IFRS: The Waiting Is the Hardest Part

After months of waiting for a sense of whether or when the United States might adopt international accounting standards, the Securities and Exchange Commission has finally sent one clear signal: keep waiting, indefinitely.

The SEC staff's final report on a work plan for adopting International Financial Reporting Standards—published on July 13, late in the afternoon of a quiet Friday afternoon—gave a long list of concerns the Commission will need to consider before setting any date for IFRS adoption. It did not, however, say whether IFRS should be adopted at all, or how long of a transition period corporate filers should have.

The starkest message in the entire report was right on the cover page, says Loretta Cangialosi, chairman of the Committee on Corporate Reporting for Financial Executives International. “It basically says the staff thinks there's more work to be done,” she says. “It's just not going to happen all at once.”

Cangialosi herself isn't disappointed with that stance, but says she appreciates the frustration of those who want a clear direction so they can start planning any changes to their financial reporting systems. “The report is a good roadmap forward,” she says. “It gives a lot of information about what needs to happen. It takes a very measured approach, which is what needs to happen to assure the stability of our markets and assure the transition is appropriate. There are still a lot of things that need to be worked out.”

In the staff's view, those issues include continued significant differences between IFRS and U.S. Generally Accepted Accounting Principles, such as where IFRS is underdeveloped compared with GAAP. Governance and funding at the International Accounting Standards Board, which writes IFRS, are another concern, as is the role that the United States would play in developing IFRS in the future. Then there's the matter of how the SEC would regulate and enforce standards written by a body beyond its authority.

Still, corporate accounting departments have endured more than five years of chatter about the United States adopting IFRS some day. Most frustrated are the largest public companies, says Scott Saks, co-chair of the international securities practice with law firm Paul Hastings, since their global operations force them to use IFRS anyway. “For the largest companies working on a multinational basis and probably already using IFRS in different jurisdictions around the world as it is, it costs money to convert everything back to GAAP,” he says.

The persistent uncertainty strains companies as they wrestle with IT investment or employee training plans, says Cindy Fornelli, executive director for the Center for Audit Quality. “There is a lot of uncertainty that continues on into the system for all parties involved because we don't know what the SEC is going to recommend ultimately,” she says. If the SEC were to consider an adoption plan with a long lead time, that would at least alleviate uncertainty, she says. “If the uncertainty would go away, companies could start to plan.”

The CAQ did publish a statement last week praising the SEC staff for finishing the IFRS work plan, yet still calling for IFRS some day to be adopted as the accounting system of the land. (Little surprise there, since the CAQ represents audit firms that stand to make lucrative fees consulting with clients about IFRS.)

Slow Walking

Still, the SEC has plenty of perfectly valid reasons not to decide IFRS adoption today: continued economic uncertainty, a heavy workload of rules to churn out related to the Dodd-Frank Act, fierce pressure from SEC critics to do more cost-benefit analyses of new rules, and the presidential election, are just a few.

Joel Osnoss, a global IFRS leader with Deloitte & Touche, says he's not surprised by the inconclusiveness of the final staff report. “And I don't think there were any surprises as to what the staff viewed as the stumbling points,” he says. “IASB and the IFRS Foundation are on their way to fixing a number of the issues raised in the report, and we can't lose sight of the fact that the Group of 20 nations has said they believe in a global set of accounting standards, and so has the SEC.”

IFRS SUMMARY FINDINGS

Below are some significant themes that emerged from the SEC staff's analysis in the IFRS report.

1. Development of IFRS. Since its inception, the IASB has made significant progress in developing a comprehensive set of accounting standards. The progress includes recent efforts by the IASB, in concert with the FASB, to improve the standards related to the convergence projects, including revenue recognition and lease accounting. The standards that are issued by the IASB are generally perceived to be high quality by the global financial reporting community. However, there continue to be areas that are underdeveloped (e.g., the accounting for extractive industries, insurance, and rate-regulated industries). By comparison, U.S. GAAP also contains areas for which guidance is in need of continued development (e.g., push-down accounting and government grants), but the perception among U.S. constituents is that the “gap” in IFRS is greater.

2. Interpretive Process. One of the important roles of any standard setter is the adequate maintenance of its standards. The IFRS Interpretations Committee (“IFRS IC”) is the interpretative body of the IASB. The mandate of the IFRS IC is to review, on a timely basis, widespread accounting issues that have arisen within the context of current IFRSs and to provide authoritative guidance on those issues. However, the Staff's outreach both domestically and internationally indicates that the IFRS IC should do more to address issues on a timely basis. The IFRS Foundation, the governing body of the IASB, has recently implemented changes that may assist in addressing this concern, but the changes were only recently implemented, and it is unknown at this point whether they will be effective.

3. IASB's Use of National Standard Setters. In order to develop accounting standards that could be incorporated in multiple jurisdictions, the IASB needs to understand the intricacies of a number of distinct domestic reporting and regulatory systems. This challenge can be difficult in the best of circumstances. The IASB has a set of procedures for interacting with national standard setters on individual projects. In addition, a significant number of national standard setters meet with members of the IASB periodically to discuss accounting issues and current IASB projects. However, the IASB should consider greater reliance on national standard setters. The national standard setters could assist with individual projects for which they have expertise, perform outreach for individual projects to the national standard setter's home country investors, identify areas in which there is a need to narrow diversity in practice or issue interpretive guidance, and assist with post-implementation reviews.

4. Global Application and Enforcement. One of the perceived benefits of a single set of high-quality, globally accepted accounting standards is that investors can read a set of financial statements of any company, understand the financial results, and make comparisons to the results of other companies. However, in order to derive many of the key benefits of a single set of accounting standards, it is critical that those standards are applied and enforced on a consistent basis. The Staff conducted a review of financial statements prepared in accordance with IFRS to assess the consistency in application. The results of the Staff's review were consistent with its expectations and confirmed that, while the financial statements reviewed generally appeared to comply with IFRS, global application of IFRS could be improved to narrow diversity. Since IFRS is being incorporated into an increasing number of countries that will have perspectives about the application of IFRS, a greater emphasis will be placed on the Staff to work more cooperatively with regulators in other jurisdictions if IFRS is incorporated into the financial reporting system for U.S. issuers. An increased level of cooperation is important to allow regulators to share views on application and enforcement and, thus, foster global consistency. The Staff believes that the financial reporting community, including the SEC, can be a constructive influence on the consistent application and enforcement of IFRS.

5. Governance of the IASB. According to the Staff's assessment, the overall design of the governance structure of the IFRS Foundation appears to strike a reasonable balance of providing oversight of the IASB while simultaneously recognizing and supporting the IASB's independence. As is typical with a global organization, the IASB does not have a mandate to consider the establishment of standards with the focus of any single capital market. As it relates to considering the needs of U.S. investors and the U.S. capital markets, the Staff believes that it may be necessary to put in place mechanisms specifically to consider and to protect the U.S. capital markets—for example, maintaining an active FASB to endorse IFRSs.

Source: SEC.

Osnoss also says he believes the dip in momentum in the past year or so doesn't mean the United States will never adopt IFRS. “I still think people are committed to getting to a global set of standards,” he says. “It's just a question of how long it will take.”

Keith Peterka, a shareholder with Mayer Hoffman McCann and a member of the IFRS Foundation's SME Implementation Group, isn't as confident. “The SEC has been under a lot of pressure to make a decision,” he says. “But as they do the cost-benefit analysis, we do have a different regulatory and legal environment” in the United States compared to other nations, “and it all comes through in that report. Can we really have one set of high-quality global standards that can be used jurisdiction to jurisdiction? Can it really work?”

Peterka notes that private U.S. companies have had an option under the framework of the American Institute of Certified Public Accountants to adopt IFRS if they believe it better meets their needs. Yet very few, even companies with significant international operations, have elected to do so, he says. “People still want their GAAP,” he says. “It has not been as widely accepted in the U.S. market as one would hope.” If the SEC were to offer major global public companies a similar option, that might drive greater acceptance, he says.

Chris Wright, managing director at consulting firm Protiviti, says companies would be wise to pay less attention to whatever the SEC may do and focus instead on what's happening at the Financial Accounting Standards Board, where major changes are coming for revenue recognition, leasing, and financial instruments, all to make those standards more closely aligned with IFRS anyway.

“Those changes are more near-term, there's more evidence of progress, and they are more likely to have a substantial impact sooner than any action the SEC might take,” he says. In fact, implementation of those standards—whenever that might happen, which isn't clear yet—could prove to be insightful “test drives” for how IFRS would work in the United States, he says.

The continued convergence effort is seen by some as an eventual, long-term path to IFRS. “Regardless of the SEC's decision or delay in making a decision, it's not all or nothing,” says Fornelli. “There can be movement toward convergence and FASB and IASB are committed to that.”

The two boards are committed at least for now, says Hans Hoogervorst, chairman of IASB. But IASB's patience with the United States is wearing thin. In a statement reacting to the SEC report, Hoogervorst reminded the SEC that IASB envisions an end to the “era of convergence” as it pursues a new agenda focusing not just on convergence with U.S. GAAP, but also on other countries' concerns as well.

 “We are revamping our institutional infrastructure to provide for a more inclusive approach to international standard setting,” he said. “This is the right timing to come on board and participate in shaping the future of global accounting.”