Convert to IFRS or Stick with U.S. GAAP? How About Neither?
As I noted in my last post, it's difficult to argue that there should be any material differences in the portrayal of the same economic situation among reporting entities in different countries. Consequently, for general-purpose financial reporting, it makes sense for similar reporting entities throughout the world to use the same set of high-quality standards. But having researched this situation for years, one thing is clear to me: neither U.S. GAAP nor International Financial Reporting Standards (IFRS) are feasible candidates for the single, global set of standards that would most benefit individuals, companies, and countries.
In particular, it’s very clear that U.S. standard-setters, regulators, and other participants in the financial reporting supply chain don’t consider the specific standards that comprise IFRS to be superior to the standards that comprise U.S. GAAP. If we thought the standards in IFRS were better, we’d have incorporated them into U.S. GAAP by now, because there’s been nothing to stop us from doing so and we’ve had decades to make it happen. The overt lack of support of the world’s largest national economy for the specific standards that comprise IFRS means those standards have no realistic chance of being globally accepted.
It’s equally clear that the rest of the world doesn’t want to use the standards that comprise U.S. GAAP. If other countries thought the standards in U.S. GAAP were better than those in IFRS, they’d have adopted U.S. GAAP instead of IFRS or at least would have seen that IFRS incorporated individual standards from U.S. GAAP by now. The fact that countries whose economies collectively dwarf the U.S. economy have rejected U.S. standards with near unanimity means U.S. GAAP has no realistic chance of global acceptance.
Given this situation, it is inconceivable to me that users of either U.S. GAAP or IFRS will somehow become convinced that they should adopt the other set of standards. Consequently, I see our only hope for the global acceptance of one set of standards to lie in standards that are better than both current U.S. GAAP and current IFRS—that is, standards that do not exist today.
Tying back to my previous blog posts, this indicates that neither a conversion to current IFRS nor the continued use of current U.S. GAAP is an appropriate public-policy goal for the United States. Instead, we should be aiming to develop a set of standards that’s better than either. And whether you think that’s what we should be doing or not, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have in fact been doing it and continue to do it.
Please don’t presume that the resulting set of standards will be called IFRS, otherwise, you’ll continue to propagate confusion that is already plentiful. I always discourage folks from referring to any future converged set of standards as IFRS because that confuses it with today’s IFRS, which isn’t the same thing at all. It’s like using the name “apple” to refer to both apples and oranges. (see Rick Telberg’s YouTube video of me talking about this at the 2009 NASBA National CPE Expo).
Realistically, though, if the countries of the world haven’t agreed on what’s “good enough” by now, what are the chances that we’ll soon agree on what’s “better”? Especially when “better” is in the eye of the beholder? In my opinion, the likelihood of future agreement on “better” standards is high, but not certain. At best it will take many years—I think 10 years is much more realistic than, say, 3 years. And I acknowledge the possibility that complete convergence on a single set of standards might never happen (or might not persist once attained).
The biggest problem with the current approach to standard-level convergence is that it will deliver few benefits before it’s complete (or nearly complete), which is likely to be a long time coming and might never actually happen. So what we need is an approach that enables us to capture more benefits sooner and without being predicated on the eventual attainment of total convergence. Ideally, such an accelerated approach would also respect the sovereignty of individual countries and jurisdictions so that we don’t get hung up in the “who” issue of standard-setting (see my previous post).
Fortunately, there is such an accelerated approach, and I’ll share it with you in my next post.
Bruce Pounder, MBA, CMA, CFM, DipIFR (ACCA) is an internationally recognized expert on corporate financial reporting and the global convergence of financial reporting standards. He has two decades of firsthand financial reporting experience as the CFO of a privately held corporation and has served as a financial reporting consultant to many public corporations. Currently Bruce is President of Leveraged Logic, a leading provider of educational products and services to accounting professionals. He is the author of the 2010 U.S. Master GAAP Guide (CCH), the Convergence Guidebook for Corporate Financial Reporting (Wiley), and the monthly "Financial Reporting" column of Strategic Finance magazine. Bruce also presents the live webcast series "This Week in Accounting."