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May 14, 2012 9:36 pm

Discord in push for accounting harmony

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Accounting reforms needed to shore up confidence in corporate reporting around the world are now set to be finalised at least two years late, after being hindered by a quest to make US and international rules interchangeable.

The delay comes amid expectations that the US will disappoint evangelists for a global accounting language by making at best a limited commitment to adopting the International Financial Reporting Standards followed in the European Union, Canada, Brazil, Australia, Russia and other countries.

Under pressure from the Group of 20 leading industrial and developing nations, US and international standard-setters were due to finalise a joint overhaul of their rules by June 2011, partly to ease concerns posed by the financial crisis.

The International Accounting Standards Board, which sets IFRS, and the Financial Accounting Standards Board, which sets the Generally Accepted Accounting Principles used by US companies, have shifted the deadline to mid-2013, compounding earlier timetable slippage.

The most important unfinished reform concerns the way banks book losses known as impairment charges on bad loans.

Stung by complaints that the current system allows banks to face up to reckless lending too late – particularly in Europe – the IASB and FASB want to oblige them to make more provisions for expected losses as well as those already incurred.

But in spite of optimism that rulemakers have at last found a workable joint approach, they are still a year away from delivering a final standard.

“The one [stalled reform] that’s embarrassing for the boards is the fact that they haven’t got impairment out yet,” says John Hitchins, PwC chief accountant.

The implementation of the new loan loss regime – alongside other tweaks to accounting rules for financial instruments – will occur even later than 2013. Peter Elwin, a JPMorgan Cazenove analyst, thinks they might not be in use until 2016.

Supporters of a global accounting language say it would benefit investors and regulators by improving comparability, while streamlining operations and cutting the cost of capital for companies. Aligning US GAAP and IFRS would be a huge step towards that goal.

However, in a formal collaboration that dates back to 2002, IASB and FASB standard-setters have been unable to eradicate some significant differences between the two systems.

Frustration has been building given that the boards could have overhauled their rules more quickly had they been acting individually.

Hans Hoogervorst, chairman of the London-based IASB, said convergence had run its course in December.

The US, meanwhile, was supposed to say if it would formally incorporate IFRS last year but deferred its decision. US companies that favour IFRS include Ford Motor, the carmaker, but the prospect of such a shift has provoked stiff opposition.

Mr Hitchins plays down the likelihood of the Securities and Exchange Commission making a decision on IFRS in an election year.

“We won’t get a US decision until next year.

“If you force the Americans to take a decision you are more likely to get a no rather than a yes at the moment. With a fragile economy companies don’t want the cost of changing GAAP framework,” he says.

A “no” from the US could also deter Japan, India and China from requiring the use of IFRS.

One IFRS supporter says the SEC’s agenda is already bulging with higher-profile reforms. Inconsistencies in the way IFRS is applied – particularly in Greek sovereign debt writedowns – have also been a concern in the US.

The SEC is now examining a mechanism for incorporating IFRS into US GAAP on a rule-by-rule basis, as opposed to the near-wholesale “big bang” adoption carried out in the EU, according to a person close to the situation.

However, Paul Bahnson, professor at Boise State University, predicts that chunks of IFRS would just be ignored by the US under this “endorsement” model: “Carve-outs would just be rife.”

One standard-setter says that such an approach would amount to “Chinese water torture” for the IASB.

Generating practicable technical solutions that satisfy everyone is no easy feat.

Mr Hoogervorst says he does not think the US stance on IFRS adoption will be affected by the revised timetable: “We have been repeatedly asked not to sacrifice quality for speed, and the SEC has made it clear to us that it was not necessary for all of the projects to be completed in order for it to make a positive decision on IFRS.”

Leslie Seidman, FASB chairman, adds that the latest delay reflects progress in grinding out a joint approach to loan impairments and financial instruments.

However if the two standard-setting bodies now fail to deliver a joint solution in this crucial area, the achievements of their decade-long attempt at convergence will appear even more limited.

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