The SEC Delays its Decision on IFRS
The SEC may delay its decision on IFRS for several months according to Jim Kroeker, the SEC’s Chief Accountant. At a recent AICPA Conference Kroeker remarked that the SEC staff would need “a few additional months” to complete the final report on the IFRS Work Plan for U.S. markets. The SEC had previously stated that the goal was to make a decision on IFRS adoption in 2011. In his statement, Kroeker said, “Given the number of things on our agenda, I cannot give you a precise schedule. I can tell you that we will do so carefully and thoughtfully, being guided by an ideal that produces the maximum benefit for the investing public and the capital markets.”
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.
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?