get,” he said.

“The one argument that the SEC makes is the cost on smaller issues, which could be easily addressed by allowing those companies that wish to convert immediately to do so, with a longer phase in for smaller companies.

“If anything, this would likely reduce expense at the largest global companies that are already using IFRS in their foreign operations and would not have a negative impact on investors as the SEC already allows all foreign private issuers to use IFRS without a US GAAP reconciliation and investors have not been harmed by that.”

The International Accounting Standards Board (IASB), which is behind the new standard, has been lobbying hard for the United States to move to IFRS since about 2002. They got little traction until a 2010 breakthrough, when staff at the SEC were directed to conduct an analysis of the proposal. A decision was expected in 2011, but distractions and disagreements have so far impeded progress.

One primary distraction, if you can call it that, has been the task of creating a regulatory framework around the Dodd-Frank Act. SEC staffers may simply be too busy working out the details of the new rules, which are no doubt a higher priority than IFRS.

Another setback has been the announced departure of the SEC’s chief accountant, James Kroeker, who will be returning to the private sector next month. Kroeker was apparently a supporter of conversion to IFRS, and those hoping for a speedy conversion will sorely miss his influence.

Laborious negotiations are also at play between the IASB and its US counterpart, the Financial Accounting Standards Board (FASB), involving a series of esoteric sticking points such as the way in which leasing liabilities are reported.

Nigel Sleigh Johnson, head of the Institute of Chartered Accountants in England and Wales (ICAEW), demonstrated a stiff upper lip in delivering a muted criticism of the SEC report:

“The fact that the US is still hesitant about a radical shift away from its own high-quality standards should not be taken as any reflection on the suitability of IFRS reporting for other markets.”

Michael Prada, chairman of trustees at IASB, was equally diplomatic:

“While recognising the right of the SEC to determine the method and timing for incorporation of IFRSs in the US, we regret that the staff report is not accompanied by a recommended action plan for the SEC,” Prada said.

The new milestone for IFRS conversion should come around mid-2013, by which time negotiations between the FASB and IASB should have ended. You can read the SEC report that has caused all this consternation right here.

-David Dias

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