U.S. Move to International Accounting Standards - A Matter of Cultural Discord - How do we Reconcile?, The

University of Memphis Law Review, The, Summer 2009 by Newman, Neal F

"Convergence is, from the accounting and financial reporting world's viewpoint, the single most important thing in the history of the world."1

I. INTRODUCTION

We live in a world that continues to evolve. Technology continues to break down walls and transcend barriers. Today, investors, issuers, and other market participants can engage in financial transactions across national boundaries and make investments, capital allocations, and financing decisions on a global basis more readily than ever before. This is due in large measure to today's ever-faster communications and ever-more-closely linked markets.2 What has not kept pace with this global transformation, however, is the language by which companies communicate, the language of accounting and financial reporting.

What exists presently is a worldwide accounting structure consisting of two major regimes. U.S. Generally Accepted Accounting Principles ("U.S. GAAP" or "GAAP") governs companies formed and operating inside the United States.3 AU publicly held companies registered with the SEC must prepare and present their financial statements in accordance with U.S. GAAP.4 The other major accounting regime is International Financial Reporting Standards ("IFRS"). To date, over 100 countries have adopted and now use some form of IFRS.5

It is inefficient for two major accounting standards to govern provinces around the world. Currently, U.S. issuers operate under one set of accounting standards, and a large part of the world operates under some customized version of IFRS.6 Likewise, global companies operating within different accounting provinces must often use different accounting standards for each of the jurisdictions in which they operate; a costly, cumbersome, and time consuming endeavor.7 Various entities responsible for the many factions of accounting standard setting and financial reporting, such as the Financial Accounting Standards Board8 ("FASB"), the SEC,9 and the International Accounting Standards Board10 ("IASB"), (collectively, "Accounting Standard Setters") have been aware of this issue since the late 1960s11 and have further recog- nized the need for change.12 The world's economies have contin- ued to converge, a dynamic which has galvanized the Accounting Standard Setters, prompting them to renew their quest of world adherence to one set of "high-quality global accounting standards."13

The United States, however, is one of the few remaining provinces that has yet to convert to IFRS.14 The United States has operated under GAAP since the early 1970s,15 and the circumstances prompting the United States to consider a change are not necessarily due to glaring deficiencies in U.S. GAAP, but are more attributable to the need for the United States to remain relevant in the global marketplace.16 The United States is no longer the preferred choice for raising capital. Today, companies can raise needed capital just as easily in London, Hong Kong, or Dubai rather than New York.17 Consequently, the United States is in the unaccustomed position of "following suit" as worldwide momentum towards adopting IFRS grows daily, and the United States faces the prospect of becoming increasingly less relevant in the world marketplace if it continues to resist the prevailing trends in financial accounting. In November 2008, in what some might interpret as a reactive measure, the SEC proposed making a decision in 2011 to mandate IFRS adoption with a planned phase-in of adoption dates - 2014 for larger accelerated filers, 2015 for mid-sized companies, and 2016 for small companies.18

We must appreciate, however, that in light of recent events, namely the brunt of the economic crisis in the latter part of 2008, the United States and its contemplated conversion to IFRS is a fluid situation. The incumbent Obama administration has in fact hinted that it will revisit projects such as IFRS as well as other financial and regulatory matters, although, to date, the administration has made no firm commitments on the matter.19 For now, the United States' conversion to IFRS is still a prominent issue, and some see it as a key component in the United States remaining relevant in the global marketplace.20 In that regard, the FASB and the IASB continue their joint convergence effort to develop a common set of "high quality global accounting standards"21 to which most provinces having a global footprint ideally would adhere.22

The United States is now focused on converting to IFRS but it seems as if the United States is either overlooking or superficially dealing with a major variable in the equation: the threshold question of the U.S. suitability for IFRS. Simply put, accounting under IFRS represents a different way of doing things, and asking U.S. issuers to comport with IFRS standards will require drastic changes. The United States is asking its issuers to leave an accounting regime under which they have been operating for several decades23 and to adopt and apply a methodology that is very different from the accounting world to which they have grown accustomed.