Treatment Differences in US / International Accounting
Amid continuing enthusiasm for the US to abandon its traditional accounting standards in favor of those set by an international body in London, insufficient attention is paid to differences in how the two treat particular questions and what those different treatments reflect about political realities.
In late August 2008 on this blog, I asked whether readers were aware of lists or charts illustrating treatment differences between US and international accounting standards. Comments and other research yielded modest results. The relevant literature tends to focus on differences in bottom lines between the two systems, not treatment differences.
This gap led Bill Bratton (Georgetown) and I to believe that a list or chart of treatment differences, with contextual analysis, would be useful to the literature (in both accounting and in law). As a result, Prof. Bratton and I prepared a contribution for the Virginia Law Review, commenting on a related paper by Jim Cox (Duke).
Our piece is now available here. The chart of treatment differences appears as the Appendix, at pp. 17-26. The preceding pages synthesize how these differences reflect deeply divergent philosophical and political realities, despite widespread talk of how the two standards are convergent.
The paper’s abstract reads as follows:
William Bratton & Lawrence Cunningham, Treatment Differences and Political Realities in the GAAP-IFRS Debate, vol. 95 Virginia Law Review (June 2009):
The Securities Exchange Commission has introduced a “Roadmap” that describes a process leading to mandatory use of [International Financial Reporting Standards] by domestic issuers by 2014. The SEC justifies this initiative on the grounds that global standardization yields cost savings and an ultimate gain in comparability, facilitating the search for global opportunities by U.S. investors and making U.S. capital markets more attractive to foreign issuers.
This Comment enters an objection, noting that the stakes include more than the choice of the framework for standard setting. The accounting treatments themselves are at issue, treatments that for the most part concern domestic reporting firms and domestic users of financial statements. We present a treatment by treatment comparison of [US Generally Accepted Accounting Principles] and IFRS and . . . discuss the differences’ implications.
[The US standard setter, the Financial Accounting Standards Board,] maintained its independence during its 35 year history in the teeth of opposition from corporate management, which experienced a steady diminution of its zone of financial reporting discretion. A switch to IFRS would allow management to reclaim some of the lost territory.
Meanwhile, the interest group alignment that protected FASB, comprised of auditing firms, actors in the financial markets, and the SEC, has disintegrated as U.S. capital market power has waned in the face of international competition. Management is the shift’s incidental beneficiary, with possible negative effects for reporting quality in domestic markets.
Hat Tips: For this piece, I thank Bill Bratton and Jim Cox for the idea and opportunity; my research assistants Dan Martin and Chris Davis, for their excellent help; and the editors of Virginia Law Review for their careful attention and interest.
To Readers: We welcome specific suggestions concerning the assembled chart, which may justify continued updating as the two standards continue to change.