Delays and Difficulties Mar the Path to IFRS Adoption

Nobody said it would be easy, but bumps in the road along the way to possible U.S. adoption of International Financial Reporting Standards are popping up more and more often, and in some unlikely places.

Regulators got a reminder of the many barriers to implementation of IFRS in the United States last month, when the Securities and Exchange Commission conceded that foreign private issuers that file financial statements based on IFRS couldn't be expected to meet a June deadline for submitting statements using the XBRL filing technology. Why not? Because the SEC hasn't yet approved an XBRL taxonomy that IFRS filers can use.

Then came news that the Financial Accounting Standards Board and the International Accounting Standards Board, which had long promised to converge all major U.S. and international accounting standards by June, wouldn't meet that goal after all. Now the target date is by December.

Such incidents underscore the challenge facing the SEC in deciding whether to adopt IFRS. The agency has said that it would make a final decision sometime this year. But what once seemed like a near certainty—that the United States would require companies to begin reporting using IFRS—is now looking less and less clear. At best, accounting observers say that it won't happen anytime in the immediate future.

“The dream and ideal of one set of high-quality financial reporting standards—very few people question that. But in putting it into practice, you run into all sorts of problems,” say Murphy Smith, professor of accounting at Texas A&M University. “For example, you still have the issue of how culture affects interpretation,” Smith notes.

At the same time, some question how much investors and issuers in the United States will gain by adopting IFRS, at least in its current form. While the Council of Institutional Investors supports U.S. standard setters working with their international counterparts to develop a single set of standards, that switch shouldn't occur until the information provided by the new standards is proved to be at least as good as that provided by U.S. Generally Accepted Accounting Principles, says Jeff Mahoney, CII's general counsel. “Is there sufficient evidence that if we switch, investors won't lose?”  

Regulators' recent pronouncements appear to indicate that more work is needed before they can provide that assurance. One such announcement was the April Progress Report on IASB-FASB Convergence Work, issued by the boards. In it, the boards extended the completion dates for what have been termed the priority convergence projects: revenue recognition, leasing, insurance contracts, and financial instruments.

The report contended that the first deadline of June 2011 had been instrumental in getting the boards to this point. Not everyone has been thrilled with that quick pace. “The plan was quite aggressive in timing. Most people prefer that they take more time and get it right,” says Lisa Filomia-Aktas, a partner in the financial service office with Ernst & Young.

Several weeks later, the SEC announced that it would sponsor a roundtable discussion in July “to discuss benefits or challenges in potentially incorporating International Financial Reporting Standards” into the U.S. financial reporting system. The roundtable will feature one panel each for investors, public companies, and regulators. Holding such an event is consistent with the SEC's efforts to reach out to investors and other stakeholders as it works through the convergence process, says D.J. Gannon, deputy managing partner for U.S. regulatory and public policy at Deloitte—but it does also leave an uncomfortably small window for the SEC to fulfill its promise of a final decision on IFRS sometime this year. 

Lingering Questions

One of the top concerns among U.S. regulators, corporations, and shareholder activists alike is the independence of IASB, which is the standard-setting body of the IFRS Foundation. “IASB funding and governance is a legitimate concern,” Smith says. “Its funding will have an impact on whether it's truly independent.”

In 2009, international accounting firms contributed more than one-third of the Foundation's budget, which was made up of donations. (The United States contributed about 11 percent.) Some question whether these contributions might sway decisions IASB makes about accounting standards. There's “a push for IFRS coming from large audit firms who see a chance to reduce their litigation expense,” says David Albrecht, accounting professor at Concordia College in Moorhead, Minn.

“Everyone wants to move to a single set of global, high quality standards. While acknowledging that no one really knows how the SEC will proceed, “the path seems to be moving to condorsement.”

—Lisa Filomia-Aktas,

Partner,

Ernst & Young

The IFRS Foundation is moving away from its dependence on contributions toward nationally administered financing programs. Such funding should account for roughly half its budget in 2011, while contributions from accounting firms will drop to about one-quarter. Gannon notes that prior to 2002 and the passage of the Sarbanes-Oxley Act, FASB also was funded largely through contributions. Today, fees levied on issuers of securities account for about 70 percent of its revenue.  

Some observers also point out that although IASB touts the 120-some countries that have adopted IFRS, few adopt it exactly as it's written. “If that's the case, are we really moving to a single set of standards?” Mahoney asks.

This criticism is a bit overblown, Gannon says. In most cases, the differences consist of requirements to disclose additional information, and the added guidance typically is consistent with the overall principles of IFRS. As a result, companies can assert dual compliance with both IFRS and their own countries' standards.

Another concern centers around the lack of enforcement mechanisms and established audit processes in many countries. “If there's not a consistent, fairly uniform application of auditing, it's going to bring into question just how well any individual company applies IFRS,” Smith says. He adds that even within the United States, some companies do a better job than others in financial reporting.

Will It Happen?

Given the recent delays and continued concerns about IFRS, will it eventually be adopted within the United States? Nobody outside FASB and the SEC can know for sure yet. The agencies appear to be debating whether the benefits to investors of adopting IFRS outweigh the cost, Smith says. Some of his peers compare the move for IFRS to the push for the metric systems in the 1970s. That, of course, fizzled out and hasn't yet re-emerged. In contrast, he says, IFRS adoption likely will keep moving forward.

BOARD MOVES

Since their report last November, IASB and FASB have taken the following actions in a move toward convergence:

1. Completed five projects: The boards have reached important decisions on a number of projects, reducing the number of remaining priority MoU projects to three (revenue

recognition, leasing and financial instruments) for continued work. Reflecting the

completion of MoU projects, publication of standards that are converged or substantially

converged on fair value measurement, consolidated financial statements (including

disclosure of interests in other entities), joint arrangements, other comprehensive income

and post-employment benefits is expected in the coming weeks.

2. Priority given to the remaining MoU areas and insurance accounting: In November 2010 the boards decided to give priority to their joint work on three MoU projects—financial instruments, revenue recognition and leases—and accounting for insurance contracts in order to permit timely completion.

3. Extended the completion target beyond June 2011: At their meeting in April, the

boards extended the timetable for the remaining priority MoU convergence projects and

insurance beyond June 2011 to permit further work and consultation with stakeholders.

The boards have revised their work plan to focus on completing the three remaining

priority convergence projects in the second half of 2011, in a manner consistent with an

open and inclusive due process. For insurance contracts, the IASB plans to complete its

project in the second half of 2011 while the FASB plans to issue an exposure draft in a

similar timeframe. This work plan is described in more detail below.

4. Agreed that the decisions that will be made on effective dates will give entities

sufficient time to implement changes: The boards have emphasized that they will set effective dates that will allow those who use IFRS and U.S. GAAP adequate time to

prepare for implementation of the standards.

Completion of MoU work

With the progress made since the last report, the boards are nearing the completion of their MoU program, which began in 2002:

The short-term projects identified for action in their 2006 MoU and updated 2008

MoU have been completed or are close to completion.

Of the longer-term projects, only three of the priority convergence projects remain for

which the boards have yet to finalize

Source: IASB April Progress Report on Convergence.

According to Filomia-Aktas, the current efforts to converge IFRS and GAAP probably will continue along the lines of what Paul Breswick, deputy chief accountant with the SEC, has called “condorsement.”

Condorsement incorporates both convergence and endorsement, and is similar to the approach many other countries have taken. As Breswick explained in a speech in December 2010, U.S. GAAP would continue to exist, and FASB and IASB would finish the convergence projects they've started. Over time, FASB would work to converge the remaining GAAP and IFRS standards, “making sure that, on a standard-by-standard basis, existing IFRS standards are suitable for our capital markets,” Breswick said.

FASB also would develop a process where it would consider new standards issued by IASB for incorporation into U.S. GAAP. Ideally, the standards would be incorporated without modification, Breswick said. But FASB would establish the criteria under which it would consider endorsing or incorporating the standards. Endorsed standards would differ from, but be considered equivalent to, U.S. GAAP, Filomia-Aktas says.

The endorsement process is a way to allow for differences between U.S. GAAP and IFRS, Filomia-Aktas says. With condorsement, U.S. filers most likely would continue to file under GAAP; any differences to IFRS, however, would be minimal and easy to identify. Retaining U.S. GAAP would reduce the cost of implementation, given how frequently GAAP is referenced in laws and contracts, she adds.

“Everyone wants to move to a single set of global, high-quality standards,” Filomia-Aktas says. While acknowledging that no one really knows how the SEC will proceed, “the path seems to be moving to condorsement,” she says.