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November 26, 2009

Convergence process in danger of unwinding, says E&Y leader

By Nicholas Moody

The US Securities and Exchange Commission (SEC) could say ‘no’ to converging with IFRS on 21 December, as Europe’s non-endorsement of IFRS 9 fans US uncertainties about the International Accounting Standards Board (IASB), according to an IFRS expert.

Ernst & Young Global IFRS leader Ruth Picker warned that the US shift to IFRS and a move to one global standard is at a crucial tipping point that could see a possible reversion to national GAAP across the globe.

“The US is watching what is happening in Europe, this non-endorsement of IFRS 9 is another thing that they could point at to say ‘this world isn’t for us’,” Picker said.

“They could use what has happened in Europe to say, ‘we’re not going to go with IFRS’. I don’t think it will be that negative but it will be going through people’s minds.”

Earlier this month, SEC chief accountant James Kroeker said the US regulator would give a clearer picture of its proposed roadmap for the adoption of IFRS by US public companies by 21 December.

Picker said pressure has been building for the past six months as a stand-off ferments between Europeans unhappy at increasing US influence over the IASB and US uncertainty about the board’s political independence.

The IASB released its updated standard on financial instruments on 12 November, the first part in an urgent three step project to overhaul controversial accounting rules for financial instruments.

But following the publication, the EC said it would not fast-track the endorsement of the standard despite being one of the key proponents of the IASB’s move to fast-track key parts of the project.

Wider tension

The EC’s decision to defer endorsement of IFRS 9 is seen to be indicative of wider tensions between Europe, the US and IASB.

“It has become a catch-22. Somehow the circuit needs to be broken,” Picker said. “We think it is now a crunch point. The non-endorsement of IFRS 9 is an indication that the EC is unhappy with the influence of the US,” she says.

Picker suggests something definitive needs to be done to prevent a retreat to national standards.

“Whether it is the G20 coming out again and saying we do not want a retreat to national standards, whether it is the US coming out and saying we will commit to IFRS, whether it is the Third Bloc of IFRS adopters [Asia-Pacific countries] saying ‘stop fighting and get with the story’. There needs to be a circuit-breaker in this negative cycle,” she said.

Picker says US inaction on when to adopt IFRS is ruffling European feathers.

“The US is asking what’s in [IFRS] for us. From their point of view there is no rush, no hurry, no need [to adopt IFRS],” she added.

“That’s understandable from a purely US perspective. But what they do not understand is that their inaction and lack of commitment is causing the Europeans to ask why the US has such a large say in the development of IFRS, for example through seats on the IASB, trustee positions and a seat on the monitoring board of the IASB.”

Picker wants to see the US commit to a adoption process rather than going through what she sees could be a process of endless convergence.

“[The US] needs to convert and let go of US GAAP, at least for multinational listed companies, like all the rest of us let go of our national GAAPs, and they are not close to letting go,” Picker said.

“You can’t endlessly converge because you will continue to have new things arising. It is fine up to a point in time, but there has to be a point where they say, ‘okay we are in with you now’.”

See Profession applauds IFRS 9 as EC postpones endorsement  for further reports on reactions to the release of IFRS 9

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