Ethics, Professional Judgment, and Principles-Based Decision Making under IFRS

Article excerpt

For almost 40 years, a movement has been under way to establish one set of international accounting standards for all countries around the world in order to facilitate international trade and investment. Since it is no longer unusual to have foreign companies list their stock on the New York Stock Exchange, one common set of accounting standards should go a long way toward increasing the understandability of international financial reports. Until recently, listing rules required that non-U.S. companies must reconcile their financial statements prepared under home country standards to U.S. Generally Accepted Accounting Principles (GAAP). However, the SEC now permits foreign companies to use International Financial Reporting Standards (IFRS), established by the International Accounting Standards Board (IASB), in lieu of the conversion of foreign financial statements to GAAP.

On November 14, 2008, the SEC released for comment a proposed road map for the adoption of IFRS that would monitor progress until 2011, when the SEC plans to consider requiring U.S. public companies to file their financial statements using U7RS. The original implementation date of 2014 was pushed back one year to 2015 to give the SEC more time to study implementation issues. The United States is under a great deal of pressure to adopt IFRS because members of the European Union did so in 2005 and many other countries have or will be adopting IFRS by the end of 2011. To date, about 120 nations have adopted IFRS as their home country standards.

The final decision of the SEC to mandate IFRS starting in 2015 will be based on whether those accounting standards are of high quality and sufficiently comprehensive. The SEC's convergence approach is based on the notion of "improve and adopt" IFRS before giving its stamp of approval. The Commission has been assessing whether IFRS develops a high quality of financial reporting relative to the standards that may be replaced. A good example of the convergence process at work is the capitalization of finance costs during the period of construction of an asset. Originally, International Accounting Standard (IAS) 23, Capitalisation of Borrowing Costs, and a revised version allowed for capitalization but identified expensing as the benchmark treatment for borrowing costs. In March 2007, the IASB issued another revised version, this time mandating capitalization to bring the standards in line with U.S. GAAP under FASB 's Statement of Financial Accounting Standards (SFAS) 34, Capitalization of Interest Cost.

In the United States, financial statements should contain useful information in accordance with GAAP and present fairly financial position, the results of operations, and changes in cash flows. GAAP conformity depends on a strong set of ethical values to guide behavior, such as objectivity and integrity and an ability to make professional judgments with respect to the relevance and reliability of financial information. The objectivity and integrity standards in the AICPA Code of Professional Conduct provide guidance on how GAAP conformity issues should be handled and what to do when differences exist between the position of a professional accountant and one's supervisor.

IFRS incorporates a principles-based approach to standards setting rather than the rules-based regime in the United States. Under the principles-based system, consideration should be given to the economic substance of financial data and its representational faithfulness in order to make professional judgments about the usefulness of financial information. On an international level, the Global Code of Ethics issued by the International Federation of Accountants (IFAC), an organization with representation from professional accounting associations around the world, provides guidance similar to the integrity and objectivity standards, but it is predicated on following principles that underlie decision making, such as economic substance over legal form and the "true and fair view override. …