Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

10 invalid arguments in favor of IFRS

with 3 comments

Professor Tom Selling provides presents 10 arguments provided by others who are in favor of IFRS and then explains why those arguments are incorrect.  Actually, he uses the word false.

He provides some background on how we got to this place and starts the discussion at 10 Claims in Support of IFRS Adoption by the SEC – and Why They are False (Part One of Three).

He continues the discussion in part two and part three.

His discussion is quite lengthy, so get a large, fresh cup of coffee or an extra-large soda and settle in for a long read. Even this recap will run quite long.

Here is his list with my extremely short paraphrase that won’t come close to doing justice. You really need to check out the full posts.

False Claim #1: There are some large U.S. corporations that want to switch to IFRS.

That may be so.  Notice that “some” qualifier?  There are also large companies that don’t think it’s a great idea.

Opposition from midsize and small companies is very strong.

False Claim #2: A move to IFRS would restore the public trust in accounting standards.

He provides three examples from the IASB that do not increase trust.  He mentions poor reasoning in favor of IAS 23 on borrowing costs and pension changes in IAS 19 that smooth earnings.

False Claim #3: U.S. GAAP is not superior to IFRS

Dr. Selling tracks down references in some public comments to the apparent source document. Academics want to see a rational, logical explanation supporting an assertion that a set of accounting standards is “high quality” and especially if it is higher than another set of standards. The papers he tracks down make very weak arguments.

I’m not sure but what he might think the reasoning is in fact invalid.  I’m a practicing CPA, not an academic, but the concept seems to be there are not any published academic papers supporting the assertion that either set of accounting standards are “high quality” or that IFRS is superior to US GAAP.

False Claim #4: IFRS is already widely adopted elsewhere

My observation – remember each country can carve out what are components of IFRS it does not like.  India has carved out quite a bit.  Any country that doesn’t like something can carve out anything they wish.

Don’t want to write bad loans down? You can carve out that requirement. Don’t like pension accounting or hedge accounting or anything else that creates volatility? Carve it out.

Therefore even if the theoretical one-and-only-one-way-to-account-for-everything-under-the-sun-accounting-standard has been adopted in many countries it’s not the same set of standards in each of those countries.

Dr. Selling believes that to the extent this argument is true, it represents European governments taking on standard-setting authority so they can continue the loose rules that allow reserve accounting.

False Claim #5: Even though IFRS may not be consistently applied elsewhere, the SEC can enforce compliance with IFRS as it sees fit.

Sounds like an attorney – claims #3, #4, and #7 may be invalid, so here’s the counter argument in case those claims fall…

Possibly the SEC could enforce high standards.  However competitive pressure between US issuers and foreign issuers could generate a race to the bottom when US issuers have to report under a more rigorous standard, thus making them appear less attractive to investors.

False Claim # 6: Costs of conversion to IFRS can be spread out over a long transition period.

So what? Incurring the costs over several years or amortizing it over a long time does not reduce the cost.

Duh.

False Claim #7: The U.S. will not experience any loss of sovereignty over its ability to set accounting standards.

He discusses one of the 65 major carve outs in India– deferring unhedged foreign currency exchange losses.

That a long list of presumably minor issues can’t be resolved between US GAAP and IFRS (he mentions  “R & D, inventories, pensions, borrowing costs”  and four other topics) suggests it would be very difficult to resolve bigger issues.

My thoughts on the argument is that if you go from setting your own standards to merely being one voice at the table, sovereignty has been seriously impaired.  He makes an analogy to the United Nations.

Sounds like another attorney argument – we will develop IFRS in a committee meeting, but that won’t mean giving up any of our positions or unilateral authority.

False Claim #8: Bad things will happen to the rest of the world if the U.S. does not adopt IFRS

Dr. Selling suggests that much of power and growth of IASB has been from the desire to insulate European companies from more stringent requirements of US GAAP.

As I have already mentioned, much of IASB’s growth was driven by the desire to insulate Europe and other jurisdictions with less developed standards, like China, from the influence of U.S. GAAP.

Increasing US impact on IFRS would actually undercut that.

False Claim # 9: Bad things will happen in the U.S. if the U.S. does not adopt IFRS

Immediate impact, even if you believe the arguments that IFRS will be one consistent standard that will apply to every company in every country, means there would be two sets of standards – US GAAP and IFRS.  (Making that argument requires ignoring the elephant in the room that every country already has carve outs meaning they have their own standards which in turn means there are already 5 or 10 or 30 sets of standards.)

But if there are magically two and only two standards? Let the competition begin! May the best accounting standards win!

He points out the extremely slow pace of convergence, far slower than critics thought likely.

Even if the US loses its place at the IFRS table, the size of the US economy will keep US GAAP a major player in world markets.

False Claim #10: All nations have the same goals for financial statements.

Personally, I can’t believe anyone would actually make that argument. If I didn’t know better, I would think that Dr. Selling was setting up a straw-man argument. (He has pointed out in his comment below this is not a straw man!) His rather pointed question:

..who could in all seriousness state that the financial reporting objectives of the SEC and Chinese regulators are anywhere near the same?

Umm, no one?

At least no one who could keep a straight face. (Ever see the SEC assert that an entire set of workpapers can not be shared with other regulators because they contain classified information?)

He then discusses the heavy involvement of European politicians in setting accounting standards to further national political interests.

I fear I haven’t come close to doing justice to the discussion.  If I short-change his ideas or mess up the whole concept, that is my fault.  If my summary or arguments are too simple, please remember I’m a practicing CPA, not an academic.

Like I said, you really need to check out the full posts.

Written by Jim Ulvog

April 10, 2012, 6:56 am at 6:56 am

Posted in Accounting

Tagged with ,

3 Responses

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  1. Thanks for covering my post. I would like to make one clarification: each of the 10 arguments that I contest were actually made by either the current IASB chair, Hans Hoogervorst, or Harvey Goldschmid (former SEC Commissioner and CAQ board member) when they were speaking at the same conference. Thus, none of them are “straw men.”

    Tom Selling

    June 6, 2012, 16:11 pm at 4:11 pm

  2. Thanks for your post Dr. Selling. I’ve made a few changes to make clear you aren’t creating or generating the arguments.

    I constantly learn that other CPAs who are quite sincere and brighter than me can come to conclusions that I just can not comprehend. Have had several of those conversations in recent years.

    Several of the arguments for IFRS you confront are ones that I have a lot of struggle with. I’m having a really serious struggle with how someone could come to the conclusion there will be one consistent, world-wide set of standards. Claim 7 and 10 are almost as serious, it seems to me.

    Jim Ulvog

    June 6, 2012, 16:58 pm at 4:58 pm


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