January 28, 2010 1:21 pm

Chartered Accountancy: Harmony proves hard to attain

Convergence of global accounting systems is set to dominate the accounting landscape in 2010.

Since last September, when the G20 backed the creation of a single global accounting standard by mid-2011, the quest for the Holy Grail of harmony is no longer just the concern of accountants.

Ask any multinational investor or senior executive and they will say the comparability of accounts that the convergence project aims to bring can be only a good thing.

But, say accountants and investors, the devil is in the details. Closing the gap between US standards and International Financial Reporting Standards (IFRS) is fraught with political and technical hurdles.

Sir David Tweedie, chairman of the International Accounting Standards Board (IASB), who is due to retire next year, is confident of completing the task.

“Global capital markets are already tightly integrated. Investors know it. The financial crisis has shown it. So why use more than one accounting language to describe it? Why should the same transaction be accounted for differently in Copenhagen and Chicago?” Sir David says.

“The G20 has recognised the importance of this work by calling for standard-
setters to redouble efforts, and that is exactly what we intend to do. Finishing the job is not going to be easy, but nothing worthwhile ever is.”

Sir David already has some momentum. Several countries, including Brazil and China, will move to IFRS in 2010, while Japan has an option to do so. India, Canada and South Korea are due to follow in 2011.

But there are problems. First, the cost of the crisis has slowed the convergence process. A large business may spend $32m to switch to IFRS from US GAAP, according to analysts.

Then, the US Securities and Exchange Commission’s (SEC) failure last year to finalise its roadmap for the adoption of IFRS by US companies starting from 2010, has led to speculation that the country is putting the brakes on the project.

Differing views of the use of fair value or mark to market accounting have led Sir David to suggest this month that he may need to create a patch-up solution to reach a single standard.

Also, the decision by the European Commision in November 2009 to defer its endorsement of IFRS 9 relating to financial instruments has raised eyebrows in the US and Asia about the influence of European regulators.

“As a result of the crisis, there is probably a lot more concern about the governance of the IASB and the ability of the US to overcome its own accounting problems,” says Pauline Wallace, head of public policy and regulatory affairs at PwC in the UK.

“We are committed to moving to full adoption in the US of IFRS but it may not happen as quickly as first thought.”

Joseph Grundfest, a professor of law and business at Stanford University, says there are also concerns in the US about how a fully converged system would have responded to the crisis, leading some to conclude that it may be safer to remain with the US GAAPsystem that they know. Prof Grundfest believes that “as a practical matter, there will be many more problems with convergence”.

Breaking this logjam in political perception is considered key to pushing ahead convergence.

Analysts at Fitch Ratings believe it is highly unlikely that the US will back-pedal completely from the goal of a single set of global accounting standards, but they say any US adoption in 2010 is “far-fetched”.

The current roadmap sees all US public companies required to move to IFRS in 2016. Instead, Fitch analysts expect the SEC, which is due to make a comment in the next few weeks, to amend the timetable and push it back further.

Claire Crossman, an analyst at Thomson Reuters, argues the IASB should draw a line in the sand and announce it will not change its rules any more to accommodate the US after June 2011.

That move could appease the Japanese and Europeans who are nervous that the IASB is prioritising US convergence ahead of their needs.

Meanwhile, the technical convergence of IFRS and US GAAP accounting continues. The continuing
co-operation between the US Financial Accounting Standards Board (FASB) and the IASB, which was reaffirmed in November 2009, is full of big projects, all to be completed by mid-2011.

But analysts and accountants say that serious questions remain about the likelihood of the projects being completed on time, and even about whether convergence will be enough.

Mary Tokar, the partner in charge of IFRS at KPMG, says that IASB and FASB have 10 projects on the schedule for completion by June 2011 and that, “There’s every possible risk at least one of them won’t get done”.

“Total convergence may be the price that gets paid, but I don’t think we need that kind of granular alignment when you think about the cost of change [to businesses],” Ms Tokar says.

Indeed, even if completed, implementation risks are likely to arise from adopting so many standards in a short time. This would probably require enormous resources from preparers and auditors, experts say.

Moreover, depending on how these standards are adopted – retrospectively, prospectively or optionally for a period – the lack of comparability that may arise will challenge analysts and other financial statement users.

Ruth Picker, a partner and Global IFRS Leader at Ernst & Young, takes the view that “convergence is not enough; they need to decide on adoption”.

Ms Picker says Ernst & Young supports convergence in the short-term, but come June 2011 the US needs to make the decision to adopt or not adopt IFRS – and the rest of the world should move on regardless.

Above all, experts caution that, in a chase to converge with the US, Sir David must not compromise the quality of IFRS or the role of the IASB as an international standard-setter.

“You can’t walk away from the fact that the US is the largest capital market and that convergence therefore has to be a priority. But it must not be convergence to the lowest denominator,” says Veronica Poole, partner and IFRS specialist at Deloitte UK.

“Sir David Tweedie cannot push for the convergence agenda irrespective of what it is going to do for the rest of the world.

“The IASB must take the lead and stop being pushed and pulled along by FASB.”

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