More Mis-inferred Rationales for Using IFRSs in the U.S.

In last week's blog post, I indicated that a major reason people in the U.S. are confused about Convergence is that they mis-perceive the rationales for why we should be considering the use of IFRSs in the U.S. Those mis-perceptions have, in many cases, led to illogical opposition to the use of IFRSs in this country.

In my previous post, I gave several specific examples of mis-inferred rationales, i.e., reasons that folks mistakenly believe are being offered for using IFRSs in the U.S. by those who are promoting the use of IFRSs in the U.S. In this week's post, I'm going to share a couple more examples of mis-inferred rationales.

The first example arises from the widespread conversion to IFRSs by countries other than the U.S. Some folks think that the U.S. is being pushed into using IFRSs because "everyone else is doing it," and reject IFRSs using parental logic: if everyone else jumps off a bridge, that doesn't mean you should too. But "everyone else is doing it" or " it's a good idea for everyone else so it must be a good idea for the U.S." are NOT genuine rationales for using IFRSs in the U.S. To reject IFRSs on the basis of such mis-perceived rationales would be illogical. (Furthermore, such rationales do not adequately explain why the vast majority of capital markets outside of the U.S. have embraced IFRSs. The proper explanation is that (1) IFRSs are largely superior to the country-specific GAAPs that other countries used before converting to IFRSs, which is not true for the U.S.; and (2) the capital markets of other countries would suffer far greater harm than U.S. capital markets would suffer as a result of not using country-neutral financial reporting standards.)

The second example arises from the SEC's recent decision to accept IFRS-compliant financial statements as-is from non-U.S. companies that are listed in the U.S. Some folks assume--incorrectly--that the SEC has concluded that IFRSs are of high-enough quality for use by all issuers under the SEC's jurisdiction. In opposing that imagined conclusion without realizing that it is only imagined, folks have once again come to oppose IFRSs for the wrong reasons.

The fact is that the SEC has not concluded that IFRSs are of high-enough quality for use by all issuers under the SEC's jurisdiction. The genuine rationale for the SEC's recent decision to eliminate the GAAP reconciliation requirement for foreign companies listed in the U.S. who file IFRS-compliant financial statements was three-fold. First, dropping the reconciliation for IFRSs filers would lower costs to issuers and therefore increase returns to investors without depriving investors of any information of value. Second, dropping the reconciliation requirement for IFRSs filers would potentially increase future opportunities that U.S. investors would have to invest in foreign companies that use financial reporting standards of adequately high (though not necessarily the highest) quality. And third, the SEC wanted to avoid provoking other jurisdictions into implementing retaliatory reconciliation requirements on U.S. companies listed abroad.

Two key points:

1. Genuine rationales for the above phenomena never include "IFRSs are superior to U.S. GAAP." Understanding that simple fact helps explain why debates about the superiority of one set of standards over the other have gotten us nowhere.


2. None of the genuine rationales for allowing foreign companies listed in the U.S. to use IFRSs are genuine rationales for allowing domestic companies to use IFRSs—which I'll address in my next blog post.