Should the US Adopt International Financial Reporting Standards?
By Blair Vago
Blair Vago is an experienced IFRS practitioner with 20+ years as a hospitality industry Controller/CFO. He began his career with Hilton Hotels Corporation and Marriott and more recently has worked with rapid-growth, start-up companies and entrepreneurs to assist them in preparing for initial public offerings (IPOs) and in facilitating mergers and acquisitions. He holds a Master’s degree from Cornell University’s School of Hotel Administration, a Certificate in Investment Banking from U.C.L.A. and is a licensed CPA.
David Tweedie, Chairman of the International Accounting Standards Board — the IFRS standard setter — recently informed the United States that if they do not adopt IFRS next year, their role in setting IFRS standards will be diminished. According to Tweedie, one of the real dangers of the US not adopting is that international observers will want the US role to be decreased. Currently the US has 4 of the 15 seats on the IASB. Mary Schapiro, Chairman of the SEC, sits on the Monitoring Board, the IASB’s supreme oversight body.
Critics of US participation in the IFRS development process say the US has thus far played a big role but may end up not adopting the IFRS framework. This is a source of frustration for many in the international community.
Proponents of US adoption of IFRS say that opting out of adoption would serve to increase the world’s perception of US arrogance. They also say that a principles-based approach to accounting would reduce the ability of US companies and their advisors to find “a way round the rule”, i.e.: to comply only with the form of the transaction and not the substance, thus stating their financials in the most favorable light. Perhaps the most obvious example of this was the Enron debacle in which management complied with the three percent rule endorsed by the FASB and SEC (the rule that enabled companies not to consolidate a company they controlled if outside investors held more than three percent of the shares), but managed to avoid consolidating entities with toxic levels of debt that eventually led to the demise of the company. Reporting under the IFRS principle of control would have required Enron to consolidate the variable interest entities and, perhaps, the largest corporate bankruptcy in American history would have been avoided.
According to the most recent work plan, there are several milestones that, if achieved, could lead the US to adopt International Financial Reporting Standards for public companies beginning in 2015. The SEC will make the final decision in 2011. Currently, 117 countries either require or permit IFRS for public company financial reporting. Canada will adopt IFRS for its listed companies beginning January 1, 2011
