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FINANCIAL REPORTING

Tweedie: U.S. decision is key to future of international standards

 

By Ken Tysiac
April 25, 2012

Three former standard setters – who served the accounting profession through the early days of the financial crisis – talked at length Tuesday during a two-hour panel discussion in New York about the U.S. adoption of IFRS, integrated reporting, and the political pressure that standard setters can face.

“Shaping the Future: Lessons From Accounting Leaders,” featured Sir David Tweedie, the former chairman of the International Accounting Standards Board (IASB); Bob Herz, the former chairman of FASB; and Paul Cherry, the former chairman of the Canadian Accounting Standards Board (AcSB). It was sponsored by the AICPA and the Institute of Chartered Accountants of Scotland (ICAS). The groups were joined by the Canadian Institute of Chartered Accountants.

Here are some highlights from the panel:

U.S. adoption of IFRS

The SEC’s long-awaited decision on whether to adopt IFRS for U.S. public issuers was a prominent part of the discussion.

Tweedie, who became ICAS president last week, said he fears fragmentation in international accounting standards if the U.S. doesn’t come on board. He said nations with significant economies such as Japan, China and India might not adopt IFRS if the U.S. doesn’t.

He said the U.S. holds the key to the future of international standards as the SEC considers its options on IFRS.

“The world is waiting,” Tweedie said. “And waiting. And waiting.”

Cherry talked at length about Canada’s adoption of IFRS. He said there have been some speed bumps, such as investment companies, where Canadian organizations use fair-value-style balance sheets rather than consolidation, and utilities, where Canadian entities recognize assets and liabilities in a way that is similar to how U.S. entities recognize them.

Views are sharply divided on the utilities topic, and Cherry said he is encouraging stakeholders to get involved early in the standard-setting process rather than waiting until standards are issued. But he said that, overall, Canada’s adoption of IFRS has gone well.

“The costs were not as enormous as some had feared,” Cherry said. “… We have been pleasantly surprised by the lack of howls and outrage.”

Small and medium-size entities

Standards for small and medium-size entities worldwide also was a topic as the U.S. awaits an anticipated May decision from the Financial Accounting Foundation (FAF) trustees. The foundation is FASB’s parent organization.

The FAF trustees are expected to decide whether to adopt a controversial proposal that would create a Private Company Standards Improvement Council (PCSIC) to recommend deviations from U.S. GAAP for private companies.

Herz said the issue is immensely important, and that there are strongly held views on both sides.

“There could be disclosure differences [for private companies],” Herz said. “Clearly the time frames for implementation should be different. The big questions are in what we call recognition and measurement areas. I’m a believer that there can be differences, but they ought to be based on clearly understood differences in user needs and/or clear cost/benefit considerations.”

Integrated reporting

The panelists weighed the merits of integrated financial reporting, or reporting nonfinancial metrics.

Moderator Greg Anton, the AICPA chairman, said more than 80% of Pepsi’s annual report deals with nonfinancial metrics such as governance, water usage, and environmental and social implications of its products.

“The vision is having a single report of what brings this all together,” Herz said. “And it’s a great vision.”

Cherry said reaction to integrated reporting on the IFRS Advisory Council, which he chairs, has been “cool to lukewarm,” in part because the council fears it may be spread too thin already.

That led to a discussion on financial reporting overload. Herz said that despite concerns about complexity, some investors want still more information on companies.

But in some cases, Cherry said, the average person would not have the time to examine companies’ complicated financial information and couldn’t make sense of it if given time. “We have to ask ourselves, ‘Who do we think we’re speaking to?’ ” Cherry said.

Political pressure

The panelists also discussed the role of politicians in standard setting.

Herz recalled a 2004 bill that passed the House of Representatives that would have pushed back a FASB standard on stock options. The bill didn’t pass the Senate. Later, the AICPA was among the organizations that opposed an amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act that would have legislated fair value accounting.

“Some people would take the view that politicians should just stay out of standard setting and leave it completely to the independent standard setters and the like,” Herz said. “That would be tremendous, but it’s not the real world. In a democratic society, people have the right to go to their elected officials and complain about things if they don’t like what’s happening.”

Cherry said it’s important for standard setters to remember their purpose when faced with political pressure.

“Financial reporting serves the purpose to facilitate economic decisions in the marketplace,” Cherry said. “Setting high-quality standards that achieve that aim is the public interest, the public calling you serve. How you connect the dots with other important aspects of public policy, again, I think that’s something that we’re working on.”

Tweedie recalled a meeting of European finance ministers with an atmosphere that he described as “hostile.”

“You come in, and you’re introduced,” Tweedie said, “and before I said a word, three finance ministers had their hands up.”

Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.

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