FASB vs. IASB?

The IFRS Roadmap calling for replacement of U.S. GAAP with IFRS by 2014 is coming under increased scrutiny. The change represents a huge shift in accounting rule changes for U.S. public companies.

The last six months have been controversial for both U.S. GAAP and IFRS. Political pressures have been brought against both the U.S. standards and IFRS as a result of controversy over fair value/mark to market accounting.

The specter of political issues haunting accounting essentially could pit the SEC and the FASB against with the International Accounting Standards Board (IASB). In announcing the roadmap a few months back, the SEC called for improvements to funding and governance of the IASB. In more recent statements, the SEC has criticized IFRS as inadequate.

Recently MIT and Wharton professors argued in a paper that there are reasons to slow down the change to IFRS.

The authors theorize that unique aspects of the U.S. economy and capital markets will not be well served by IFRS “the [IFRS] standard setting process involves a compromise among a large and very diverse set of constituents across the world. Different countries have different goals with respect to financial reporting regulation. While current IFRS are arguably focused on the needs of “outside investor” economies such as the U.K., Australia or the U.S., the majority of the economies around the world still relies heavily on close relationships among a large set of stakeholders and is less focused on outside capital markets. A potential risk for the U.S. and countries with similar “outside investor” models is that the IASB could be influenced to modify IFRS to meet the demands of “inside stakeholder” economies. As a result, future IFRS may be less suited for “outside investor” economies such as the U.S.”

“We expect incentives and institutional factors to remain a driving force of reporting practices in the years to come. Hence, adopting IFRS on a worldwide scale will hardly eliminate all national, industry and firm-level forces and incentives that influence firms’ financial reporting practices. Local capital markets, enforcement institutions and economic forces are simply too strong and diverse, making a uniform implementation of IFRS around the globe highly unlikely. Moreover, globally adopting IFRS likely shifts regulatory competition from the creation of accounting standards to the interpretation, implementation and enforcement of existing IFRS in local markets. These forces could lead to regional versions of IFRS or different de-facto standards. For instance, financial crises, new business practices or innovations in the capital markets can require changes or new interpretations of extant IFRS, which in turn might lead certain countries to opt out or adopt their own version of IFRS. The carve-out of specific sections in IAS 39 (Financial Instruments) during the endorsement process of IFRS by the European Commission in 2004 and 2005 is just one example of 72 such a nationalized version of IFRS, which sets an important precedent. The recent financial crisis presented the IASB with the threat of another EU carve-out.”

The paper is: "Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors."