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Accounting Standards: To Merge or Not To Merge?

10/14/2011 --

Convergence of U.S. and international accounting standards has critical implications for global economy, says Ross professor.

ANN ARBOR, Mich.—Is the momentum toward merging international and U.S. accounting standards slowing? It would appear so. The summer 2011 deadline for convergence has passed and it remains unclear how U.S. Securities and Exchange Commissioner Mary Shapiro feels about creating a single, global set of accounting standards.

Though the accounting world may seem black and white, convergence of domestic standards set by the Financial Accounting Standards Board (FASB) and international standards set by the the International Accounting Standards Board (IASB) is a multifaceted political issue with many shades of gray. And while there may be a pause in the action at the moment, Ross professor Cathy Shakespeare thinks the U.S. is on course to adopt a hybrid way of endorsing a global standard, as long as Congress can maintain existing oversight of the FASB.

"Standard-setting moves at the pace of a glacier," says Shakespeare, associate professor of accounting. But that's a good thing, she adds. "It's slow because you want to get it right the first time. The last thing you want to do to companies is make them keep changing."

The ultimate decision has implications for both multinationals and organizations that only file in the U.S. A merger of standards could benefit multinational companies who have to track items differently in the U.S. and Europe. But it also would add cost and could create resentment on the part of purely domestic firms that don't file abroad, Shakespeare notes.

Former SEC Commissioner Christopher Cox was a major proponent of forming a single, global standard but the current commissioner seems more cautious, she says. In the U.S. the SEC picks the accounting standard-setter, which is the FASB. In Europe, the European Commission endorses standards set by the IASB. There are some major differences on how the two account for things such as leases and financial instruments.

The two systems also handle enforcement and guidance differently, Shakespeare says. The IASB standards are light on implementation guidance, while FASB and the SEC offer more guidance for firms with questions.

U.S. multinationals are at a disadvantage right now, Shakespeare says. Foreign companies who issue stock in the U.S. and use IASB accounting standards can file a form and do not have to reconcile their accounting to the U.S. standard. U.S. firms, on the other hand, have to reconcile their numbers to the IASB standard if they want to issue stock in Europe.

"If you make it easier for multinationals to list in your country and they only have to use one language for their accounting systems, you run the risk, however small, of having companies move offshore," Shakespeare says. "That way, they can still issue shares in the U.S. and Europe and not have to deal with two systems."

But that's just one of the pressures facing U.S. regulators. Firms that file only in the U.S. might wonder why they'd have to bear the cost of changing their accounting systems to an international standard. At the same time Congress exercises oversight of the SEC and FASB. That oversight includes the authority to summon members to testify, a power Congress is unlikely to relinquish under any new system.

Meanwhile, members of the IASB likely are asking why Americans are on the board at all when we're not joining the party, Shakespeare says.

"There are a lot of moving pieces here," she says.

A likely way to resolve the situation was outlined by SEC Chief Deputy Accountant Paul Beswick. He suggested a process in which the IASB and FASB continue to work on their convergence projects. Once those are completed, the FASB can endorse IASB standards for use in the U.S., with or without changes. Some have termed this idea "condorsement."

This approach wouldn't require Congress to give up ultimate oversight of U.S. accounting standards and should create a better accounting system for everyone, Shakespeare says.

"I suspect this 'condorsement' is the way we're going to go," she says. "It's the only politically acceptable plan out there at the moment. It puts us on a path toward convergence but without giving up FASB standard-setting or Congressional oversight. They can still move toward convergence, but we don't have to reset all of these standards overnight. There was some concern about the pace of change and that it wasn't allowing enough time for firms to respond to the changes and figure out what it would mean for them."

The extended timetable also gives the IASB and FASB time to work on their convergence projects, which are not easy issues to resolve, Shakespeare says. The three main areas of concern are revenue recognition, leases, and financial instruments.

"It all sounds simple, but it turns out to be very complicated," she says. "Revenue recognition is an area where there are big differences between the two. The leasing project is trying to improve some bad accounting. That's an area fraught with abuses. And with the financial instruments project you get into some politics."

The SEC is expected to provide more details on convergence near the end of 2011. In the meantime, Shakespeare thinks attention on the subject is good for accounting.

"It's a really exciting time to be in accounting," she says. "People see the importance of accounting and realize it's a critical part of the capital markets. We're not on the back-burner anymore. People realize how important our role is."

Terry Kosdrosky



For more information, contact:
Terry Kosdrosky, (734) 936-2502, terrykos@umich.edu