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By Ronald Fink
Arguments among regulators over fair value accounting are creating a major roadblock for the convergence of global accounting standards, a report released on Tuesday by Fitch Ratings warned. The ratings firm described U.S. and international rule makers as engaged in "the mother of all accounting debates" over their differences.
The Securities and Exchange Commission is mulling issuing a hard date for when U.S. companies can start to report their results according to either U.S. Generally Accepted Accounting Standards, set by the Financial Accounting Standards Board, or to International Financial Reporting Standards, set by the International Accounting Standards Board. Initially, the SEC had proposed that some companies could start doing so as early as this year, but the commission was expected to issue a final decision on that last month and has yet to do so.
In fact, that start date is likely to slip as a result of a clash between FASB and IASB over how to value financial instruments, Fitch said in the report, entitled "Accounting and Financial Reporting: 2010 Global Outlook."
"The goal of international and U.S. standard-setters to issue a converged accounting standard on financial instruments, in light of an initial 'false start' coupled with looming political and regulatory pressure regarding fair value, will continue to fuel the mother of all accounting debates in 2010," Fitch wrote. As a result, the report said expectations that the initial 2010 start date can be maintained were "far-fetched."
The ratings firm noted that FASB is adopting standards for reporting gains and losses on financial instruments based primarily on changes in fair value, though the board has shown some leeway on the effect on income statements as a result of criticism from banks and their political allies.
Meanwhile, IASB is retreating further from fair value in the face of such criticism by allowing financial institutions to use fair value or historical cost on their balance sheets as well as income statements.
But Fitch insists that the difference won't scuttle the process of convergence entirely, and that the two reporting regimes will ultimately be close enough to gain SEC acceptance.
"This initial divergence and prevailing political interference lead many to believe that the march toward a single set of global standards for financial instruments is set for a dead end," Fitch said. "However," the firm added, "recent pronouncements from the two accounting boards leave open the possibility -- albeit slim -- of a converged standard."
Other issues also divide the two boards, including off-balance-sheet financing, lease accounting, pensions, revenue recognition, and financial statement presentation. But there's less daylight between IASB and FASB on those, according to Fitch's analysis.
As a result, the firm expects the SEC to amend its current timetable -- which is known as the "road map" -- instead of jettisoning it entirely. Under the current schedule, some U.S. companies could report under either set of standards as early as this year, others could do so in subsequent years, and then all would be required to switch to IFRS by 2016.
But Fitch said it expects the commission to require that the boards meet "additional milestones" before it considers the two sets of standards as sufficiently converged.
"Despite the perceived setbacks, Fitch believes it is highly unlikely that the U.S. will backpedal completely from the ultimate goal of a single set of global accounting standards," the report concluded.
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