Analysis: U.S. demands overshadow accounting prize

LONDON Thu Apr 26, 2012 8:16am EDT

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LONDON (Reuters) - Shareholders and regulators have long wanted the "holy grail" of a single set of reporting standards as a bedrock for comparing performance and value of companies across the world but U.S. reluctance means this goal is still a distant prospect.

U.S. conditions for backing a common accounting language look likely to leave investors having to pick apart local rules and regulations as they scour global markets for havens in which to put their money.

The International Accounting Standards Board (IASB), whose guidelines are used in more than 100 countries mainly in Asia and Europe, and the U.S. Financial Accounting Standards Board (FASB) have been locked in talks to align their rules for years.

The work has become bogged down in technical debates and pressure from auditors - such as KPMG, PwC, Deloitte and Ernst & Young - to take time to get it right, but policymakers are losing patience as investors are left waiting.

Finance ministers from the world's top 20 economies (G20)gave the two rule setters an ultimatum last weekend, saying they must finish alignment by mid-2013 "at the latest", 30 months after the original G20 deadline.

"The delay is pretty hard to fathom for outsiders like politicians and regulators," said Nigel Sleigh-Johnson, head of the financial reporting faculty at international accounting body ICAEW.

Much is at stake, with the United States playing a central role.

Successful alignment is essential for the United States to decide whether to adopt IASB rules outright.

This would in turn reassure Japan, India, Singapore and China to fully commit to IASB rules as well and create a truly common accounting language for investors.

But the United States has repeatedly delayed its adoption decision as alignment drags on and may now be tempted to push it back further, raising concern that momentum risks fizzling out.

The issue is politically sensitive, with U.S. Congress leery of handing sovereignty in accounting to a body in London.

"Will the Securities and Exchange Commission take any action prior to the presidential elections in November? The indications coming out of the SEC is that they want to move to IFRS cautiously," said Ed Nusbaum, chief executive of Grant Thornton auditing firm and a member of FASB's oversight foundation.

Industry officials close to the IASB still expect the SEC to publish proposals on adoption in the coming months, though a final vote by SEC commissioners could take longer.

BITS AND PIECES

To coax the Americans on board, the IASB is setting up a formal network this year to give local standard setters like FASB a voice after their country switches to IASB standards known as IFRS.

But tension is emerging over how such a network will operate and whether countries should have leeway in implementing rules locally - and risk muddying the picture for global investors - as a price for adopting IASB rules.

Some fear local wriggle room would dilute the benefits of a single accounting language while others say the United States and others simply won't commit to IASB rules without it.

"If it's just a matter of providing input then that will not be sufficient. It needs to be involvement in designing and ratifying standards to the point where ratification at the national level can end up with modifications," Nusbaum said.

Full carve-outs or exemptions from IASB rules would be a "mistake" but the model used in the EU of simply ratifying a new rule without possible local tweaks, will not do, Nusbaum said.

"I think it's a battle to come but if you get the United States on board then it's over, you have a global set of standards. If they don't come on board, you run the constant risk of it all falling apart," Nusbaum said.

Even if the United States does commit itself to IASB rules, it may adopt each rule individually over time, still making it hard for investors to compare transatlantic companies.

"Let's take this a step further, maybe ratify the whole thing or bits and pieces," said Nusbaum, who has been a skeptic on IFRS.

SEC chief accountant James Kroeker said in February the planned network must be able to deal with remaining differences between national and IASB rules after adoption.

"It does leave open the possibility that there are some areas where we will have to continue over time to narrow the differences," Kroeker has said.

The IASB wants the network to focus on applying the rules in the same way.

"The trustees' strategy review describes various initiatives to ensure consistent application of IFRSs internationally, including the deepening cooperation with national and regional bodies involved in accounting standard-setting," an IASB spokesman said.

INDIA TOO

A senior European accounting policymaker said the United States would only adopt IFRS if it would have room for local tweaks and that the IASB may be ready to accept this in return for becoming the global rule setter.

"The IASB trustees are very keen on preserving their brand and want to look more closely at consistent application, but if this is a price to pay to get the U.S. on board then they will be ready to pay it," the policymaker added.

India is also keen on having local freedom.

"India sees a series of carve outs as being necessary so they can adopt IFRS. We are still hopeful we will talk them out of that," said Kevin Stevenson, chairman of Australian Accounting Standards Board and of the Asian-Oceanian Standard-Setters Group (AOSSG).

"Our attitude has to be to put all the heavy working into getting the standard into the shape you want before it's issued and not fiddling with it after it's issued," Stevenson said.

"I don't think FASB has a strong hand to be holding out but if the IASB is wise, it has to keep them in touching distance and part of the family," he added.

Liz Murrall, director of company reporting at Britain's Investment Management Association, an investor body, says the IASB should concentrate on setting high quality standards.

"When setting standards then yes, you liaise heavily to see what is acceptable, but if you start to have carve outs and national tweaks then the IASB would have not achieved its objective and comparability would be lost," said Murrall, who is also a member of the IASB's advisory council.

ICAEW's Sleigh-Johnson said there was no way of stopping some "national tweaks" but there should be a commitment to keep them to an absolute minimum or else the benefits of having a global accounting language will be lost.

TURF BATTLE

The IASB's new network is likely to include regional groupings of national standards bodies, like the ASSOG in Asia to avoid too many people sitting around the table.

This is sparking a turf battle as countries like Britain and Germany do not want to see the EU's regional grouping EFRAG becoming their only voice, especially as the United States' FASB would almost certainly have to have its own seat at the table.

National bodies also worry about losing their relevance as rulemaking has shifted to the IASB and regional bodies come to the fore.

"The IASB may have to devolve some power to make it work although I do not think that this should go as far as giving local standard setters the power of veto," said Pauline Wallace, head of regulatory affairs at PwC.

Australia's Stevenson said national bodies must still have bilateral relations with IASB even with the new network.

Industry veterans urged keeping an eye on what's needed to achieve the big prize of a common accounting language over time.

"A U.S. decision is really a critical part of the future success of IFRS. This is a once in a lifetime change in global regulation and you just have to recognize there will be obstacles and delays," Sleigh-Johnson said.

(Editing by Alexander Smith and Elizabeth Piper)

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