A full year after the Securities and Exchange Commission published its proposed roadmap for adopting International Financial Reporting Standards in the United States, those in the financial reporting world must keep waiting for final word on what the SEC plans to do next with IFRS.
The nation’s top arbiter of all things accounting, Financial Accounting Standards Board chairman Robert Herz, summed up the frustration and uncertainty at a financial reporting conference last week. While speaking on a range of issues, he told the crowd: “The $64,000 question is, `Where are we going in the U.S. towards IFRS?”
Herz
The SEC has vowed to provide clarity on the issue sometime this fall, prompting Herz and others at the Financial Executives International conference to quip that autumn “officially ends at 9 a.m. on Dec. 21.” (Actually, in Washington the winter solstice arrives at 12:47 p.m. this year.) SEC officials at the conference, however, gave few hints about when the agency might announce further plans.
Last year the SEC published its proposed timeline for IFRS adoption, under which a select number of large U.S. companies could start using IFRS as soon as 2011, with most other large companies following suit by 2014. But when the Obama Administration came to power in January, new SEC Chairman Mary Schapiro immediately said she would review the timeline and not be bound by the previous administration’s plans. IFRS has lingered in bureaucratic limbo since then, although the proposal itself has gathered hundreds of public comments.
During a panel discussion at last week’s conference, SEC Chief Accountant James Kroeker said his office is developing a “work plan” to follow up on questions and concerns raised by commenters. Those issues, he added, went well beyond the seven milestones identified in the original SEC roadmap.
If the SEC does move ahead with IFRS adoption, Kroeker assured preparers that they’ll have “ample time to prepare.” That has been a chief fear of IFRS critics. They worry that if they must adopt by 2014, that means they would need to start keeping books in accordance with IFRS in 2012, and they would not have enough time to prepare.
Kroeker
“We understand … that people are going to need time if there is a mandate to do all of the systems work, to invest in the human capital, invest in the systems, and invest in an understanding of IFRS,” he said. The SEC “will consider the needs of preparers, auditors and investors … as we talk about continued progress toward IFRS.”
Questions have also been raised about the independence of the International Accounting Standards Board and its overseer, the International Accounting Standards Committee Foundation. Skeptics in the United States want clear signs that IASB and IASCF won’t be vulnerable to political pressure.
IASB member Patrick Finnegan argued that IFRS adoption in the United State and Japan (which is considering adoption by 2015) would actually reinforce IASB independence, since their political weight would put “extreme pressure on the European Union and the European Commission as a whole to avoid tampering with the rules.”
“The more universal these rules, the better the application and enforcement,” he said.
Don’t Forget Convergence
Meanwhile, FASB and the International Accounting Standards Board have accelerated efforts to converge IFRS and U.S. Generally Accepted Accounting Principles, so that whenever the SEC does decide to adopt IFRS in the United States, the transition will be less onerous.
“We’re just going to continue working with IASB” on key projects previously outlined in a Memorandum of Understanding, Herz said. He did add that both boards face “the riding two horse problem,” as they work on convergence while also maintaining their respective accounting literature. In the United States, Herz noted, demand for more guidance and interpretations “hasn’t abated.”
COMMISSIONER CASEY ON CONVERGENCE
SEC Commissioner Kathleen Casey speaks on the timeline for convergence of U.S. GAAP and IFRS:
As I have already noted, the objective of financial reporting is to provide decision-useful information to investors to enable them to make judgments across a wide variety of investment opportunities. In our global markets, however, investment opportunities are not limited to U.S. companies. As a result, accounting standards that provide investors with highly comparable, decision-useful information about businesses without regard to their domicile will facilitate well-informed capital allocation decisions among investment opportunities across the globe, leading to continued improvements in the efficiency of the global capital markets.
For many years, the Commission has supported and led efforts to develop a single set of high quality accounting standards to support this need of investors for information on companies worldwide. As you know, consistent with the Commission’s 2005 roadmap, in 2007 the Commission eliminated the requirement that foreign private issuers that file in IFRS, as issued by the International Accounting Standards Board (or IASB), reconcile their financial statements to U.S. GAAP. The question now before the Commission is the extent to which the use of IFRS should be permitted or mandated for U.S. issuers.
This goal of providing investors with comparable information about businesses worldwide is the animating principle behind the Roadmap for the Potential Use of Financial Statements Prepared in Accordance with IFRS by U.S. Issuers, which the Commission published in November 2008 (the “Roadmap”). Our consideration of the Roadmap, and the dialogue on global accounting standards, is ongoing. We received over 200 comment letters on the Roadmap from a wide array of stakeholders, and your thoughtful comments are extremely helpful.
As the number of U.S. investors with holdings of securities of non-U.S. companies continues to increase, the Commission and the FASB would be remiss and would fail the needs of investors if we did not continue to support the development of a single set of high quality global accounting standards. The desirability of convergence on certain key accounting standards—particularly those related to financial instruments and other areas relevant to the credit crisis—has been highlighted in a number of forums, including the March 2009 communiqué of the G-20 finance ministers, the Department of Treasury’s June 2009 Regulatory Reform report and the July 2009 Report of the Financial Crisis Advisory Group. The Commission strongly supports the continued convergence efforts of FASB and IASB. The existing convergence targets of these two standard setters pursuant to their 2006 MoU, as updated in September 2008, set the goal of completing several major joint projects by 2011. And less than two weeks ago, the FASB and IASB issued a joint statement reaffirming their commitment to achieving convergence of IFRS and U.S. GAAP, and announcing plans to intensify their efforts to complete the major joint projects described in the MoU.
Going forward, it is crucial that the United States continue to play a leadership role in the support and development of a single set of high quality global accounting standards. It is also my hope and expectation that the Commission will soon articulate the next steps to be taken with respect to the use of IFRS by U.S. issuers—further signaling our commitment to this important goal.
Source
SEC Commissioner Kathleen Casey on IFRS Convergence (Nov. 17, 2009).
FASB and IASB originally agreed to an MOU on convergence in 2006, promising to converge all major differences in their standards by 2011. World leaders have increasingly called on the boards to move more quickly to help fight the financial crisis, most recently at the G-20 summit meeting in Pittsburgh in September. In response, FASB and IASB published updated version of their MOU earlier this month promising to redouble their efforts and complete convergence by June 2011. The boards also agreed that they will meet monthly.
Golden
FASB Technical Director Russell Golden explained during a panel discussion that it was “inefficient” for the boards to work separately and conclude and then reconcile their differences after the fact. Particularly on controversial issues, he said, the boards will meet face-to-face so each can understand the other’s thinking.
“In times past, one board has leap-frogged the other,” he said. “We agreed that the leading board will reconsider its conclusions as the lagging board gets up to speed.”
A converged standard on financial instruments will be a top priority, Golden said. Currently, FASB’s proposed new standard requires far more use of fair-value accounting than IASB’s does.
“We’re going to expose our views, and hopefully … reconcile those differences to arrive at a comparable solution,” he said. “What that might mean is that both numbers—both [amortized] costs and fair value—are relevant, and both may be presented on statement of performance as well as the statement of financial position, or maybe that a comparable solution will be arrived at though disclosure.”
Asked by reporters about the chance that the boards will reach a converged answer, Herz remarked: “I’ve found that in standard setting, you never know where you’re going until you completely get there and go through the process.”
Finnegan
Finnegan said he supports having both fair value and amortized costs presented on the balance sheet, and said he’s “optimistic that will be an element of the converged solution.” He also refuted critics’ objection that displaying fair value prominently creates “unnecessary volatility.”
“That’s the reality,” Finnegan said. “Financial instruments fluctuate … and to hide that information isn’t serving anybody’s needs.”
During a separate discussion at the same conference, Kroeker also shared his views on the issue. “I think there is room for both,” he said. “The difficult challenge is how you appropriately convey both sets of information.”
IASB released its revised financial instruments standard, IFRS 9, last week—notably, without the endorsement of the European Commission. Speaking to reporters, Finnegan said he considered the Commission’s lack of enthusiasm in some respects to be “a silver lining, in that it will allow us to work closely with FASB and finish this time next year with a standard that’s more likely to be … more converged.”
He said the Commission’s major concern relates to the standard’s classification conditions for determining whether an instrument is eligible for using fair value or amortized cost. “That’s something they want the board to continue focusing on,” he said. “They also want to have the benefit of seeing the three phrases of the project finished and evaluate the standards as a package.”
No comments yet