Friday, September 16, 2011

BLOG 112


I have just returned from my annual trip to Chicago. I go every year to attend the Midwest Accounting and Finance Showcase, which updates me on US tax. Don’t ask why, it’s a long story! I enjoy going though. Better, I discovered about ten years ago that if I stay in the US for a couple more weeks I can attend the Chicago Jazz Festival too.

The Showcase met its usual high standard (so did the Jazz Festival but that’s not my topic for today), but as I’m not really interested in Illinois State tax I was at a bit of a loss as to what to do on the second day. So I went along to a talk on IFRS for SME’s given by Marion Powers of Kellogg North West University. I went to her talk on International Financial Reporting Standards (IFRS) a couple of years ago and found it hilarious – it was mainly about how IFRS could never work in the US, so I thought that IFRS for SME’s (Small and Medium-sized Enterprise) would be equally amusing.

Interestingly it wasn’t! Indeed Marion thinks that IFRS for SME’s is very similar to US GAAP (Generally Accepted Accounting Principles) which somewhat took me aback. The reality is that most small businesses in the US do not use US GAAP at all; they use a cash basis with modifications to meet the tax legislation so that the accounts can serve as the tax return too.

The big stumbling block to the adoption of IFRS (and IFRS for SME’s) in the States is that US GAAP allows stock to be valued on a LIFO basis, i.e. sales are matched with the latest purchases, not with the earliest acquisitions as in the UK. This defers profit in times of inflation. LIFO is not permitted under IFRS (or IFRS for SME’s) so a switch will give rise to huge taxable profits in many businesses for the transitional year.

Marion also updated us on whether the US is likely to adopt IFRS. The answer seems to be that it is unlikely to do so. IFRS has the support of major investment houses but apparently of very few others. The US standard-setter, The Financial Accounting Standards Board (FASB) seems to have lost much of its enthusiasm for IFRS. Talk is now of “condorsement”. Under this the US would endorse the use of IFRS but would keep the bits of US GAAP that IFRS does not cover. The US would also keep FASB for a transitional period of 5-7 years. During that period FASB would be “the voice of the US” in making representations to the International Accounts Standards Board (IASB) and during that period would aim to incorporate IFRS into US GAAP in stages. Apparently that is how Japan adopted IFRS starting in 2005 and becoming fully IFRS compliant only this year.

Marion pointed out that few countries have actually adopted IFRS in full. Most, like the EU, have not adopted all of it or have amended the bits they don’t like. Only 16% of countries use pure IFRS. Accordingly the original dream of a universal accounting standard is just that, a dream that is unlikely ever to be achieved.

Marion thinks that the SEC will permit the use of IFRS by US companies but not require it. Currently only about 6% of US companies use IFRS. The SEC is due to decide later this year.

I also noticed an article in “Accounting Today” by two academics, Paul Miller of the University of Colorado and Paul Bahnson of Boise State University. They titled their article “To the SEC: Don’t throw in the towel by changing FASB to FARSB and creating a FARCE”. This is a critique of “condorsement”. They suggest that it will turn the FASB into the “Financial Accounting Rubber-Stamp Board” (FARSB). FARCE stands for “Financial Accounting and Reporting Cannot Evolve”. The two Pauls say “condorsement” is not merely deplorable but also potentially illegal because it is tantamount to abdicating the SEC’s statutory responsibility for creating reporting standards … The FARSB Proposal would take away the commission’s powerful status as the “300-pound gorilla in the room” when it comes to standard-setting. Even though the SEC has no explicit formal role in FASB’s process, it does monitor and, on occasion, nudge the board through well-established back-channel communications. Having FASB automatically “condorse” everything will deprive the commission of that power and reduce it to being only one of many national regulators with little or no influence on the FASB. As a result the commission would no longer be in compliance with its congressional mandate to establish reporting standards”.

Actually it appears that the real problem is that the two Paul’s do not like either US GAAP or IFRS. They want companies to “satisfy today’s enhanced hunger for knowledge by applying 21st century technology to implement continuous reporting that publishes information weekly, daily and even more frequently”.

Accordingly they believe that “even though current GAAP and IFRS might be the best existing standards, they do not produce high-quality financial statements and must be replaced with new standards that produce rational and useful information. Therefore this move to neutralise FASB will not lead to significantly more useful financial reports… Subjecting FASB to “condorsing” IFRS is a questionable, even contemptible, end run around long-standing statutory protections for US markets. It will not achieve progress because it will preserve today’s incomplete and grossly inadequate financial statements in suspended animation”.

Strong words – and depressing one’s too! In effect they are saying that the US system (which let’s not forget facilitated the Enron fraud) is so superior to anything else in the world that it would be a tragedy to adopt worldwide standards because that would mean that people like the English, French, Germans, Canadians, Australians and similar backward countries would have an input into future changes in accounting standards, which would dilute the brilliance of US standard-setters that stand head and shoulders above those in the rest of the world (although they would of course still have an input into developing IFRS).

I find this depressing because I think it worrying that, in the shrinking modern world, US academics can adopt such an insular position and not accept that the US, like everyone else, can benefit by pooling its knowledge and systems with others.



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