BY PAUL B. W. MILLER AND PAUL R. BAHNSON
The demise of the drive
to bring international
standard-setting to the U.S.
We’re drafting this column in Janu- ar y, when many were surely puzzling over Securities and Exchange Commission Chief Accountant Jim
Kroeker’s December announcement that
the commission would not, after all, decide
by year end whether the International Accounting Standards Board and International
Financial Reporting Standards would replace
the Financial Accounting Standards Board
and U.S. GAAP.
We explain how to interpret his statement
and then describe its context and the fallout
of events in Europe. Our main point: The
quixotic quest to create uniform international
standards is dead and done.
Those who take Kroeker’s words literally
are likely to think this demurral is just another round of Washington’s favorite game
of “Kick the Can” that tediously postpones
decisions. To us, however, his message is profoundly different.
UNDERSTANDING THE WORDS
The key to his real meaning is understanding
the carefully chosen words in his statement
that, “I’m encouraged for the prospect of in-
corporation of IFRS.”
Just what does “incorporation” mean? In
essence, it is a positive-sounding replace-
ment for the inelegant term “carve-out,” in
which a country uses IFRS only after remov-
ing offending portions. Instead of focusing on
what’s taken out, “incorporation” focuses on
leaving in the non-offending parts. In other
words, incorporation will integrate suitable
IFRS provisions into GAAP.
“Incorporation” is far different from “
adoption,” which means accepting IFRS the way
it comes without removing even a comma.
To adopt, the SEC would have to embrace
the IASB as the authorized standard-setter,
which then would bind it to accept all future
Paul B. W. Miller is a professor at the
University of Colorado at Colorado Springs
and Paul R. Bahnson is a professor at Boise
State University. The authors’ views are
not necessarily those of their institutions.
Reach them at firstname.lastname@example.org.
IFRS, as well as those already in place. In fact,
about the only countries that gave or will give
carte blanche to the IASB are economically
insignificant and have neither the resources
nor the will to create their own credible standard-setting process.
“Incorporation” also differs from the “
condorsement” trial balloon that would have
FASB rubber stamp whatever the IASB produced. The Financial Accounting Foundation’s November comment letter to the SEC
on “condorsement” clearly said, “No way!”
They argued, among other things, that this
would severely compromise the SEC’s influence on the standard-setting process.
Finally, “incorporation” is totally distinct
from “convergence,” the term for the effort to
issue common standards emblazoned with
the two boards’ logos. To make “
convergence” happen, their members struggled to
reach one common consensus after another.
That proved unworkable because of their disparate goals, constituencies, backgrounds,
motives and perceptions. Also, the June 2011
deadline turned out to be incredibly naive.
UNDERSTANDING THE CONTEXT
Well, if Kroeker and the commissioners decided to “incorporate,” rather than “carve
out,” “adopt,” “condorse” or “converge,”
why didn’t they just say so at the SEC/Pub-lic Company Accounting Oversight Board
conference? Shouldn’t people just accept the
chief’s report that they merely postponed the
promised December 2011 decision for “a few
months,” and that the quest is still viable?
The SEC’s problem was that the decision
to incorporate will disappoint key players
who went whole hog into the idea that FASB
should be shoved aside. On the other hand,
a decision to adopt or condorse would upset
FASB and others who don’t like giving up
U.S. sovereignty. It would also fly in the face
of federal statutes.
They simply could not waltz into the convention hall and blurt out the answer. They
have to invest some time figuring out how
to explain what they’ve decided in order to
minimize negative reactions.
Further, notice the vagueness of the phrase
“a few months.” How many is a few and how
will anyone know when that period has
passed? Also, 2012 is an election year and any
action after March or so could be perceived
as lame duck, just like the now-meaningless
“road map” the SEC produced in 2008.
Why did Kroeker and the commissioners
decide to go this way? We think the findings
of their well-conceived work plan, the FAF’s
November letter, and other criticism caused
them to reach these conclusions:
;Adopting IASB is legally impossible;
;Compelling FASB to “condorse” fools
;Allowing U.S. companies to choose between GAAP and IFRS is absolutely unworkable; and,
;Expecting both boards to agree on key
issues is hopelessly optimistic.
In addition, we suspect that they realized
that changing would create large costs with
little or no benefits.
More savvy observers knew about these obstacles and fully anticipated this impasse. On
the other hand, ardent chauvinists ignored
the impediments and contrary views held by
those they dismissed as “detractors.”
This decision was surely encouraged by the
IASB’s increasing tilt toward Continental Eu-
ropean interests. It was obvious that Chair-
man David Tweedie would not be replaced by
a fellow citizen of the United Kingdom, and
inconceivable that a U.S. accountant could
be appointed unless the SEC adopted. It was
no surprise that someone from the continent
JUST A FAÇADE
As we reported in October, Floyd Norris of
The New York Times revealed that Europe’s
unified front on accounting standards was
bogus because banks on the Continent applied IFRS to their Greek bond investments
with so much diversity that Hoogervorst initiated a stealthy back-channel effort to rein
them in. (So much for the superiority of prin-ciples-based standards, eh?)
We also note the IASB’s December decision to postpone the effective date of IFRS 9
on financial instruments to 2015. Despite the
foundation’s assertion that global standards
are almost here, the IASB knows that apply-