Investors, Issuers, and Regulators Discuss IFRS

The Securities and Exchange Commission convened a day-long summit last week on International Financial Reporting Standards, to discuss whether and how the U.S. accounting system should be moved to the international model and to hear the views of top stakeholders on the topic.

Panels of investors, issuers, and other regulators gave their thoughts on the benefits and drawbacks of moving to IFRS, a potentially enormous shift that would transform financial reporting for U.S. public companies.

A vast majority of panelists said they supported some sort of move to a single set of high-quality, global financial reporting standards, although even the supports still had plenty of practical concerns for adopting IFRS in the United States. Chief among them: the governance and funding of the International Accounting Standards Board, which oversees the development of IFRS; the range of ways in which IFRS is applied and enforced around the world; the cost and usefulness of IFRS to some smaller issuers; and the timeline and manner of adoption.

The SEC has pondered the wisdom of adopting IFRS for several years. The idea was popular during the Bush Administration, when the SEC even allowed foreign private issuers that use IFRS to file financial statements here without reconciling those statements to U.S. Generally Accepted Accounting Principles.

The SEC under the Obama Administration, however, has been much more tentative about IFRS. SEC Chairman Mary Schapiro has promised that the Commission will take a final vote on the issue this year, but even an affirmative vote would be followed by years of phasing in such a dramatic change to corporate accounting.

The first panel, “Investor Understanding and Knowledge of IFRS,” included executives from about a half dozen firms, including Standard & Poor's, Morgan Stanley, and Allstate, and organizations such as the California Public Employees' Retirement System. Despite the title, much of the session focused on the merits of adopting IFRS and various ways that task could be accomplished.

Gregory Jonas, a managing director at Morgan Stanley, said he supported the  “condorsement” model outlined by SEC Deputy Chief Accountant Paul Beswick last December. Under this approach, U.S. GAAP would continue to exist. At the same time, the Financial Accounting Standards Board, which oversees GAAP, would work with IASB to converge U.S. standards to IFRS over time.

Jonas argued that U.S. investors will only encounter IFRS more often over time, and the only way to maintain influence over the standards is to commit to IFRS in some form. “The U.S. can't forever expect special status,” he said.

At the same time, Jonas said, condorsement guards against the risk of IFRS failure by keeping the U.S. standards in place. It also allows for U.S.-specific interpretation when needed—to accommodate a change in tax law, for example.

Kevin Spataro, a senior vice president of Allstate, said that his company also supports a single, global accounting framework and that IFRS could fit the bill. Still, IASB needs to adopt the processes that have made FASB an effective standard setter, he said. “The cornerstone is having a process that is formal, interactive, transparent, and continuous.”

Panelists also expressed doubts that IFRS would lead to a truly universal accounting standard. They worried that even with a single standard, countries would develop their own interpretations of IFRS and enforcement approaches, leading to differences between financial statements. “I think that is a real risk,” said David Larsen, a managing director at consulting firm Duff & Phelps.

 “It's not perfect,” Jonas admitted, “ but some improvement is better than no improvement.”

The Small-Company Question

A second panel consisted of representatives from smaller companies and regional accounting firms, who questioned whether adopting IFRS would be worth the effort to them. While most acknowledged the theoretical benefit of a single global set of standards, several said their firms would not gain much from moving to one.

“I get that one set of standards makes sense,” said Shannon Greene, chief financial officer of Tandy Leather Factory, a $60 million company. But at the same time, “I see no benefit to IFRS at all [for my company].”

“Why does one industry have a different concept than another? Changing to IFRS provides an opportunity for a 'do-over.'”

—Bill Yeates,

Partner, National Director of Auditing & Accounting,

Hein & Associates

David Grubb, a partner at accounting firm Plante & Moran, said that while his firm supports the overall goal, the costs of compliance, especially for smaller firms, must be considered.

Panelists were divided on just how to make the switch if a decision to move to IFRS was made. Charlie Rowland, chief financial officer of Viropharma, a $439 million biotech firm, supported the “Big Bang approach,” where companies convert to IFRS reporting all at once. He said his staff could survive six months of extra work and long days to make a Big Bang approach work; stretching conversion over several years, however, would amount to “death by increments,” he said.

That being said, Rowland still favored delaying the transition for several years. He argued that the SEC shouldn't set a date for adoption until FASB and IASB wind down their current project of converging several major accounting standards (which, in theory, will be done by the end of this year). Once that's done, he said, companies will have a better sense of how much a Big Bang conversion will cost. The extra time will also allow companies to educate workers, managers, boards, and investors about the effects of IFRS adoption. 

Then there was the question of whether some companies should be allowed to adopt IFRS early. Daniel Beck, corporate controller at Bank of the West, supported early adoption, saying it would save costs for businesses that currently report under both sets of standards. Bill Yeates, national director of auditing and accounting at Hein & Associates, countered that early adoption would confuse users of financial statements. In addition, it would require training people under two standards.

FASB CONVERGENCE IDEAS

The following excerpt is from FASB's “Work Plan for the Consideration of Incorporating IFRS Into the Financial Reporting System for U.S. Issuers”:

FASB's participation in IASB's standard-setting process could occur in several ways, including:

providing input into IASB's strategic planning of the global standard-setting agenda, including setting project priorities;

assisting IASB, as needed, in carrying out specific standard-setting and research projects;

participating in the development of illustrative examples and implementation guidance in coordination with IASB;

providing examples of and insight into U.S. perspectives as IASB develops standards;

helping to address implementation and interpretation issues by identifying them and undertaking research in support of the IFRS Interpretations Committee;

playing a central role in the evaluation of standards on a post-implementation basis from the perspective of U.S. capital market participants and more broadly assisting IASB in evaluating the effectiveness of standards (post¬-implementation reviews);

assisting in communications between IASB and U.S. constituents to facilitate widespread dissemination of information about IFRS and communication of U.S. constituents' concerns to IASB;

participating in meetings with other national standard setters;

encouraging participation by U.S. constituents in the development of new and revised IFRSs; and

developing the expertise and experience of individuals for participation in global standard-setting activities.

FASB would continue to promulgate U.S. GAAP primarily through its endorsement of standards promulgated by IASB. Under the framework, due to FASB's participation in IASB's standard-setting process, FASB should be in a position to readily endorse (i.e., incorporate directly into U.S. GAAP) the vast majority of IASB's modifications to IFRS. However, FASB would retain the authority to modify or add to the requirements of the IFRSs incorporated into U.S. GAAP, similar to other jurisdictions, and such U.S.-specific modifications would be subject to an established incorporation protocol. Such a protocol could entail FASB determining whether IASB's modification to IFRS (either by means of issuance of a new standard or amendment of an existing standard) met a pre-established threshold—for example, a threshold that incorporates the consideration of the public interest and the protection of investors. If IASB's modification reaches that threshold, FASB would incorporate fully IASB's adopted standard into U.S. GAAP. If FASB concludes to the contrary, in incorporating the standard, it would need to determine whether it should modify the requirements of the standard, retain relevant U.S. GAAP, or find an alternative solution. Before making any modifications, FASB could discuss the situation with other national standard setters to understand their perspectives on the issue and the approaches they have taken for endorsement of that standard in their respective jurisdictions.

Source: FASB Work Plan for Incorporating IFRS.

Yeates brought up some of the shortcomings of GAAP, such as the many rules that govern revenue recognition. “Why does one industry have a different concept than another?” he asked. Changing to IFRS provides an opportunity for a “do-over,” he said.

Spillover Effect

The third panel focused on the larger regulatory environment and how a change to IFRS would affect other regulatory agencies and activities. Participants hailed from the Federal Energy Regulatory Commission, the National Association of Insurance Commissioners, the National Association of State Boards of Accountancy, the Office of the Comptroller of the Currency, and the Federal Housing Finance Agency. All said that a move to IFRS would affect their own activities.

For example, Bryan Craig, chief accountant and director of audits at FERC, said that his commission, which is charged with setting rates that public utilities and others charge their customers would need to determine what effect the new standards might have on those rates (if any).

Gaylen Hansen, a director at large with the National Association of State Boards of Accountancy, said he opposed adopting IFRS. “The case has not been made that IFRS is better than GAAP,” he said. “I would ask to you to reconsider the current proposal.”

Kathy Murphy, chief accountant at the OCC, said that “the agencies overall support one set of global, quality standards.” But since those agencies oversee many businesses that aren't public, she worried that that a move to IFRS could lead to one reporting structure for public firms and another for private firms. “We want one set of U.S. standards,” she said.

Rob Essen, a senior policy fellow with the National Association of Insurance Commissioners, also raised the issue of private company reporting. He said that NAIC currently reviews changes to GAAP and either accepts, modifies, or rejects them. That process probably would continue should a move to IFRS proceed. The shift would be significant, however, and the NAIC would have to consider whether private insurance entities would move to IFRS.