While the standard setter for accounting principles in the United States is the Financial Accounting Standards Board (FASB), many countries outside the United States follow accounting standards set by the International Accounting Standards Board (IASB). For the past several years, the FASB and the IASB have been working hard to unite or “converge” their accounting principles such that, effectively, only one set of rules exists. Until recently, the process has worked reasonably well, but now, in the process of developing the standards for insurance contract accounting, the efforts toward conformity have hit a snag—maybe temporarily, maybe not. This snag, together with other developments mentioned below, appears to be slowing down the convergence of accounting standards.
Steps toward Convergence
Several years ago, the two boards entered into a “memorandum of understanding” in which they agreed to try to converge their standards into a common set of accounting principles that could be used around the globe. They have successfully completed this effort in areas such as business combinations and other comprehensive income, and the effort is ongoing in other areas such as leases, financial instruments, revenue recognition and insurance contracts. Still other areas such as earnings per share and fixed assets have not even been considered.
The boards seem generally in-step on leases and revenue recognition but, on June 12, 2012, the FASB concluded it had reached an impasse with the IASB on how to account for insurance contracts. A major “hurdle” for the IASB is that it effectively has no insurance accounting rules in existence whereas the FASB has insurance accounting guidance that goes back several years and has “proven the test of time.” The boards hope that the impasse can be resolved but key differences remain.
The Significance of the Impasse on Insurance Accounting
So why is this recent development concerning the narrow topic of insurance accounting, which most companies don’t worry about, relevant or even “blogworthy”? True, this development affects a fairly small group of companies, but that group is a very important part of the world economy, and it could affect the “pending” decision by the Securities and Exchange Commission (SEC) to permit or require U.S. registrants to follow standards issued by the IASB instead of those issued by the FASB. If the boards cannot agree on something as important as insurance accounting, can we expect the SEC to permit or require U.S. companies to follow the IASB’s International Financial Reporting Standards (IFRS)? There are also other key differences that remain in the two sets of accounting rules, including the prohibition under IFRS against using the last in, first out (LIFO) inventory valuation technique.
Waiting for an SEC Decision on Adoption of IFRS
In a possibly related development, the current SEC chief accountant, James L. Kroeker, announced on June 20, 2012, that he was leaving his role at the SEC in July to “enter the private sector.” Jim was a key driver in helping the SEC staff assemble a staff report with a recommendation that would be delivered to the five SEC commissioners to help them decide whether to permit or require U.S. public companies to use IFRS. While speculation and even the expressed views of certain SEC commissioners and staff indicated that the staff report was due in a “few weeks,” that optimism must now be tempered to reflect both the impasse on insurance accounting and the resignation of the SEC’s chief accountant.
It is hard to imagine that the pending staff report will be issued under the direction of a “lame duck” chief accountant. And finding a replacement is typically a long process as he or she must be well respected in the accounting world and must have “the ear” of the SEC chairman—something Jim Kroeker has had since his appointment by the chairman over three years ago. That said, the typical chief accountant does not remain at the SEC for long, due to many reasons including a pay-scale that is significantly lower than in the private sector.
In addition, this is an election year in the United States. The President appoints the commissioners with the “advice and consent” of the U.S. Senate, including the important role of the chairman of the SEC, currently Mary L. Schapiro. Typically, major decisions of the SEC that are pending immediately before a U.S. presidential election “get lost in the shuffle” either intentionally or otherwise. It is how the election-year process works in the United States, irrespective of the political party in power.
Summary and Prognosis
In summary, progress toward convergence is slowed because, first, the FASB and the IASB currently cannot agree on important aspects of insurance accounting, next, the SEC chief accountant has resigned, and, finally, the reality of the November election looms ever larger as the year 2012 progresses. Maybe the former chairman of the IASB, Sir David Tweedie, was correct or at least directionally so when he said publicly that if convergence was not accomplished by the end of his term (June 30, 2011), maybe it would never happen.
Ron Pippin is an experienced CPA based in Wheaton, IL. His 40 plus year career includes being an audit partner in Arthur Andersen, a member of Andersen’s Professional Standards Group (“national office”) in Chicago, the Director of Financial Reporting for a Fortune 50 company and most recently, the editorial director of CCH’s Accounting Research Manager. Currently, Ron does independent writing and analysis together with accounting consultation on a variety of topics.