On August 4, 2008, the Securities and Exchange Commission (SEC) hosted a roundtable discussion on the performance of International Financial Reporting Standards (IFRS) and United States Generally Accepted Accounting Principles (U.S. GAAP) during the present subprime crisis. The roundtable participants represented a cross section of investors, issuers, auditors and other market participants, in both the United States and the European markets, with experience in considering and/or evaluating company financial statements prepared in accordance with IFRS or U.S. GAAP, as well as special observers from the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).
Financial accounting standards have increasingly been shaped in recent times by both globalization and an increase in cross-border transactions. In particular, since the IASB’s inception in 2001,1 IFRS has sought to harmonize accounting standards and reporting in the international community. IFRS, which was adopted three years ago in the United Kingdom, is now used in over 100 countries. In recognition of the growing prevalence of IFRS throughout the world, the SEC determined in 2007 that foreign private issuers using IFRS would no longer be required to reconcile their financial statements to U.S. GAAP in their SEC filings.2 In this regard, the SEC’s roundtable was timely, as many expect that the SEC may, in the near future, mandate that U.S. companies use IFRS instead of U.S. GAAP, with a date of implementation far enough in the future to give companies sufficient time to prepare.
The roundtable discussion, which specifically focused on the merits of the IFRS and U.S. GAAP accounting frameworks within the context of the subprime crisis, yielded some reflective comments comparing the more principles-based IFRS with the more rules-based U.S. GAAP. Panelists noted that, in a number of critical areas, including accounting for off-balance sheet arrangements and inventory accounting, accounting under IFRS and U.S. GAAP can lead to very different results. It was noted that, in many areas, IFRS is viewed as more complicated and labor intensive when compared to U.S. GAAP, because IFRS lacks the more detailed set of rules that have been developed in U.S. GAAP accounting.
In particular, one panelist was highly critical of IAS 18 regarding revenue recognition, which was characterized as incomplete, insufficient and inconsistent in its result. Many commentators have noted that the adoption of more substantive guidance relating to IAS 18 and IAS 39 (regarding revenue recognition) will be critical to the adoption of the IFRS standard in the United States.
Panelists collectively agreed that both U.S. GAAP and IFRS withstood the subprime crisis and recognized that both accounting standards have inherent strengths and weaknesses. The common consensus, however, was that the global community and investors should collectively strive to implement one set of global accounting standards, and continue to support joint efforts between the IASB and FASB to converge the two systems. While IFRS, as a new accounting standard, lacks the maturity and, at times, detail of U.S. GAAP, it perhaps has the unique advantage of looking back at the present U.S. GAAP framework and not replicating the same mistakes that have resulted in recent accounting mishaps in the United States.
The SEC, with the guidance of the Division of Corporation Finance and the Office of the Chief Accountant, is moving closer towards the possibility of adopting one single set of globally accepted accounting standards. In light of IFRS’ recent performance during the subprime crisis, the SEC has again highlighted the importance of focusing on IFRS as a potential accounting standard to be adopted by issuers in the United States. Mr. John W. White, Director of the Division of Corporation Finance at the SEC, believes that it is only a matter of time before the SEC will issue a detailed roadmap outlining how and when the SEC adopts IFRS as the generally accepted accounting standard to be applied in the United States.3