By Darla Sycamore
The Merriam-Webster dictionary defines promulgation as
1: to make (as a doctrine) known by open declaration: or
2 a: to make known or public the terms of (a proposed law) b: to put (a law) into action or force
The FASB refers to the promulgation of accounting standards in its Mission Statement (sometimes the process of issuing accounting standards is also referred to as pronouncing). A similar process occurs in Canada where the pronouncements of the Accounting Standards Board are the generally accepted source of GAAP for private enterprises.
In both countries securities regulators substantially outsource to these organizations. Effectively there is a promulgation of law in the land by these accounting bodies.
So what happens then if a country decides to accept IFRS as their accounting standards? Over 100 countries currently require or permit the use of, or have a policy of convergence with, IFRS. It's complicated. Deloitte has provided a good analysis of the status of IFRS in different countries. Some countries, like Canada for instance, have decided to make a full commitment by adopting IFRS as their standards at least for "publicly accountable" (includes publicly listed) entities.
In Canada there is quite a bit of legislation that refers to the Handbook (produced by the Canadian Accounting Standards Board) as the source of GAAP. The strategy will be to incorporate IFRS in the Canadian Handbook to satisfy the legal requirements. There has been support of this initiative by U.S. legislators and securities regulators in the spirit of international cooperation. Some commentators have decried this "outsourcing" of Canadian law. Of course in theory at least a national jurisdiction has the authority to promulgate whatever laws it wishes. But what about the goal of international conformity - will it then go out of the window? Quite a conundrum.
There is a lot of effort going on to converge U.S. GAAP with IFRS. Many projects are in process to this end. This goal is a laudable one in any event. Why then make the commitment to adopt IFRS? It's a good question. There are shades of dÃ©jÃ vu as a foreign body, based in London no less, promulgates law to be applied in a sovereign jurisdiction and a very important and influential one at that. It would be a very important gesture to globalization and international cooperation if the USA signed on to the adoption of IFRS along with many countries and a growing list. There is an opportunity that should not be missed in my opinion.
We are still waiting for an announcement from the SEC on whether and when IFRS will be required or permitted for U.S. companies. Indeed a detailed timetable has been expected for some time. The SEC has held four roundtable discussions on IFRS, the latest of which was August 4, 2008. Concerns were raised about the lack of maturity of IFRS compared with U.S. GAAP and the lack of specific guidance in IFRS when compared to U.S. GAAP. These concerns have led some commentators to believe that the SEC is having second thoughts. It's an important decision and many of the technical issues will be resolved in the convergence process. Conrad Hewitt, the chief accountant at the SEC stated in a recent interview that there would be a proposal concerning IFRS some time before September 21 but acknowledged there could be a delay. We must recognize that the SEC has recently appointed three commissioners who need time to study the various alternatives and their pros and cons. What we do know is that an overwhelming number of countries are adopting or conforming to IFRS and it will be very difficult for the U.S. to hold out as a lone single standard setter. We live in interesting times for financial reporting.
Having said all that, it seems totally unreasonable to provide the International Accounting Standards Board (IASB) with carte blanche and legislators in other jurisdictions would certainly agree with that thought. There have been rumblings from many EU countries about this issue recently. It's like drafting rules for the United Nations!
In response to issues raised by several countries, including many in the EU that have already adopted IFRS, the International Accounting Standards Committee Foundation is undertaking a review of governance processes of the Foundation and the IASB board. This includes oversight and appropriate representation. Clearly not every country can have a seat at the table at all times but the process has to ensure that there is input by all and such input is carefully considered. The IASB recognizes the importance of U.S. GAAP and currently there is a U.S. member, Jim Leisenring, on the IASB Board. He is a regular on roundtable discussions in the USA and Canada.
On July 21 the IASC Foundation published proposals to change its Constitution and is seeking comments by September 20 2008.
The proposals deal with having an international monitoring group to enhance the credibility of the IASC Foundation. The proposals also deal with the size of the IASB board and the geographical composition. An expansion of the current 14 member IASB board to 16 members is proposed, adding an explicit geographic requirement of 4 IASB board members from North America (Canada and Mexico would seem to be included here), 4 from Europe, 4 from the Asia/Oceana region, and 4 others from any region.
The IASC Foundation stated that, "The Trustees will publish a further discussion document inviting respondents to suggest (governance) topics for consideration by the Trustees. It is expected that consultations will be held during the course of 2009, with changes taking effect from 1 January 2010."
The governance game is afoot and seems to be on a kind of fast track. Will this help smooth the adoption of IFRS in the USA? It remains to be seen.
About the author
Darla Sycamore is a professional accountant based in Toronto. She is a Trustee of the Canadian Financial Executives Research Foundation. The views expressed in this article are entirely her own. She writes a blog under the nickname of The IFRS Exorcist that deals with IFRS implementation matters. Sycamore also consults on IFRS matters.