Accounting for Quality: the Quality of Accounting

Accounting is esoteric.  🙁  I say this as one who has never taken an accounting course in his life, but has written papers on accounting standards, and has had to implement them in the life insurance industry, which is possibly the industry with the most complex accounting of any industry.  (Okay, if we did the investment banks properly, they would be more complex.)

My post is prompted by Barry’s post.  I have known for a while, and commented here that the SEC is planning on abandoning GAAP for IFRS.  Why are they suggesting this?

  • IFRS is not that much different from GAAP.
  • They want to have every company in the developed world on a similar accounting basis, even if the basis is slightly worse than the existing standards.
  • Then perhaps, foreign companies will once again list their equities in the US.

You can get the same information in different ways from:

The latter two links do not directly address the issue, but they write intelligently about accounting.

This download is big, but it summarizes the differences between FAS and IFRS (in 77 pages).

My short take is this:

  • IFRS is a more liberal accounting standard.  Not by a lot, but significantly.
  • There will be a ton of retraining for accountants in the US, and financial analysts (ouch).
  • Earnings will rise, but P/E multiples will fall.  The intial net effect should be small.
  • Value investors will fare relatively better, as they spend more time on the balance sheet, income statement, and other earnings quality issues.
  • Exchanges in the US might get more foreign listings, if Sarbox were repealed.  Moving to IFRS is not enough.
  • If I were on the SEC, I would not care about global comparability, I would stick with GAAP, and stand alone if necessary, among the nations of the world.  Why move to a less informative, and more rubbery standard?  I don’t see a good reason.

IFRS is more flexible, which means that companies under it are less comparable.  I don’t see the advantage in our moving away from GAAP, which has its problems, but less than IFRS.  When I get the web address to post complaints, I will post it here, and I will be writing the SEC to stop this foolishness.