Earlier this month Russell Golden, Chairman of the US financial reporting standard setter the FASB, poured cold water on any expectation that the US would soon adopt the International Financial Reporting Standards (IFRSs) as issued by the IASB*. Against the background of political support for uniform accounting standards from the G20, the deployment of considerable resources by both the FASB and IASB in pursuit of converged standards and expectations fuelled by the announcements of previous chairmen of the two bodies, this may be seen as a significant setback. At the very least it brings into question whether the objective of a single set of global standards is realistic.
What does this mean for valuers producing valuations for financial reporting? Ironically, valuation is one of the areas where the IASB and FASB have succeeded in aligning their standards. Both “Fair Value Measurement” standards, IFRS 13 and ASU Topic 820, were developed in tandem and are effectively identical in all material respects. However, while this means that “fair values” should be estimated and reported in the same way under both accounting regimes there remain distinct differences in what may be measured at “fair value”. For example, real estate that meets the definition of “investment property” under IFRS has to be reported at its current fair value in the owning entity’s statements, whereas under US GAAP there is no distinction between investment property and other types of property plant and equipment and revaluation is not permitted.
Does this apparent setback in attempts to create a single set of accounting standards have implications for the stated objective of the International Valuation Standards Council (IVSC) to produce a single set of global standards for valuation? I believe it has lessons that are relevant.
It is important to note that Russell Golden indicates that the FASB will continue to actively participate in the development of the IFRSs with the objective of producing more comparable standards that are truly global. However, since the two boards started along the path towards convergence some thirteen years ago, the FASB has noticed increased recognition among U.S. stakeholders that legal, regulatory, and cultural differences among and between jurisdictions are likely to result in at least some variation in the way that accounting standards are written, applied in practice and enforced. In short, it has become clear that one size does not fit all.
While further from the public eye, a parallel can be drawn with discussions that have taken place over a number of years between the IVSC and various national valuation standard setters. Much time can be, and has been, wasted on debates about whether a particular word or phrase in one standard is preferable to the equivalent in another. However, it is a fact of life that in different jurisdictions and cultures words that are superficially similar may be interpreted in very different ways. The important thing to focus on at a global level is the outcome of applying different standards. Different standards can produce the same result using different words arranged in different ways. If a principle is globally accepted then it is desirable that national standard setters are free to choose the way of complying with that principle that is most effective within their jurisdiction. The alternative of trying to achieve global consistency by enforcing complete uniformity of language runs the risk of misinterpretation and misapplication in practice because of legal and cultural differences.
The importance of global standards in the modern world remains paramount and is no way diminished by the FASB’s announcement. However, it does highlight the need for efforts to be focussed on agreeing the fundamentals that are truly global and recognise that below this different paths may be taken to achieve those fundamentals.
* FASB Outlook - From the Chairman's Desk August 2015