Any Change in the IFRS Issue?

Edith Orenstein, in her exceedingly well done FEI Blog, quotes SEC Chief Accountant James Kroeker as saying:

Kroeker outlined six general areas that the SEC would have to “carefully consider … fully understand and address” regarding the potential use of IFRS by U.S. companies.  He added that this list is not all-inclusive. The six areas are:

1. U.S. Investor understanding of and perspectives on IFRS;
2. The development and application of IFRS for use as the single set of globally accepted accounting standards for U.S. issuers;
3. The impact on the U.S. regulatory environment;
4. Preparer considerations, including, among other matters: changes to accounting systems, changes to contractual agreements, corporate governance considerations, and litigation contingencies;
5. Human capital readiness; and
6. The role of the FASB in achieving the goal of a single global standard.

Kroeker noted, “I expect that you will hear more from us on this topic in the near term.”

James Kroeker

It is so depressing to hear James Kroeker speak of #2 and #6, as it reveals the SEC’s continued fixation on a single global set of accounting standards.

A global accounting standard is both unwise and misguided.  I’ve explained why many times.  However, just in case today is the day Mr. Kroeker checks out my blog, I’ll explain it again.

The world’s most brilliant accounting professors have shown (1) that accounting rules have economic consequences, and it is a government’s responsibility (a calling, even) to adjudicate between competing economic interests in such ways that are optimal for the country of that government, and (2) the economic consequences of accounting standards are dependent upon a country’s history, economy, legal system and make-up of capital markets, and (3) a country (such as the U.S. is made worse off by adopting accounting standards optimized for a different country, and (4) there is no such thing as “true” accounting standards, as the optimality of accounting standards depends on the needs of a culture’s economy (accounting standards are not derivable from either nature nor God).

It has always been, and remains, perplexing to me to hear claims that we need a single set of global accounting standards.  I keep hearing the claim that it will enhance U.S. investor ability to make comparisons between company A and company B.  This is most decidedly a false statement.  It is false because:

1. The implementation of IFRS will not be consistent from company to company or country to country.  Harvy Pitt, former Chairman of the SEC has said that a company will account differently over time for similar transactions, companies in the same industry will account differently for similar transactions, and companies in different industries will account differenlty for similar transactions.  Investors will simply need to deal with it.
2. Comparability of two companies is only partially dependent on financial statements.  It has been shown that published financial statements are only a minor (at best) component of investors’ decision models.  If so, then why is it important for investors to be using global accounting standards?  Answer, it isn’t.  However, changing American accounting to IFRS will have a huge negative impact, as the more general IFRS will lead to opaqueness in the financial statements.  Decreased transparency leads to less information value and lower equity values.

The SEC and Chief Accountant seem to have a hidden agenda here.   They have never admitted the real reason for the rush to IFRS in the U.S.  Many observers have been guessing for along time as to the real reason.  If it was valid, it shouldn’t be that difficult to figure out.

Debit and credit – – David Albrecht