There are enormous pressures on both sides of the U.S. IFRS decision. Pushing for adoption are the G20 group of nations, the IASB and a significant number of U.S. stakeholders including large multinational companies (who are already dealing with IFRS in many jurisdictions), Big 4 public accounting firms, and those seeking to be competitive in global capital markets. Others want to stay with U.S. GAAP. This group includes smaller companies, companies with U.S. operations only, and financial statement preparers who are already dealing with other significant changes.

Moving Toward IFRS

The SEC has been studying the implications of a move to IFRS for some time. In December 2007 the SEC removed the requirement for Foreign Private Issuers to reconcile to U.S. GAAP. The result is that a large number of Foreign Private Issuers are now filing Forms 20-F and 40-F in IFRS. The decision to eliminate the requirement to reconcile IFRS to U.S. GAAP is what caused many market participants to ask: “If IFRS is good enough for Foreign Private Issuers, why isn’t IFRS good enough for U.S. companies”?

In November 2008 the SEC issued a Roadmap for the possibility of using IFRS for other types of SEC filings as well. The Roadmap to IFRS was conditioned upon a study of the implications of IFRS adoption and its impact on investors and other market participants. A decision about IFRS would then be considered, but only after seven milestones had been addressed. It was the Roadmap to IFRS that set 2011 as the year for the SEC to decide the fate of IFRS.

In February 2010, based on comments from constituents on what the SEC should take into account in its evaluation of IFRS, the SEC issued a statement in support of convergence of global accounting standards. In its statement the SEC outlined the factors it considered to be of particular importance as it continued to evaluate IFRS, and presented a comprehensive work plan that laid out what had to be done to support an IFRS decision.

The Condorsement Approach

In May 2011, the SEC’s Office of the Chief Accountant issued a paper in which it described one possible IFRS adoption approach it dubbed “Condorsement”. The Condorsement idea resulted from combining the most common IFRS adoption approaches used in other jurisdictions, namely Convergence and Endorsement. These two approaches emerged as the most common among jurisdictions that have adopted IFRS. These common choices for adopting IFRS consist of:

• Convergence – Under this approach jurisdictions do not directly adopt IFRS as their accounting standards. Rather, they maintain local standards while making efforts to converge such standards with IFRS.
• Endorsement – Under this approach jurisdictions directly incorporate individual IFRS into their local standards based primarily on (1) stated criteria designed to protect investors and other stakeholders, or (2) modifications or additions to individual IFRS to comply with local regulations or to address the perceived need for country-specific or industry-specific guidance.

Although the SEC has not yet made a decision regarding whether and, if so, the manner in which IFRS adoption should be accomplished, the Office of the Chief Accountant said that in addition to the Condorsement approach, it is also considering several other approaches including full adoption of IFRS on a specified date, full adoption over a staged transition period, and an option allowing U.S. issuers to apply IFRS.

Generally, the Condorsement approach would retain the FASB as the U.S. standard setter, retain the SEC’s oversight role over the FASB, and incorporate IFRS into U.S. GAAP over a defined period of time (say five to seven years), with the ultimate goal being that a U.S. issuer compliant with U.S. GAAP would also be able to assert that it is in compliance with IFRS. Condorsement would not dilute the SEC’s role in setting accounting standards or establishing rules for public companies.

In a Condorsement based adoption approach, existing convergence projects would be stratified and addressed by category as follows:

• Category 1 projects would be those U.S. GAAP and IFRS convergence projects scheduled for completion;
• Category 2 projects wild include those that the IASB has included on its current agenda for IFRS; and
• Category 3 projects would include those standards that are not on the IASB’s agenda for future standard setting.

Category 1 projects would be incorporated into U.S. GAAP and IFRS thereby practically eliminating the major differences. The U.S. GAAP related to Category 2 projects would remain in effect until a new IFRS standard was issued on that topic. The new IFRS standard would then be considered for inclusion in U.S. GAAP and would become the basis for determining if U.S. GAAP on that topic should be retained, the newly issued IFRS should be adopted, or if other action should be taken with respect to that standard. Following the development of an IFRS transition plan, Category 3 projects would be addressed in a manner similar to Category 2 projects with the idea being to allow prospective adoption of Category 3 projects whenever possible.

In November 2011 the SEC released two reports on IFRS adoption. The first report compares U.S. GAAP and IFRS and a second report that analyzes IFRS in practice.

More Time Needed to Complete IFRS Work Plan

In his December 5 speech announcing the delay in releasing the Commission’s final report on the IFRS Work Plan for U.S. markets, Kroeker emphasized the importance of taking this opportunity to establish a “strong and lasting” framework for IFRS incorporation into U.S. GAAP. Kroeker believes the framework should:

• “Demonstrate a high level of support for U.S. commitment to continued development and use of global consistent high quality accounting standards;
• Provide both in fact and in substantive operation clear U.S. authority over standards applicable in the U.S. capital markets;
• Provide for and facilitate a strong U.S. voice in the process of establishing global accounting standards;
• Be responsive to the economic and other impacts of change;
• Consider whether to retain “U.S. GAAP” as the basis for U.S. financial reporting, thereby mitigating the costs and complexity of introducing a new set of standards under regulatory regimes, contractual documents, and U.S. laws under which compliance with U.S. GAAP is often specifically contemplated.”

The State of Convergence

On a related note, both FASB chairman Leslie Seidman and IASB chairman Hans Hoogervorst said in recent speeches that as the current U.S. GAAP and IFRS convergence projects wind down, the Memorandum of Understanding (“MoU”) approach to converging U.S. GAAP and IFRS is not a the best way to resolve differences. As efforts to converge differences between U.S. GAAP and IFRS are made, differences between the two standards continue to persist. Both emphasized that a new, more workable approach to bringing the two standards together is needed.

At the recent AICPA National Conference on Current SEC and PCAOB Developments Seidman said that the FASB would like to finish its convergence work on remaining priority projects like revenue recognition, leasing, financial instruments and insurance. She said “However, we do not believe indefinite convergence is a viable option, politically or practically. As any observer can see, this process is challenging technically and administratively.” Hoogervorst echoed her comments at the same conference when he said “Our convergence history with FASB has been extremely useful in getting us to a point where IFRS and U.S. GAAP are much improved and closer together. So, it’s tempting to just maintain the status quo. But for the long-term, the status quo is an unstable way of decision making that inevitably leads to diverged solutions or sub-optimal outcomes.”

A Path Forward

It seems clear now that a path toward a single high quality global accounting standard is emerging. It appears that convergence may be nearing an end and endorsement may begin to play a more important role in global standard setting. The details may not yet be finalized, but U.S. companies are already being impacted by global accounting standards. As converged standards begin to be implemented, companies need to take a broad view of their approach to implementing and following new accounting standards. A formal strategy for dealing with global standards should be developed that addresses:

• Leadership and communication of the global standard adoption process;
• Considers what peer companies are doing;
• Addresses accounting processes to identify any gaps in information gathering that may need resolution;
• Prepares for changes in technology that may be required; and
• Develops worker’s skills for addressing changing accounting standards.

Since new standards are likely to be much more principles based, a management decision support framework should also be developed to formalize how accounting decisions will be made. An SEC decision on IFRS appears to be around the corner. why not begin to develop a readiness framework for adopting global accounting standards by becoming a champion for preparedness in your organization?

The 2011 IFRS Taxonomy is based on IFRS as issued at January 1, 2011. The interim release of the IFRS Taxonomy contains additional taxonomy concepts that reflect new IFRS standards and improvements to existing IFRS standards published by the IASB. The interim taxonomy release gives companies the opportunity to report XBRL financial concepts using the latest IFRS standards without creating custom taxonomy elements.

The interim release of the 2011 IFRS Taxonomy follows the taxonomy architecture in The IFRS Taxonomy 2011 Guide and The Global Filing Manual.

While US GAAP is often considered rules based, it is better to think about individual standards within US GAAP as being more or less rules-based. There are advantages and disadvantages to a rules based approach. Advantages include clarity in application, reduction of risk (but only when the applicable rule is followed), and comparability for companies in the same industry for the same rule. Disadvantages include a regimented approach where a transaction must be accounted for in accordance with the rule even if the applied accounting is misleading, non-comparability between different industries when the transactions are similar, and increased risk when the applicable rule is not followed (its hard to defend a position when the rule is broken).

Similarly, IFRS is often thought of as principles based, but is better considered more or less principles based. Clearly defined principles provide many advantages as a basis of accounting, including allowing preparers the ability to consider the best way to account for and report a transaction, increased comparability among companies with similar transactions no matter the industry and the ability to defend positions based on the principles followed. Disadvantages include an increased ability to manipulate transactional accounting, increased variations in accounting approaches for similar transactions, and fewer bright lines to consider in determining how to account for a transaction.

In today’s global marketplace IFRS has a distinct advantage over US GAAP. The fact is that IFRS is either permitted or required in over 120 jurisdictions while US GAAP is required in one. The SEC will decide later this year when, whether and how IFRS should be adopted in the United States. If IFRS is permitted or required in the United States, companies will need to develop a judgment framework that documents how accounting decisions will be made in a principles based accounting environment. Because there could be variations in accounting by different companies for similar transactions, companies should disclose the basis for the accounting followed as well as the factors considered and reasons for accounting decisions made.

If you could choose to follow accounting standards that are principles based or rules based, which would you choose?

Effective with periods ending after June 15, 2011, Foreign Private Issuers using IFRS as issued by the IASB are being required by the SEC to file their annual reports on forms 20-F or 40-F with an XBRL exhibit. In the first year, detail tagging of the front facing financial statements and block tagging of footnotes would be need to be completed. In the second year in addition to detail tagging of the front facing financial statements, the footnotes would be detail tagged at four different levels as outlined below.

• Level 1 – Each complete footnote tagged as a single block of text.
• Level 2 – Each significant accounting policy within the significant accounting policies footnote tagged as a single block of text.
• Level 3 – Each table within each footnote tagged as a separate block of text.
• Level 4 – Within each footnote, each amount (i.e. monetary value, percentage, and number) is required to be separately tagged. Narrative disclosures are not required.

One big open item on the 2011 XBRL agenda is the IFRS Taxonomy. Yes, the SEC’s XBRL rule requires certain foreign private issuers to file the XBRL exhibit to their SEC filings beginning with periods ended after June 15, 2011. But to do so, these filers would be required to use a taxonomy that is approved by the SEC (approved taxonomies are listed on the SEC’s website). The problem is that there is not an approved IFRS taxonomy listed on the SEC’s website.

Without an approved IFRS Taxonomy, foreign private issuers will not be able to prepare XBRL financial statements and the ability of US companies to move to IFRS would be hindered. Fortunately, there is a 2011 IFRS taxonomy that has been exposed for comment until March 18, 2011. Hopefully the SEC will consider approving the new 2011 IFRS Taxonomy or will issue additional guidance clarifying expectations for foreign private issuers. To encourage US adoption of IFRS it is essential the the IASB develop a robust IFRS Taxonomy that can meet the demands of the advanced reporting requirements US companies.

Is the IFRS Taxonomy robust enough for US use and what’s next for XBRL and IFRS? We will have to wait until the SEC clarifies its intentions later this year.

One of the criticisms of IFRS acceptance around the world has been the emergence of national IFRS “flavors”. A condorsement approach would undoubtedly lead to a US flavored accounting standard. The resulting somewhat similar global accounting standard would never allow multinational companies to achieve the economies of scale that could be achieved by with a truly global accounting standard. Similarly, simplifying comparisons of global investment options would be hindered. If we are serious about improving global financial reporting transparency then we should adopt a high quality global accounting standard.

In addition to achieving high quality and global acceptance our further goal is to improve financial reporting transparency. The best way to obtain transparency in financial reporting is through a principles based approach. US GAAP is primarily rules based. Pursuant to US GAAP, different industries report similar transactions differently because of the rules they must follow. Under a principles based approach, financial reporting professionals determine the best representation of a transaction based on well established principles. Some say we can’t adopt a principles based approach because we live in a litigious society. I say people who follow rules have no defense when they inadvertently break that rule, but people who follow principles can easily defend themselves based on the principles followed.

Like it or not, IFRS is the de facto (i) principles based (ii) globally accepted and (iii) high quality accounting standard. Over 100 countries have adopted IFRS. Nine of the ten largest capital markets have adopted IFRS. Want to guess which country is the IFRS adoption hold out? As for the countries that have adopted national flavors of IFRS, how can we expect them to move to full IFRS adoption if we don’t do adopt IFRS as issued by the IASB?

Choose adoption not condorsement!