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The Bruce Column – Allaying the fears

05 Oct 2011

Paul Revere may have blazed a trail into Boston warning the good citizens of America that they were under threat.

This week saw Hans Hoogervorst, the Chairman of the IASB, ably abetted by his IFRS Foundation Trustee colleague and onetime SEC Commissioner, Harvey Goldschmid, sounding the clearest of warnings about the impending SEC decision on the future of financial reporting in the US.

Goldschmid described need for the SEC to 'make a firm, affirmative IFRS incorporation decision' in the next few months as a 'National Imperative'. 'The future path of financial reporting, and of investor protection and effective financial markets on a global scale, may well be determined in the next few months', he said. 'It is difficult to imagine that, after a decade of investment in convergence a negative decision could be a possible outcome', said Hoogervorst, 'or that the US would intentionally choose to discard international leadership in something as fundamental as financial reporting'.

Pretty unequivocal stuff. But the underlying arguments which both men employed during their speeches to the AICPA conference in Boston sought to allay any fears. Hoogervorst in particular addressed the argument, prevalent in the US, that somehow IFRS is not much used in full, particularly in Europe. 'Some even say that Europe does not use IFRSs due to the optionality of nine paragraphs of IAS39 Financial Instruments', said Hoogervorst. 'Yet this option is used by less than 30 companies. That is less than 1% of listed companies in Europe. The other 99%, some 8000 listed European companies, all use full IFRS'.

Another frequently expressed worry in the US is that somehow enforcement would move offshore and that the US would lose its sovereignty. Again Hoogervorst was patient and placatory. 'A major comfort to the United States should be that if you adopt IFRSs the SEC will remain in full control of enforcement', he said. 'So there is absolutely no danger of importing different enforcement standards from abroad into the United States. Indeed', he continued, 'it is much more likely that international standards of IFRS enforcement will benefit from the SEC's rich experience and active participation'. And Goldschmid echoed this view. 'Would there be effective enforcement if the US adopted IFRS?' he asked his audience. 'The short answer', he said, 'is "yes". Put bluntly the rigor of US enforcement fundamentally pivots on the leadership at the SEC'.

Goldschmid also took regulatory arbitrage as one of his themes. 'Too often during the financial crisis', he warned the conference, 'we have witnessed the danger of arbitrage and unhealthy political interference when the two systems, IFRS and US GAAP, can be played off against each other. Cries of "level playing field" and "unfair competition", for example with respect to financial instruments and fair value reporting, have been used to try and weaken both systems. The lesson to be learned', he said, 'is that incorporation of IFRS into US GAAP, so that we have only one set of high quality global standards, will, as the G20 implicitly recognised, largely eliminate the arbitrage problem'.

Both men cited the advantages already seen in US companies. 'There are good commercial advantages to everyone speaking the same high quality financial reporting language', said Hoogervorst. And he used the Ford Motor Company as an example. 'Standardising on IFRSs has the potential to allow Ford to use the same financial reporting language for both internal management reporting and external financial reporting on a worldwide consolidated basis. One language will eliminate duplication and translation risks across all Ford international subsidiaries. The long-term savings could be substantial'.

And both men suggested the downside, if the US turned its back on IFRS or took them up half-heartedly, would be great. Hoogervorst made the point that 'the US's current share of global market capitalisation now stands at just over 30%, compared to an average of 45% between 1996 and 2006. US financial markets have not shrunk', he said, 'it's just that other parts of the world, in particular the Asian financial centres, have become global players'.

The lesson which he drew from this was simple. 'These developments call for the United States to play a key role in developing global standards'. And he cited investor pressure, quoting CalPERS, the largest public pension fund in the United States, when it said in its submission to the SEC that "the SEC has the opportunity to effectively improve accounting standards, and to regain and increase investors' trust in financial reporting". 'To me', said Hoogervorst, 'that says it all'. And Goldschmid delivered the same message. 'I believe the best way to protect US stakeholders, including investors who are increasingly investing globally, is for the SEC to make an affirmative incorporation decision'.

These two speeches showed the advantages of making IFRS the truly global financial reporting language. But their real importance is that they also addressed a few of the most common objections which have come from within the US.

Robert Bruce October 2011

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