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Thursday, November 15, 2012

Can the U.S. Legal System Adapt to Princple Based Accounting Standards?

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    An interesting question was posed Nov. 13 to senior accountants during a joint Financial Accounting Standards Board and Securities and Exchange Commission Q&A panel: how do you expect the U.S. legal system to allow for the adoption of principle based accounting standards? 
    The question, posed at the Financial Executive International’s 2012 Current Financial Reporting Issues conference in New York, foreshadows the knock-on unknowns the SEC and the FASB will have to grapple with within the realm of its IFRS adoption decision.  Furthermore, these are the types of issues that could also heighten the sense of unease some practitioners have expressed towards IFRS adoption.
Misguided Debate. 
    The debate of "principle versus rules" is somewhat misguided, said SEC Acting Chief Accountant Paul Beswick, one of the panelists.  IFRSs are younger and will evolve to adapt to the environment, he said.  “I found a great quote [fitting to the topic]: ‘the only difference between U.S. GAAP and IFRS, is time,” Beswick explained. 
     Currently, some 400-to-500 foreign private issuers are already using IFRSs in the U.S. market, and accounting firms have been able to issue audit opinions under each of those standards. “So it is happening and people are able to deal with it,” said Beswick. “But, when you talk about taking it on a wider scale--obviously some challenges might exist and we need to be cognizant of that,” he said.
Culture Shift. 
    Practitioners have agreed that principle based standards would indeed result in a culture shift in the U.S., since companies are used to having “bright line”, or industry specific accounting standards. Those bright lines however, have also allowed more structuring opportunities as well, FASB technical director Susan Cosper pointed out.“So in certain circumstances you could say principles based standards allows broader latitude when you’re complying with the standard because there’s an intention of what the standard is trying to accomplish when folks are actually applying it,” she said. 
    Still, said Cosper, it remains to be seen how the U.S. legal system will cope. “As far as our counterparts in Europe, they don’t have quite the same litigious environment that we do so we’ll have to see how that goes,” she said. 
By dlugo@bna.com (Denise Lugo)
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