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Will IFRS Come to the United States…After the Election We May Find Out

September 23, 2012

The future of IFRS in the United States is still uncertain after the release in July of a long-anticipated SEC analysis of IFRS.

The SEC staff said the global financial reporting community considers the standards produced by the International Accounting Standards Board (IASB) to be of high quality despite areas that need further development. But the report questioned the funding of the IASB and the timeliness of responses to widespread accounting issues by the IFRS Interpretations Committee. It also said adoption would be costly for U.S. public companies.

Many view global comparability and consistency in accounting standards worthy of pursuing. The SEC report said the IASB has made significant progress in developing a comprehensive set of standards. If there is ever to be a single global standard, it is far more likely the United States will need to move to IFRS rather than 120 countries converting to US GAAP.

Some believe that the SEC’s continued indecision on IFRS leaves the U.S. isolated and limits U.S. companies’ access to international capital. Many are disappointed that no clear action plan on IFRS is described in the SEC’s report. Businesses are seeking a decision in one direction or another so that they can make plans for the future.

It’s clear that a decision on IFRS will not be made before the presidential election. But if a new president appoints a new chairman of the SEC, that could change.

Funding is a major obstacle to IFRS in the United States

The biggest obstacle to IFRS adoption for U.S. public companies may be the funding of the IASB. Voluntary funding was critical for the IASB as it got off the ground in the early 2000s; the SEC report said that until 2008, the IFRS Foundation financed the IASB largely through voluntary contributions from a wide variety of participants across the world’s capital markets. The concern with that model is that it leaves the IASB open to the perception that organizations that provide funding could try to influence accounting standards. However, I can remember when the FASB was funded by voluntary contributions as well.

The SEC staff also described the following concerns in its report:

Maintenance of IFRS. The SEC concluded that the IFRS Interpretations Committee should do more to address accounting issues that arise within the context of current IFRSs and provide timely, authoritative guidance.

Application and enforcement of IFRS. A review of financial statements found that while they generally complied with IFRS, global application could be improved to narrow diversity in practice (i.e. national “flavors” of IFRS). The SEC staff wrote that the financial reporting community, including the SEC, can have a positive effect on the consistent application and enforcement of IFRS.

Use of national standard setters. Greater reliance by the IASB on national standard setters—in order to understand the intricacies of distinct domestic reporting and regulatory systems—is needed, the SEC reported.

Governance of the IFRS Foundation. The SEC believes that mechanisms to consider and protect U.S. capital markets, such as maintaining an active FASB to endorse IFRSs, may be necessary

FASB and Endorsement

A significant portion of the report discussed the barriers to outright adoption of IFRS, contrasting full adoption with an endorsement process that would involve FASB.

Although the SEC could mandate that publicly traded U.S. companies use IFRS as issued by the IASB, the report said that would affect other regulators and may require additional federal and state legislation.

Those requirements could be diminished if FASB assumes an endorsement role. But if FASB is involved, its duties would need to be established from among a wide variety of alternatives. These range from the small role of writing each IFRS into U.S. GAAP as-is and without delay, to the significant duty of considering IFRSs during FASB’s own standard-setting process.

A scenario the SEC staff identified between the two extremes would allow FASB to endorse new or newly modified IFRS standards for incorporation into U.S. GAAP. The “vast majority” could be endorsed without change, but FASB would have the authority to add or modify the IFRS standards subject to a protocol that considers the public interest and protection of investors. In the rare case that IFRS standards had gaps, FASB would be allowed to fill them.

Under the endorsement process, FASB could act as a strong U.S. voice in the interests of U.S. investors, according to the report. To prevent too much divergence from the IASB standards in the United States, the SEC staff suggested the IASB “take U.S. perspectives into greater consideration during the standard-drafting process—resulting in standards that meet the needs of U.S. constituents without the need for modification during an endorsement process.”

Tax Implications

Federal and state tax effects of adopting IFRS are covered briefly in the report. If current federal and state tax law is not amended to reflect IFRS, the report said, companies would be required to track a significantly increased number of book-tax differences. Some companies would also end up paying more tax because IFRS does not permit the use of the LIFO method for inventories, and the Internal Revenue Code requires that a company use the same method of inventory accounting for financial and tax reporting purposes.
A change to IFRS might also require companies to request permission from the IRS to change a method of accounting and might affect computation of U.S. earnings and profits for federal tax purposes. Transfer-pricing policies may also be affected.

The report identified two areas of state taxation that could be affected by IFRS adoption: (1) apportionment of income, if IFRS adoption changed underlying apportionment factors; and (2) taxes based on a company’s net worth or equity, if IFRS adoption affected either of those.

While the tax implications of IFRS remain to be addressed, the US tax code does allow companies to absorb major changes in tax accounting over a period of several years.

Preparedness for an IFRS Transition

The level of preparedness for a transition to IFRS varies widely, the report said. Many large public accounting firms with an international presence have experts already on staff or have IFRS training programs in place.
Many companies, however, would need training or would need to hire IFRS experts as consultants or full-time employees, both costly propositions. The report said most companies’ employees “currently have little or no knowledge of IFRS requirements or developments and are only focused on U.S. GAAP.”

Issuers generally supported a single set of high-quality, globally accepted accounting standards, the report said. Many issuers expressed concerns about how much change the financial reporting system could absorb. More issuers preferred a managed transition through which FASB would incorporate IFRS into U.S. GAAP. Small issuers, particularly those who do not have global operations, expressed more concern about the transition than bigger issuers who compete globally.

The SEC staff was very clear in stating that a transition to IFRS could be difficult for some companies. While some standards would be easy to convert, others would require issuers to overhaul accounting systems, controls, and procedures.

Where do we go from here?

The U.S. decision on IFRS could remain in flux for the next year. But if a new SEC Chairman is appointed by a new president we could finally see a decision of IFRS.
As the wait for an SEC decision on IFRS continues, CPAs can turn their international standards focus to the convergence projects on leases, revenue recognition, and financial instruments. These standards alone will have a significant effect on company financial statements.

FASB and the IASB are working on three key convergence projects. The leases standard will require lots of attention because it will put assets and liabilities stemming from leases on the balance sheet and mean changes for lessees and lessors. The wide-reaching revenue recognition project, among other things, eliminates certain industry-specific guidance and requires businesses to disclose more information about revenue. The boards had been scheduled to issue standards in those two projects plus one on financial instruments by the middle of 2013, but the financial instruments project did not get saw problems in July.

FASB sought to address some constituent concerns in the project, and FASB Chairman Leslie Seidman said the staff would work expeditiously. But the IASB’s Hoogervorst said it was “deeply embarrassing” that the boards have not come up with an acceptable solution in the project after three years. He expressed concern that the project could unravel.

But the future of IFRS in the United States is still uncertain. Will a transition be made using the SEC’s new “condorsement” approach, or perhaps with only endorsement of certain IFRS standards? Could optional adoption or straight-out adoption be in our future? Or will IFRS be rejected? There is still not a clear answer to these questions. Will the future become clear after the presidential election? Only time will tell.

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