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Lack of IFRS Taxonomy…an IFRS Adoption Hinderence?

March 10, 2011

The SEC’s Roadmap to IFRS adoption consisted of milestones that if met could pave the way to IFRS adoption. One of the Milestones, facilitating the use of interactive data (XBRL) for IFRS, is a current topic in 2011 since all filers, including certain foreign private issuers using IFRS, need to begin filing in the XBRL format. If US filers could adopt IFRS, they would need to be able to file XBRL exhibits to their IFRS SEC filings. That cannot be done until an IFRS Taxonomy is approved by the SEC.

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.

Choose adoption not condorsement!

January 22, 2011

There have been a few articles and blog posts favoring a blend of IFRS convergence and endorsement (dubbed “condorsement” by some). Is this really a good idea? We started down the road to IFRS in order to achieve a “high quality global accounting standard”. Would ‘condorsement” lead the largest capital market in the world to a high quality global accounting standard?

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!

IASC Seeks XBRL Participants

April 22, 2010

The International Accounting Standards Committee Foundation (IASCF) through its standard-setting body, the International Accounting Standards Board (IASB), is seeking FPI participants for a pilot XBRL program. The IASCF sees itself as the independent, private and not-for-profit body responsible for developing a single set of high quality global financial reporting standards for use throughout the world. XBRL Pilot participants are being sought because the SEC’s rule on XBRL requires that Foreign Private Issuers (FPI’s) begin filing an XBRL formatted exhibit to form 20F for financial periods ending after June 15, 2011.

On 17 December 2008, the SEC published rules that require all FPIs to submit their financial reportsin Interactive Data format, SEC speak for XBRL. According to the rule, FPIs “using IFRS as issued by the IASB will be required to tag their financial information using the most recent list of tags for international financial reporting, as released by the IASCF and specified in the EDGAR Filer Manual”.

FPIs, which will be mandated to file with XBRL in IFRS from 15 June 2011, are invited to participate in a pilot initiative being coordinated by the IASC Foundation. The pilot will focus on FPI use of the 2010 IFRS Taxonomy to tag SEC filings in XBRL.

The purpose of the pilot is for FPIs to produce real XBRL filings that include block-tagged notes. The pilot is intended to test the validity of the IFRS Taxonomy to “determine and demonstrate that the IFRS Taxonomy is practical for filers and for users of filed XBRL content”. FPIs from all industries are welcome to participate.

The pilot initiative will start when the final IFRS 2010 Taxonomy is released (about the end of April 2010). Companies interested in joining this initiative are invited to express their interest by writing to Olivier Servais, Director of XBRL Activities

  • Mail: IASC Foundation: 30 Cannon Street, London EC4M 6XH
  • Email: oservais@ia sb.org

The IASCF will accept applications until 15 May 2010.

For more information on XBRL see http://xbrl.org/; http://xbrl.us/Pages/default.aspx and http://xbrlusa.wordpress.com/

US GAAP & IFRS Convergence Progress Report Issued

April 16, 2010

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) published an accounting standard convergence progress report on April 14 2010. The report summarizes the two boards work to improve and achieve convergence of US GAAP and IFRS. In November 2009 the two boards demonstrated their shared commitment to convergence by establishing a comprehensive work plan to complete their joint projects by a June 2011 target. The 2011 target is significant because it corresponds with the year in which the SEC is expected to make a date certain decision about IFRS conversion.

To accomplish their objective of substantially converging US GAAP and IFRS by 2011, the boards have accelerated and intensified their efforts. Instead of meeting every four months, they have agreed to meet every month. In addition, they have expressed their willingness to schedule special meetings to address key convergence issues.

In addition to the stepped up convergence efforts, the boards are developing extensive outreach programs to involve a broad group of convergence stakeholders in standard setting due-process. Their outreach will include educational sessions on their websites and in Oceania, North America and Europe. They have already scheduled session in Tokyo, and Norwalk Connecticut.

As of 31 March 2010, the FASB and IASB had achieved substantially all of the milestone targets they set for the first quarter of 2010. The progress made by the boards is explained more fully in their report.

  • For five of the major Memorandum of Understanding projects they are on track to publish, by mid-2010, exposure drafts that would improve and achieve substantial convergence of US GAAP and IFRS in those areas.
  • On two major projects, financial instruments and insurance contracts, the boards have reached different conclusions on some important technical issues. Addressing convergence differences in those areas could affect the convergence timetables described in their report.
  • The boards also agreed in late March to explore an alternative approach to lessor accounting. That decision could also affect convergence timetables

The boards have agreed to maintain a high degree of transparency about convergence progress by reporting progress against planned convergence milestones. They will report progress quarterly with the next report being published in July 2010.

SEC Views on IFRS – Part 1

March 13, 2010

The SEC held a public meeting on February 24, 2010 to express its support for a single set of high quality global accounting standards. Over the coming weeks I will be posting summaries of some of the views published by the SEC in its Release numbers 33-9109 and 34-61578

In its expression of support the SEC stated that a single set of high-quality globally accepted accounting standards is consistent with the its mission of protecting investors, maintaining fair, orderly and consistent markets, and facilitating capital formation. The commission reiterated its support for continued convergence between US GAAP and IFRS and acknowledged that IFRS is best positioned to become the single global accounting standard.

The commission last addressed the topic of convergence when it released a proposed Roadmap to IFRS in November 2008. The proposed Roadmap set forth seven milestones toward eventual adoption of IFRS. However, the commission stopped short of proposing a date certain for adoption and instead stated that it would make a decision about adopting IFRS by 2011. The seven milestones set forth in the proposed Roadmap to IFRS are as follows (see IFRS Roadmap Milestones):

IFRS Roadmap Milestones

  • Improving Specific Accounting Standards
  • Improving the Structure and Funding of the IASB
  • Facilitating the use of interactive data (XBRL) under IFRS
  • Updating the Education and Licensing of U.S. Accountants
  • Evaluating the early adoption experiences of a limited group of companies
  • Timing of future rulemaking
  • Sequencing of companies required to use IFRS

The Roadmap generated comments from a diverse group of investors, issuers, accounting firms, regulators, educators, and others as to what factors the SEC should consider as it evaluates IFRS. The SEC has carefully reviewed the thoughts of those who commented on the Proposed Roadmap to IFRS. In my next post I will summarize the SEC’s conclusions regarding the factors it considers particularly important as it continues to evaluate IFRS through 2011.

Preparing for a global accounting standard

Now is the time to prepare for a gradual migration toward a single global accounting standard, especially for multinational companies. As more countries move toward IFRS (like Canada, Japan, Australia and others), companies should determine what the migration to IFRS means for them. In addition, US based companies should stay actively informed about the standards being converged by the FASB and the IASB. Companies should also consider conducting an IFRS impact assessment to determine how a transition to IFRS might impact them. By doing so, companies can plan for a smooth transition to a single global accounting standard.

Financial Crisis Advisory Group on Global Accounting Standards

February 2, 2010

The Financial Crisis Advisory Group recently issued a letter to the G-20 Group of Nations expressing its support for “a single set of high quality, globally converged financial reporting standards that provide consistent, unbiased, transparent and relevant information across geographical boundaries”. The letter summed up the Financial Crisis Advisory Group’s review of the progress of the International Accounting Standards Board IASB) and the US Financial Accounting Standards Board (FASB) in addressing the recommendations contained in their July 28, 2009 report.

In their July 2009 report the Financial Crisis Advisory Group set forth four main principles and a series of recommendations to improve the functioning and effectiveness of global standard-setting. The primary areas addressed in its July 2009 report include:

  • Effective financial reporting
  • Limitations of financial reporting
  • Convergence of accounting standards
  • Standard-setters’ independence and accountability

Harvey Goldschmid, Co-Chairman of the group commented on the report by saying “I urge policymakers around the world to study the report and to take note of its conclusions, especially the importance of broadly accepted accounting standards that are the result of a thorough due process. The report highlights the importance but also the limits of financial reporting. Accounting was not a root cause of the financial crisis, but it has an important role to play in its resolution.”

FASB and IASB to Meet Monthly on Convergence

December 21, 2009

Bob Herz

The FASB and the IASB plan to meet every month in order to complete accounting standard convergence by June 2011. The monthly meetings are necessary as the chairmen of the two boards focus on their efforts to reconcile US and international accounting standards

FASB Chairman Robert Herz and IASB Chairman Sir David Tweedie held a three-day meeting at FASB headquarters in Norwalk, Conn. In late October to resolve difficult differences in areas such as fair value measurement, revenue recognition, asset impairment and financial statement presentation. During their meeting, they set a series of milestones for when they expect to issue draft standards.

Sir David Tweedie

“We’re going to work on these issues together every month,” said Tweedie. “That’s why we think we’ll make our June 2011 target date.” The June 2011 is important because it was a target set at the G-20 summit in September 2009. During their meeting the G-20 encouraged the development of a single set of high quality global accounting standards.

FASB Chairman Bob Herz commented that the $64,000 question is, “Where are we going with IFRS?” as he described plans for the FASB and the IASB to work more closely on uniting US GAAP with international standards.

The SEC has not yet approved its proposed roadmap to the adoption of IFRS, but is addressing the issue. Commissioner Elisse Walter, in her keynote address to the American Institute of Certified Public Accountants, said that in early 2010 the SEC will determine what to do about the adoption of international accounting standards. SEC staff members are “formulating a recommendation to the commission” based on the comment letters it received on its proposed roadmap to the adoption of IFRS. The commissioner said “I expect we will likely consider further action sometime in early 2010”.