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Posts Tagged ‘IFRS’

In the United States, today is election day.  In the last presidential election, the candidates were clearly divided on accounting issues.  But what about 2012?

In 2008, Barak Obama was solidly behind moving the U.S. to IFRS.  During his first term he was unsuccessful, and earlier this year the SEC waved the white flag on moving the country to IFRS.  So far in this campaign, Obama has not signaled his intentions with respect to future actions on the issue.

In 2008, John McCain emphatically endorsed American control of its own accounting standards.  However, this appeared to be a personal stance as opposed to a Republican political position.

I have not been able to uncover any statement by Mitt Romney revealing his position on global accounting standards.

Most Washington observers expect SEC Chair Mary Schapiro to step down shortly after today’s election.  The appointment of her successor (and we have had no clues) would say a lot about future U.S. government intentions on who is to set American accounting standards.

With respect to auditor rotation, both candidates are mum. Although it is true that several Democrats threatened legislation banning a PCAOB rule requiring auditor rotation, President Obama has not commented on the issue.  Mitt Romney is a client of PriceWaterhouseCoopers.  In 2008, the large auditing firms heavily favored Obama with political contributions.

There appears to be no desire from either candidate about changing the status quo on the position of audit firms in the American capital markets.  Sigh.

Both candidates have been active in discussing tax policy, but that is not the focus of The Summa.

Debit and credit – – David Albrecht

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Shyam Sunder is James L. Frank Professor of Accounting, Economics, and Finance at Yale School of Management in New Haven, Connecticut.  He has long opposed a single set of global accounting standards.  So to has Stella Fearnley, professor of accounting at Bournemouth University, Bournemouth, United Kingdom.

Their recent op-ed piece, “Global Accounting Rules — An Unfeasible Aim,” appeared in the June 3, 2012 edition of the Financial Times.  I have asked for, and been granted, permission to republish it here.


Global Accounting Rules
– An Unfeasible Aim

By Stella Fearnley and Shyam Sunder

The introduction of the euro and the adoption of International Financial Reporting Standards (IFRS) in the EU and other countries were promoted by aspirational rhetoric about gains from uniformity. Applying uniform process or rule in diverse societies does not yield uniform outcomes. Effective oversight and control of the process and rule-making can become impossible and unbalanced with so many players involved. Failure to recognise and manage the risks associated with uniformity has driven the European Monetary Union to a critical precipice. Similar risks apply to the efforts of the International Accounting Standards Board (IASB), the accountancy profession and some international regulators to bring about adoption of IFRS for global use.

The IASB and US Financial Accounting Standards Board have committed significant resources since 2002 trying to agree on common accounting standards. Despite their efforts, IFRS have not been approved by the Securities and Exchange Commission for US adoption. The SEC may never risk the political backlash from ceding control of its accounting to a non-US body. We can learn from the euro debacle and assess not only if the vision of one set of global accounting standards is achievable but also if it is desirable.

Accounting standards interact with law, commercial codes, and social norms in different countries in many ways. The IASB has pushed its agenda ahead taking no responsibility for recurrent unintended consequences. The disaster of some banks depleting their capital by paying bonuses and dividends out of false profits, generated under IFRS’s defective mark-to-market and loan-loss provision standards, is a good example.

Abandonment of judgmental true-and-fair standards in favour of written rules make accounting vulnerable to mis-statements through complexity beyond the grasp of users and directors.

China, Japan, and India have yet to be persuaded to adopt IFRS and watch from the sidelines. Within Europe, some countries view IFRS as an Anglo-American invention, and remain sceptical of its suitability for their own needs.

Complexity and interactivity of social systems and markets make it all but impossible for a group of experts to divine the “best” accounting solution that will serve divergent economies. Even if it were feasible, it can only be developed through bottom-up evolution of accounting and not through top-down imposition of a single method selected by a board of “experts” with limited accountability.

The IASB’s persistent denial that the procyclical and complex accounting model played a part in the banking crisis by inflating profits undermines trust in its competence and intent.

The euro debacle points to prudent wariness of Icarus-like overreaching ambition that is not underpinned in theory or experience. Common standards, such as common currency, may appear a good idea, particularly for international companies, regulators and audit firms. But what did we get? A Board that issues standards that can induce false profits in reports and drown users in complexity; that has not accepted responsibility for the dysfunctional consequences of its standards; and has no effective mechanisms for timely correction of defects.

Although the big players get economies of scale from applying IFRS across their international activities, shareholders and other stakeholders, particularly in the banking sector, have not been well served by the outcomes of IFRS standards.

We therefore urge the SEC not to proceed with IFRS in the US. Directors and auditors in the EU and other countries applying IFRS could lead by insisting on a true-and-fair override to cut complexity in IFRS based accounts.

We suggest the G20 drop its support for global accounting standards. Instead, they could recommend that accounting reports reflect the economic substance of businesses based on professional judgments and sound, prudent principles, and recognise that Anglo-American based accounting standards are not necessarily appropriate for the whole world.


Debit and credit – – David Albrecht


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IFRS.  IFRS.  I do not like thee, IFRS.

U.S. GAAP or IFRS?

The debate over U.S. adoption of IFRS (International Financial Reporting Standards) has died down in recent months.  This is due to three reasons, I think.  First, the FASB and the IASB have declared that further progress toward convergence is no longer possible.  The respective board members simply see the world differently and have come to different conclusions about the composition of specific accounting rules.  In other words, no compromise is possible.

Second, many (including ProfAlbrecht) believe that upon the reelection of President Obama in November, 2012, the Securities and Exchange Commission will be directed to announce the abandonment of U.S. GAAP and the adoption of IFRS.

Third, Europe and America are side-tracked by the issue of possibly mandating auditor rotation.

Tom Selling.

But that hasn’t stopped my good friend Tom Selling of the Accounting Onion from continuing the good fight. On April 2, 2012, Selling posted an insightful and well researched piece, “Ten Claims in Support of IFRS Adoption by the SEC – and Why They are False.” So impressed with this essay, I am tempted to copy it, strike out Selling’s name and replace it with mine, and submit it to two or three leading journals.

Selling is eminently qualified to write this essay.  One of the seven experts on IFRS summarized in The Summa, there is no financial accounting author more widely respected today.

You should read Selling’s masterpiece.  But if you don’t want to take the time (it a pretty long essay), here is my summarization of the major points in “Ten Claims in Support of IFRS Adoption by the SEC — and Why They are False.”

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When IFRS?

In December, 2011, Leslie Seidman (FASB), and Hans Hoogervorst (IASB) declared convergence between U.S. GAAP and IFRS to be at an impasse.  Chief Accountant James Kroeker said the SEC would need further study on the issue.  Since then, much has been written about the prospects for the U.S. adopting IFRS at this time.

Here is my thinking on the issue, but I really don’t know why I’m bothering.  I’ve played this prediction game before, and have failed miserably.  I don’t have inside contacts at the SEC, so there is no flow of inside information.

I doubt the SEC will make any decisions on IFRS until after the first Tuesday in November (election day) and the results have been certified.

The rationale is fairly simple.  IFRS is unpopular with many American rank and file accountants, small and medium business executives, and smaller investors.  Because observers expect a close presidential election between Democratic incumbent Barak Obama and the Republican challenger, President Obama will not risk alienating voters by adopting IFRS.  There will be time for that afterward if Obama wins the election.  If he doesn’t, then IFRS will wait for the next president.

Debit and credit – – David Albrecht


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James Kroeker, the SEC’s chief accountant, spoke to the AICPA on Monday.  He said,

We remain committed to completion of a final comprehensive report on [IFRS] … the staff will need … a few additional months time to produce a final report. At the same time, the staff is in the process of developing an approach for Commission consideration.

I’m shocked.  What is the SEC waiting for?  President Obama has already promised the G-20 to move the U.S. to complete IFRS adoption.  The SEC is on record as committed to moving the U.S. to global accounting standards.  And Kroeker probably dreams of getting an IFRS tattoo.

Message consistently delivered by current and former IASB chairs.

I know Tom Selling at Accounting Onion keeps writing that there is still hope for derailing the IFRS Express, but I doubt it.  The reason for doubt is SUMMArized in the image to the right —->

Kroeker also said the SEC should, “Provide for and facilitate a strong U.S. voice in the process of establishing global accounting standards.”

Yeah, right.  I know what Hans, Ian, and the IASB have to say about that.  Can’t print it here, though.

Did you notice that the FASB and the FAF escaped mention?  They are already an afterthought.  In the new world of accounting standard setting, it will be the SEC calling the American shots.

I sense a power struggle going on between the SEC and the IASB, and I suspect it is the only reason why the SEC is asking us for “just a little more time.”

Meanwhile, I remain committed to defeating the movement to adopt IFRS in the USA.  IFRS has the worst set of rules imaginable for the US.  I hope we never have to use them.

Debit and credit – – David Albrecht

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Miscellany — interesting items that caught my eye during the week.


Jonathan Weil shows why he is one of the premier journalists writing about accounting in, “Goldman Sachs Envy Gains New Meaning at Big Four.”  Weil shows several examples of the revolving door between the large accounting firms and their regulators on the PCAOB.  There are stinky conflicts of interest.


Adam Jones, accountancy correspondent for the Financial Times, writes about new KPMG International chairman Michael Andrew in “KPMG vows to remain a multi-disciplinary firm.”  In this interview, Andrew ridicules all non-Big 4 accounting firms,

He also lashed out at a Commission proposal to force the Big Four to share some audits with smaller rivals. “Can you imagine a second-tier firm auditing a global bank at a time when there is already a lack of confidence in the marketplace?”

He added: “They simply don’t have the skills or the market expertise.”

He also accused some smaller rivals of being “quite lazy” about investing in their businesses.

Mr. Andrew is a jerk.  But Steve Martin was funnier at it.

Jones has another story on the issue, “Auditing has moved into the realms of sitcom.”  It’s worth a read.


Stephanie Sammons, of Social Media Examiner, writes about, “5 Simple Steps for Improving Your LinkedIn Visibility.”  Read it.  Do it.


Tom Selling is terrific when he writes about IFRS adoption issues, as he does in, “Will the SEC Sneak IFRS in Through the Back Door?”  Selling is sounding more pessimistic about how the nefarious SEC might sneak in IFRS, despite all reason and common sense (as well as almost every accountant and investor) being against it.

I have little faith.  The commissioners of the SEC are political appointees, and Mary Schapiro has been a willing accomplice to Obama administration policy.  She has her marching orders to install IFRS, and she is loyal to the hand that feeds her.


Mark Schaefer of {Grow} has another post out on Klout, “Kould Kare Less.”

His Klout score is high, but he doesn’t care.  Mine isn’t, and I don’t care either.  Yet, many do.


Debit and credit – – David Albrecht

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Michael Cohn of Accounting Today on Tuesday, September 20, in “FASB Convergence Timeline Moves to Next Year,” reported, “Financial Accounting Standards Board chair Leslie Seidman said that many of the priority projects slated for convergence with the International Accounting Standards Board probably will not be settled until next year at the earliest.”

Unfortunately, Seidman says that progress is being made.

American accounting rules, once the best in the world, have been set on a course to converge with business-friendly European accounting rules.  European accounting rules also are known as IFRS (International Financial Reporting Rules).  Business-friendly make it easier for corporations to fudge the numbers, while providing insufficient information to investors to make informed decisions (see “Investors Say IFRS ‘Unfit for Purpose‘ “), it is my opinion that the United States should drop the convergence project and roll back recent rule changes made simply for convergence purposes.

I am not the only critic of IFRS.  Tom Selling has never stopped beating the drum against IFRS.  His most recent blog post on IFRS, “I’m Not the Only One Dissing the SEC’s IFRS Fixation,”  identifies recent anti-IFRS comments by notables Lynn Turner, Jack Ciesielski, Ed Ketz, Tony Catanach and Floyd Norris.  Go team go!

Debit and credit – – David Albrecht

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Hans Hoogervorst

Tom Selling’s latest on Accounting Onion is about Hans Hoogervorst, leader of the International Accounting Standards Board (the organization responsible for IFRS).  “The Hans Hoogervorst IFRS Sales Pitch Hits the Road.”  Selling’s post further cements his reputation as the premier commentator on financial reporting and accounting standard setting politics.

I do not like Hans.  Hans is a career politician.  As such, we should remember the typical politician’s propensity to be willing to say anything at any time to further his agenda.

Until just less than three years ago, he knew little more than “transparency is good,” and “global accounting standards are a must.”

Now, Hans is travelling the world, trying to get all countries to unconditionally accept IFRS.  He has made recent speeches about a United States switchover.  Hans, why not start with Europe?  Europe uses a customized version of IFRS.  The reason, of course, is that to Hans, it matters not what accounting rules are in place as long as they are branded IFRS.  During a recent speech in China, Hans admitted that he decided he wanted to chair the IASB before he became interested in accounting for accounting’s sake:  “These experiences triggered a personal interest in accounting … my desire to lead the IASB as it adapts to become the global accounting standard-setter.”

Selling says it well:

For a standards setter, Hans Hoogervorst, the new IASB chairman, doesn’t know much about accounting. By his own frank admission, he wasn’t even very interested in the subject until after the financial crisis hit in 2008, and he seems almost proud to disavow a command of the details of IFRS.

Consequently, his role on the IASB is obvious: to sell IFRS to as many countries as possible. Why anyone should expect someone with his background to do that with any sort of credibility is beyond me, but his selection seems to reflect a conscious strategy on the part of the IFRS Foundation: to promote the sizzle instead of the steak.

Recently, Hans has turned his attention to China, asking it to unconditionally adopt IFRS.  During his speech, Hans said,

[W]hile Chinese GAAP is not word-for-word IFRSs, I understand that analysis by the Chinese regulator shows that for companies with dual listings in Shanghai (using Chinese GAAP) and Hong Kong (using IFRSs) the average difference in reported profit is 0.6%. The difference in term of net assets is even as smaller as around 0.2%.

Hans, that companies can report the same results under Chinese GAAP and IFRS is not an argument for why the country should switch to IFRS (Selling agrees).  Actually, that there is little difference in reported financial results is a condemnation of both sets of accounting standards.  IFRS is notorious for allowing corporate flexibility in reporting results.  Chinese GAAP is much less exacting than IFRS.  It is entirely reasonable to expect that a company can look at financial recordings and be able to paint the sky any color it wants, either chartreuse or polka dotted.  Application of general accounting rules depends upon assumptions, and assumptions depend upon intention.  If a company wants to paint the sky a particular color, it can do so under either IFRS or Chinese GAAP.  The paintings will be similar because it is only one corporate painter.

Debit and credit – – David Albrecht

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Lost sight of in the SEC push to adopt IFRS is the primary reason for adopting it.  In “IFRS Is for Criminals,” Ed Ketz and Anthony Catanach of Grumpy Old Accountants remind us.

In their essay, the grumpies let it all hang out:

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Three topics are hitting the accounting news sites.  I’m just passing along announcements.

IFRS

Work Plan for the Consideration of IncorporatingInternational Financial Reporting Standards into the Financial Reporting System for U.S. Issuers:  Exploring a Possible Method of Incorporation

A Securities and Exchange Commission Staff Paper

May 26, 2011

I will be commenting on this next week.  In the meantime, read the FEIblog summary here.


Leases

The FASB and IASB have been working on leases.  The accounting for leases has been a problem area for many, many, many years.  I’ve not commented on it yet.  With the current proposal, neither corporations (and their paid auditors) nor investors are happy with the proposed rule.  The latest change is a prime example of why the IASB will not produce US-useful accounting numbers.

Edith Orenstein at the FEI Blog has a good write-up on the latest, “Preparers Concerned About Change In Direction In FASB, IASB Leasing Proposal.”


# Shareholders to Become SEC Reporting Registrant

Jim Hamilton’s World of Securities Regulation, one of my most trusted and useful news sources, has a new piece out, “House Legislation Would Raise 500-Shareholder Threshold for Reporting Against Backdrop of SEC Review of the Trigger.”  I’ve been wanting to write on this issue for some time.  The Jim Hamilton Blog reports that new legislation has been proposed, increasing the number of shareholders required for enhanced disclosures from 500 to 2,000 shareholders of record.  This will be useful to many large companies, such as Facebook, to ignore the light of the public eye.  This proposed legislation is corporation friendly and investor unfriendly.

Debit and credit – – David Albrecht

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Tom Selling of the Accounting Onion is by far the best writer today on GAAP vs. IFRS.  It isn’t easy being Tom, given that the political, regulatory and auditing establishment (political types all) have come out in favor of IFRS.  They publish so much spin (don’t touch it or smell it) about the benefits of the U.S. moving to IFRS, that it must seem like everyone in the world is for it.

But they aren’t.  All the smart guys are against it.  Isn’t that the way it so frequently works.  Smart, educated sane professionals trying to make the world a better place are pitted against powerful political parties whose only interest is what’s in it for them.  And India is backing off its commitment to IFRS after it decided it would need 65 carve-outs.

Today’s e-mail brings notification that Tom Selling has written yet another must read blog post on the issue.  He writes about the establishment spin, on one hand, and on other hand a WSJ reporter’s careful analysis of the perils of IFRS.  The blog post is titled, “ ‘Convergence Flaws'” v. Convergence Spin.”   You should just go read it.  You won’t be sorry.

Just a thought:   David Tweedie is making the rounds again hawking IFRS.  Is there anyone less believable in the accounting world today?  Other than E&Y after its Lehman Brothers audit opinion?

Another thought:  A recent survey of financial statements users reveals that 18% believe the auditor report is of no use to them at all.  I wonder what the results would have been had they asked about the value of IFRS financial statements.

Yet another thought:  Is there any more of a perfect storm than (1) corporate executives preparing financial statements (2) under IFRS and (3) receiving a clean audit opinion from a large audit firm?

Debit and credit – – David Albrecht

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Thanks to Rick Telberg at CPATrendlines, I am now aware of Mary Schapiro’s latest comments on accounting (to the CFA Institute 2010 Annual Conference in Boston, Mass.).  We now have proof that the spirit of Professor Philip Barbay is alive and well inside the beltway.  You don’t remember Professor Philip Barbay?  He was the fool to Thornton Melon (played by Rodney Dangerfield) in the 1986 classic, Back to School.  Here’s the scene I best remember:

  • Dr. Phillip Barbay: …now, not withstanding Mr. Mellon’s input. The next question for us is where to build our factory?
  • Thornton Melon: how ’bout fantasyland?

The Rodney Dangerfield (I don’t get no respect) character got no respect from Professor Barbay, and we in the accounting world get no respect from SEC Chair Mary Schapiro.

Let’s take a close look at Schapiro’s remarks.

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