SEC Proposal: Abandon US Accounting Rules

What this country really needs is less tranparency in earnings reports, and more wiggle room for corporate reporting:

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Cox_sucker

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We are governed by utter idiots . . .


Similarities and Differences: A comparison of IFRS and US GAAP
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Ifrs_and_us_gaap

WSJ:

"The Securities and Exchange
Commission signaled the demise of U.S. accounting standards, kicking
off a process Wednesday that could ultimately require all publicly
listed American companies to follow an international model instead.

Introduced
in two steps, the shift could eventually cut costs for companies and
smooth cross-border investing. At the same time, investors worry it
will create confusion, especially during the transition. Other critics
worry that the international system offers too much wiggle room for
companies, compared with the more precise rules enshrined in U.S.
standards.

The SEC’s proposal would allow some large
multinational companies to report earnings according to international
accounting beginning in 2010. The SEC estimates at least 110 U.S.
companies would qualify based on their market capitalization, among
other factors. The agency also laid out a road map by which all U.S.
companies would switch to International Financial Reporting Standards,
or IFRS, beginning in 2014, at the expense of U.S. Generally Accepted
Accounting Principles, the guiding light of accountants for decades.

The proposals will be open for public comment for 60 days and could be finalized later this year."

Anything that artificially boosts earnings is great for America . . .

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Sources:
SEC Moves to Pull Plug On U.S. Accounting Standards
KARA SCANNELL and JOANNA SLATER
WSJ, August 28, 2008; Page A1
http://online.wsj.com/article/SB121985665095476825.html

SEC May Let Companies Abandon U.S. Accounting Rules
Jesse Westbrook
Bloomberg, Aug. 27 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azXvW6B6aINg

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What's been said:

Discussions found on the web:
  1. matt commented on Aug 28

    I’d hate to be the one to break it to you, Barry, but there has been a convergence effort vis-a-vis IFRS and U.S. GAAP for years and this is the ultimate destination.

    Generally, I find the IFRS to be more strict than U.S. GAAP. You should talk to one of those dreaded CFAs and get briefing on IFRS.

  2. Scott commented on Aug 28

    Matt, you have it backwards.

    IFRS is MUCH less strict than the GAAP measures.

  3. ssm commented on Aug 28

    Barry,

    When bad things are done by people it is either stupidity or malice. A wise person once counseled me to never attribute malice where stupidity is a perfectly good explanation. You have adhered to this philosophy nicely by commenting ‘we are governed by utter idiots’.

    I think unfortunately that malice is the better explanation. I think we are governed by utterly evil people, and I’m talking about both sides of the political aisle.

    What this jackass is saying is, “bad stuff happens when people can see the true numbers so lets allow everybody to lie and use the power of government to hide it for them.”

    If that isn’t pure evil at work, then what is?

    There’s a special hell for these people.

  4. Carlomagno commented on Aug 28

    Matt, you have it backwards.

    IFRS is MUCH less strict than the GAAP measures.

    Posted by: Scott | Aug 28, 2008 7:18:52 PM

    Oh yeah, to this day US GAAP still allows this concept called QSPEs… which IFRS got rid of years ago.

    And yes, I know that FASB has recently (finally) plucked up the courage to ditch this nonsense. Took their time about it.

  5. Don commented on Aug 28

    An unintended consequence might be that the uncertainty created by the new rules actually cause U.S. investors to assign lower multiples to these companies, thereby depressing stocks. I’m not a big believer in perfect market efficiency, but don’t you think this will get factored into the mindset of investors over the course of the next five years? What would really be cool is if the eligible companies produced both sets of numbers for three years or so, so that we could see how they compare.

  6. m3 commented on Aug 28

    i co-sign ssm all the way.

  7. JustinTheSkeptic commented on Aug 28

    yes, of course make everything even-steven across the board.

    Oh! so much I don’t know but why don’t we (the people of the would) sit down at the “round-table” and talk about truth…rub the wheels of truth! Ah, what is truth.

    BR, you need a “cancel” button…to lazy to go back…lol

  8. Doug commented on Aug 28

    It`s a fine line between caution and paranoia. Most countries in have been moving away from U.S. GAAP for quite some time. While you`re at it, you might as well rail against the rest of the world adopting the metric system.

  9. matt commented on Aug 28

    Don:

    If I remember correctly, LIFO is prohibited in the IFRS and FIFO is preferred. This would tend to cause inventories to be higher (in an inflationary environment) and COGS to be lower (again, inflationary environment).

    This would tend to cause earnings to be overstated compared to LIFO. An adjustment to P/E would have to be made to compensate, I think.

    But you were talking about a discount due to confusion/uncertainty. I think we are overstating the impact of a switch.

    I am not an accountant, so I can’t say how IFRS would affect financial companies, given their dramatically different business structure from a typical goods producer/retailer.

  10. Jeff M. commented on Aug 28

    I saw this first thing today and the sad thing is I wasn’t even surprised. These jackals have hijacked capitalism and our country.

    Can we all just finally admit at this poitn that the entire game is rigged?

  11. VennData commented on Aug 28

    If Bush wins in ’04 the WSJ Opinion page headline reads:

    “White House Leads Effort on Globalization of Business Rules”

    If Kerry wins in ’04 the WSJ Opinion page headline reads:

    “Kerry Rams French Accounting Rules Down Throats of Over-Burdened US Entrepreneurs”

    Anyway, it would be cool if the BLS adopted international inflation rules.

  12. Jeff M. commented on Aug 28

    So instead of actually fixing the problems that ail our corporations, markets and economy, the powers-that-be just decide that a little cosmetic window-dressing will do just fine. If we’re all this stupid to fall for it, then we deserve everything we get as a nation.

  13. Thomas Shawn commented on Aug 28

    would that we adopt the low corporate tax policies of Ireland, Poland and others.

  14. Rob P commented on Aug 28

    So as the economic superpower of the world which has gotten that way through the methods we use, we are to bow down to the way the rest of the world does it? Guess it is time to start brushing up on my Mandarin!

  15. JustinTheSkeptic commented on Aug 28

    I’ve come to the conclusion that everything is bull-shit and I am its anchor.

  16. Agronox commented on Aug 28

    I don’t think you’re giving this a fair shake, Barry. This isn’t some new crazy Cox plan. The SEC’s Office of International Corporate Finance has been working to make something like this happen since at least several years ago. (I summered there as a 2L; biggest professional mistake of my life.) It makes a lot of sense for an investor to pick up an annual report from a company in Germany and a company in the United States and be able to compare results without trying to reconcile the different accounting systems. This is a Good Thing.

    Believe me, there’s a whole hell of a lot you can (and should) beat the SEC up on, but this isn’t it.

  17. Pat G. commented on Aug 28

    I was wondering what bone the government was going to throw the money center banks for shorting the hell out of commodities. I guess PPT really stands for Politicians & Principals of Trade.

  18. Steve Barry commented on Aug 28

    Just changing an accounting rule, all else being equal, is simply moving a number from one column on a piece of paper to another. Anyone thinking that such an action can change the long term value of a company is simply clueless about equity valuation. Yeah, some suckers could buy due to more lipstick on the pig…but it would be short-lived. What accounting rules should aim to do is incent corporations to invest capital wisely. Unfortunately, very few regulators would have a clue on how to do that.

  19. Stuart commented on Aug 29

    Bingo, you hit the motive on the head. More flexibility to maximize reported earnings.

  20. Jerry commented on Aug 29

    I feel compelled to follow ssm’s lead on this one. I used to think that people in positions of power were generally kind of stupid (with very few exceptions), or at least unwilling to commit to any appreciable change. Now, alas, I think that the powers-that-be are more evil than stupid (again, with rare exceptions), and that they simply are unwilling to offer people any insurance of reliable numbers and accounting. It’s pretty disgusting.
    Jerry

  21. Stuart commented on Aug 29

    It’s 100% pure unadulterated greed pushing this with no braking. Wall Street is to legitimate commerce what Al Qaeda is to Islam.

  22. Philippe commented on Aug 29

    It is all pertaining to definitions, save the fact that actual cash, cash flows, real capital, will establish the real difference.
    What is about FASB? What’s about the prices models versus the market prices? What is about inflation as being the real rate of change of money supply as opposed to real change of prices, what is about a bond market not paying to attention to an average real change of money supply hovering around 12 % during the last five years and saying that now the inflation is neutral since the money supply delta is shrinking?
    Those are the definition of today’s financial disasters and the definition of today’s financial cure.

  23. Michael commented on Aug 29

    As a UK banker, I am quite surprised at what a controversial issue this is for you guys. The rest of the world has been happily converging on IFRS for many years…

    Matt and Scott are both right in different ways – IFRS is more principles-based rather than relying on a huge list of rules for every eventuality, but also leans more towards fair value accounting. This actually provides much more transparency for big liabilities (e.g. pension deficits) than US rules.

    It’s a little naive to imagine that principles-based accounting implies greater “wiggle room”, it simply relies more on good old fashioned common sense.

  24. BG commented on Aug 29

    I remember back in the 80’s & 90’s, when we publicly ridiculed the accounting standards of non-US Companies. ‘No Non-US Company’s accounting/financial results could measure up to the scrutiny, discipline & accuracy required by GAAP reporting.’

    Well, we now know it was never that good; but, the case was made publicly anyway for financial advantage.

    Remember that?

    One thing is certain, they have now apparently ran out of wiggle room with GAAP and are looking for a whole new set of rules to exploit while also staying out of jail. That tells me that Sarbanes-Oxley must be doing the job.

    I’m sure there really are some improvements in some areas they have us focusing on; but, we have learned over time, that the real motivation for this change has absolutely nothing to do with what they are indicating but is instead well hidden beneath volumes of code. You’ll never hear the true impact of the change in a public SEC forum with Chris Cox.

  25. One Salient Oversight commented on Aug 29

    I remember having a discussion a few years ago with an accountant about the difference between the two.

    This friend was quite knowledgeable in both systems and pointed out that IFRS is much better than GAAP because IFRS relies upon principles while GAAP relies upon rules.

    The difference is that, with GAAP’s many rules, companies can and do find all sorts of little loopholes in what can be done and what can’t be done. IFRS, however, because it relies upon principles, pretty much gets rid of all these little loopholes because they don’t meet basic principles.

    I think that moving US companies into the IFRS will be very good for the US.

  26. Movie Guy commented on Aug 29

    You can’t make this stuff up.

    Screw it. Bring on VAT. Let’s get this over with.

    Thank God this is Friday.

  27. wally commented on Aug 29

    I thought all the looting had been done, completed just in time for the next presidential election.
    Geez, was I ever WRONG!

  28. BobC commented on Aug 29

    I would suggest that the problem is not the accounting rules but rather the inventive ways in which unethical people subvert them. GAAP accounting seems to mean finding the gaps in the rules to some.

  29. Dervin commented on Aug 29

    I read a few articles about this years ago, but what I remember is if you follow all the rules in GAAP, you can still cook the books quite easily. But under the IFRS while there are less standards, it’s harder to cook the books.

  30. Chris D. commented on Aug 29

    “We are governed by utter idiots . . .”

    I wish that were true. Unfortunately, I think we’re a henhouse governed by foxes.

  31. me commented on Aug 29

    So what happens to US small caps that have no foreign exposure, just spend billions on new accounting systems that no one understands?

  32. b commented on Aug 29

    The International Accounting Standards Board, the London-based body that sets the international standards, is currently funded by companies and auditing firms, while its U.S. counterpart, the Financial “Accounting Standards Board, is essentially funded with a tax on companies. The SEC says finding a stable and independent source of funding for the IASB, founded in 2001, is one of the conditions it has set for going ahead with the switch. The SEC and other regulators have agreed to create a monitoring body to fund and oversee IASB.”

    I think the above little nugget of info from the original article is the more relevant take-away here. Follow the money…

  33. Scott in Chicago commented on Aug 29

    Chris Cox is aptly named for he is, indeed, a complete dick. What a horrible idea. By all means, given the exemplary performance of our corporations while operating under little regulatory enforcement, give them an even freer reign. This administration is the worst thing that ever, and I do mean ever, happened to this country and to our way of life. Enjoy the holiday, people…party like it’s 1999! Run for cover like it’s 1929!

  34. Michael commented on Aug 29

    “If I remember correctly, LIFO is prohibited in the IFRS and FIFO is preferred. This would tend to cause inventories to be higher and COGS to be lower. This would tend to cause earnings to be overstated compared to LIFO.”

    Matt,

    FIFO is indeed the preferred choice under IFRS since LIFO is prohibited, but the result is *lower* earnings, not higher. You’re forgetting the effect of taxes (and so is Barry, it seems).

    Using your example of rising prices, recall that LIFO inventory accounting uses higher COGS, which lowers pre-tax earnings, but since it also lowers taxes the result is higher after-tax earnings. It’s no secret that this is why LIFO is the preferred choice for most American companies.

  35. Mark Hessel commented on Aug 29

    Some good comments with excellent
    questions. Barry, I hope you will come back later with a
    little bit more detail than

    We are governed by utter idiots . . .

    Give us at least a couple of
    examples why GAAP is better than
    IFRS.

    I have to agree that standardization
    would easier to understand.

  36. Joe Facer commented on Aug 30

    “We are governed by utter idiots . . .”

    Barry, if you’re trying to pick a fight, you’ll have to start with something we disagree on…

    You’re a prime source for info on a blog I do for 401a participants. There’s ALWAYS too much useful info in your blog over a week’s time. Next time you are in SF, rattle my cage. I’ll trade you a beer and sandwich on a killer ride up the coast for some clarity on your thought processes.

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