Comparability

Will IFRS really help make financial statements more comparable by having all publicly traded company reports based on the same set of standards?  In my opinion, they will look comparable and that may be the end of it.  The issue I see is having many accountants, both auditors and internal accountants, working from a rules based mindset in a principles based environment.

In the rules based environment there is a line to push up to and to make a clear call when crossed.  In the principles based environment there will be many lines depending on personal tastes, preferences, and risk aversions.  Some will be overly conservative with the real fear being that some will be overly aggressive.  Not all professional judgement is crafted equally.  Some CFO’s of small organizations are not that thoroughly experienced and seasoned and rely heavily on the work of external auditors to guide their application of accounting principles or rules.

Not all auditors are imbued with the same degree of professional skepticism and ethical adherence.  Some will encourage clients to push the lines and see themselves in a similar light as the corporate counsel that informs of where the lines are clear and where they are not.  Cluing the client in to the areas of ambiguity so that lines can be pushed without being technically crossed.

Others will be so scared of being seen in the former light that they will take the most conservative stances thinking that it makes them more ethical than most.  Either way too conservative or too agressive does not paint a proper picture of economic standing and well-being.

However, this will probably exhibit a type of normal distribution with most professionals trending towards some median that is seen as an industry or professional norm with outliers that make the news reports on the aggressive side and those that rant against the aggressiveness of the median on the conservative side.  Hopefully these norms will be sufficient to produce a resonable degree of comparability for most financial statements, but finding the likely places for abuse to lurk may become more difficult as abuse becomes a more vague concept.

However, more concrete standards may evolve in the way that legal principles evolve into legal precedents with the results of disputes aiding to draw lines in the gray areas of the principles.  If this is the route that follows, we essentially get rules anyway even though we started out with principles.  However, the rules have been arbitrated and may still be disputable rather than set by the standard setter.

Does FASB have a future?

With the recent decision by the SEC to allow foreign corporations to file their financial statements in accordance with IFRS (no reconciliation to GAAP required), does GAAP (and FASB) have much of a future?  FASB, recognized by the SEC as a standard setting body, has traditionally served setting standards for public companies who report to the SEC.

However, with the recent decision to no longer require foreign companies to reconcile with GAAP, the SEC has taken the first step towards requiring no publicly traded company to report based on GAAP if they use IFRS.  FASB and the IASB are still working on their convergence project to create a single international standard for accounting, but with this move the SEC has tilted the balance of power in favor of the IASB.

If FASB and IASB have a serious disagreement, I doubt IASB will have much incentive to concede (or even compromise).  FASB may remain in play for privately held companies, or public companies that are deeply entrenched in GAAP and have no international components, but the a large number of US based public companies will probably take the option to report on IFRS when it is given to them.  This proposition is already being floated around the SEC and will probably be approved shortly (if IFRS is good enough for one set of publicly held companies, it is good enough for another set of publicly held companies).

Accountants and auditors for publicly held companies may have only one set of standards to be intimately familiar with in the near future as IFRS is positioned to take the place of the American standard of accounting embodied in GAAP.  Apparently good guiding principles trump stringent, sticky, loophole-filled rules.