SEC Kicks IFRS Further Down the Road(map)

I am proud to announce that I did my civic duty yesterday. I turned off all of my electronic devices for the entire day and actually read the entire final SEC Staff report on its IFRS Work Plan.

After finishing, I skipped dinner and headed straight for the wet bar.

I mean this in all seriousness: it took me just a few minutes to figure out that the SEC doesn't want anyone to read this report. I know this because, despite years of the Staff's researching, round-tabling, surveying, conferencing, reading, analyzing, monitoring and speechifying since the 2008 Roadmap release, its 127-page single-spaced report does not contain a single table, chart or graph. The SEC is doing its best to paper over the fact that the Staff has not made any recommendations to the Commission at this point, but there can be no excuse for its failure to provide even a modicum of usable data.

It's not because data isn't available to be had:

 

Now, that's data! In fact, it's the data that foretells the doom of IFRS incorporation: public companies opposed IFRS adoption by 2:1 and total comments ran against IFRS adoption by an even greater margin. 

Into the valley of Death
Rode the six hundred.

It's the data the SEC could have easily tabulated for itself from the comments to the original Roadmap release, but it proved itself incapable of dealing with reality:

"Forward, the Light Brigade!"
Was there a man dismay'd?
Not tho' the soldier knew
Some one had blunder'd.

"Some one"? It can't be a coincidence that the Staff's report was released on the last day of work for James Kroeker; so that everyone remaining can point fingers at each other with seeming impunity.

Or Crazy Like a Fox?

I have long suspected that the SEC is trying to put the EU in the lead for the final tricks (bridge metaphor), and that's what the Staff's report may have catalyzed. Indeed, there is mounting evidence that every single SEC commissioner and staffer who understands a wit about accounting must be waiting and hoping for the EU to finally come to the end of its tether, and to be the one to declare l'engager est terminée.

First, there is this little nugget from the Staff report itself, indicating that other IASB constituencies are not going to take kindly to any half-baked commitment from the SEC toward IFRS. The U.S. must be subservient or else:

"The Monitoring Board [of the IFRS Foundation] decided to … include as criteria for membership on the Monitoring Board the 'domestic use of IFRS in the relevant jurisdiction and financial contribution by the jurisdiction to the setting of IFRSs.'" [p. 39, bold italics supplied]

Second, Reuters reported yesterday that the process to kick the U.S. out of the club has already begun:

"The United States may have to give up its seat on a top global accounting body if it continues to drag its feet over the adoption of international book-keeping rules, the European Union's executive said on Wednesday.

Discussions over whether the United States would adopt … [IFRS] … have been going on for a 'very long time and, despite repeatedly expressed commitments from the U.S., things are advancing very slowly.'…

'The lack of a clear vision from the U.S. creates uncertainty and hampers the IFRS from becoming a truly global accounting language,' said [Stefaan] De Rynck, who speaks on behalf of Michel Barnier, the EU commissioner responsible for financial services.

'It is also becoming more difficult to justify the representation of jurisdictions not applying IFRS in the IASB governance framework,' he added in remarks seen as taking a swipe at the United States.

…

The IASB declined to comment." [bold italics supplied]

 

Third, the FASB is starting to re-assert itself. It has recently backed away from – at least until it gets more feedback – its tentative agreement with the IASB on loan-loss accounting. According to the WSJ, this sudden development has Hans Hoogervorst worrying that one of the three litmus-test projects will revert to square one. In other words, loan accounting could be the straw that breaks the camel's back.

Thus, I have concluded that, given neither data nor recommendations, there can only be two purposes for the Staff report: (1) to get under the skin of the EU; or (2) to buy time for the commissioners to personally extricate themselves from the mess. With Mr. Kroeker, Chair Schapiro's handpicked chief accountant gone, it seems it is just a matter of time – but not until after the presidential election – before Schapiro herself vacates the battlefield.

Picking up the Pieces

But, what will be left for Ms. Schapiro's successor to decide? It is clear even from the Staff's three-page summary that convergence is dead; and "condorsement" is, at very best, on life support.

That leaves only endorsement. An endorsement policy on the part of the U.S. would be the very worst of all possible scenarios for the EU. Imagine that the IASB continues to promulgate its putatively principles-based standards, and that the FASB incorporates them into U.S. GAAP; and then to be interpreted in excruciating detail by the EITF. That should either bring down implementation chaos, or IASB standard setting will come to a screeching halt (it's already as slow as molasses) for fear of opening up a Pandora's box of niggling rules and restatements on the rest of the world.

Methinks the screeching halt scenario is more likely, and it could lead to the next schism; where consequently, the EU will break off from the IASB to set its own standards. Then, what will happen to the IASB?

La commedia è finite! – almost.

* * * * *

PS – I'll have more detailed comments about specific assertions made in the Staff report in a later post. Yes, the report is almost an information dump; nonetheless it is also quite perceptive and thoughtful in sections; while also misleadingly inaccurate in others. I'll try to point out some of both.

Comments

[Tony]

Good for you for getting through 127 single spaced pages of something the SEC does not want you to read. What you learn and share is a real service to us all.

[Stephen Bouvier]

My apologies for not commenting on this sooner …

As a journalist who follows this issue, watching the SEC and its machinations over IFRS is best likened to discerning nuance in a Soviet-era dictatorship. It is almost as if the SEC wanted to give us a model of how NOT to make public policy.

However, there is a basic in all this that rarely gets aired: what precisely was the U.S. supposed to endorse?

An unfinished financial instruments model that many FASB members clearly dislike? A lease accounting model that has yet to become an exposure draft? An incomplete revenue standard? Or, how about an insurance liabilities standard that some U.S. insurers neither want nor need?

Even if we assume that the U.S. was in some way prepared to endorse some half-finished documents that 'might' make it into GAAP, is the U.S. truly ready to cede sovereignty over its tax policy to the IASB?

Once you say that tax law follows GAAP, you are completely at the mercy of whoever decides what GAAP is … as the UK government has discovered when it said the tax treatment of certain investment funds should follow IAS 39's classifications. Great.

Anyone want to tell Congress that they'll just have to wait until GAAP is settled before they can change a tax rule?

And if you were Mary Schapiro, would you want to pull the switch? I'll be honest and say that I wouldn't. When the standards aren’t even finished, it’s like asking someone to bungee jump without the cord.