U.S., International Accounting Rules Face Divergence Pressure

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By Steven Marcy

U.S. and international accounting standard setters must resist forces that might drive their rules apart, which could undermine investor ability to understand financial performance by multinational companies.

While the two sets of accounting standards probably won’t ever be completely converged, they are close enough now to provide investors with sufficient information to obtain a clear, accurate picture of companies with multinational operations, Scott Evans, deputy comptroller for asset management for Office of New York City’s comptroller, and Alan Beller, senior counsel for law firm Cleary Gottlieb Steen and Hamilton LLP, said Feb. 28.

Yet differences in implementation and local interests could potentially begin to unravel 15 years of effort to merge them as closely as possible, they told a Council of Institutional Investors conference. U.S. generally accepted accounting principles and international financial reporting standards must remain close in wording, implementation and enforcement, Evans and Beller said.

“It is hugely in your interest to make sure IFRS remains high-quality and IFRS doesn’t diverge from U.S. GAAP,” Beller told the conference.

U.S. Investors Have a $7 Trillion Interest

Similarity among the standards is crucial to the financial well-being of governments, pension funds, mutual funds and other U.S. institutional investors that hold nearly $7 trillion in assets whose performance is measured in accordance with IFRS.

“We are all global investors,” said Beller, who also is trustee of the IFRS Foundation, which oversees the International Accounting Standards Board.

Dangers of Drift

Evans warned against any divergence by the U.S. Financial Accounting Standards Board and IASB. “They are practicing something very close right now,” Evans said. “But if the IFRS veers from U.S. GAAP, it’s going to take the rest of the world” with them. Evans said, and that is “a big problem for the U.S.”

“U.S. investors can’t afford for the IFRS to drift too far from U.S. standards, so we must get behind the continued integration of the U.S. policy makers and international policy makers,” Evans said. “That’s at risk.”

While U.S. and international standards on financial instruments, revenue recognition and leasing are very closely worded and closely related in concept, differences in implementation could still cause them to diverge in practice, Evans said.

Push for Optional Use Over

Efforts in the U.S. to allow the use of IFRS as an optional or supplemental method of reporting financial statements with the Securities and Exchange Commission are probably at an end, Beller said, as well as any continued drive toward complete convergence. Smaller companies and auditing firms foresaw too many complications and expenses.

“I think that the smaller the company, the worse the fear that the option would turn into the requirement” for also filing under IFRS, Beller said. That would saddle them with increased costs emanating from duplication and conversion.

Costly Audits

Another deterrent to U.S. adoption of IFRS as an option or supplement is accounting firms' fear of incurring enormous costs and personnel additions if they are required to prepare audits in accordance with both IFRS and GAAP, Beller said.

“No outcry” emerged from the investor community for a completely converged set of standards, Beller said; IFRS and GAAP are close enough in concept and language to be used by multinational companies.

The two rule sets are close enough now that the IFRS community “doesn’t care” if complete convergence fails to be achieved, Beller said. Further significant convergence isn’t “part of our conversation anymore” with the SEC or U.S. Treasury Department, he said.

To contact the reporter on this story: Steven Marcy in Washington at smarcy@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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