The Securities and Exchange Commission (SEC) plans to issue a release this summer proposing rules that would allow non-US enterprises to report financial statements using International Financial Reporting Standards (IFRS), eliminating the longstanding requirement that such statements be reconciled to US GAAP. Companies would elect to use either IFRS or US GAAP. The proposal also entertains the possibility of allowing US enterprises to make the same election.
If approved, these changes would intensify competition between the promulgators of IFRS, the International Accounting Standards Board (IASB), and the promulgators of US GAAP, the Financial Accounting Standards Board (FASB). What will define the terms of the heightened competition? Race to the bottom or race to the top? Will accounting standards—and financial statements—be friendlier to investors and other users or to managers and auditors?
The changes likely would hasten the move to a single international capital accounting system, with one of the two winning the race. The loser could go out of business. Picking the winner is difficult. But the packaging of the relatively young IFRS to fit the prevailing romance with so-called “principles-based” accounting is a clue: the smart money bets that adopting the proposal would put FASB out of business within a decade.