SEC Delays IFRS Plans, While Companies Grow Impatient

Corporate America has waited all year for an answer from the Securities and Exchange Commission about when and how the United States might eventually adopt International Financial Reporting Standards here at home.

Well, keep waiting.

The SEC made clear at a conference of the American Institute of Certified Public Accountants this month that it's not prepared to make a decision. Chief Accountant James Kroeker said the staff is developing a plan for how the SEC might incorporate International Financial Reporting Standards into U.S. capital markets and is drafting a report for commissioners to consider. That work will take a few more months, Kroeker said, followed by another period of time (nobody knows how long) while the SEC commissioners decide what to do.

Meanwhile, the patience of some issuers is growing thin. “The lack of certainty is very costly,” said Susan Callahan, manager of accounting policy and special studies at Ford Motor Co. “It is one of our biggest change management hurdles,” she said during the same AICPA gathering.

Ford is among a group of large corporations—including Chrysler, Kellog, Bank of New York Mellon, and others—pressing the SEC to allow them to adopt IFRS even before any possible mandate or transition for the rest of Corporate America. They argue that global companies need to communicate in a common language and that U.S. companies need some certainty on the IFRS question. They're also calling on the SEC to give registrants flexibility to manage a transition in a way that best suits their operational needs. For global conglomerates, that means an option to adopt as soon as practically possible.

Ford is made up of approximately 475 separate legal entities around the world, Callahan said; many already follow IFRS in other countries. The company sees potential for significant business process improvement by putting all 475 separate entities onto the same accounting platform.

As an example of the operational issues, Callahan said Ford recently entered into a joint venture in Russia. “Until we can use IFRS, U.S. companies can be viewed as less attractive business partners from the get-go,” Callahan said, because everyone else at the table reports under IFRS. The prospective joint venture partners have to weigh the hassle of taking on an entity that reports under U.S. Generally Accepted Accounting Principles for an undefined period of time, she said. “For competitive reasons, the benefits of moving to IFRS will far outweigh the costs,” she said.

The SEC is moving slowly as it weighs the benefits to companies like Ford, against concerns that the United States would have less influence over its accounting system. Kroeker gave some hints, however, about what kind of plan the staff is likely recommending, based on his vision for what a “strong and lasting framework” would look like.

That plan would demonstrate support for global standards, but provide “both in fact and in substantive operation clear U.S. authority” over standards that would apply to U.S. capital markets. It would secure “a strong U.S. voice” in the further development of global standards, and it would consider “whether to retain U.S. GAAP as the basis for U.S. financial reporting.”

Those criteria fit neatly with an approach recently offered by the Financial Accounting Foundation, the overseer of the Financial Accounting Standards Board, which writes accounting rules for use in the United States. The FAF plan supports the broad concept of “condorsement,” a system proposed by the SEC staff last May where international standards are gradually adopted in the United States as FASB nudges GAAP rules to be more and more like IFRS. But it would also fix the process by converging GAAP and IFRS on important matters, and then still have FASB decide how to proceed on smaller concerns.

“The lack of certainty is very costly. It is one of our biggest change management hurdles.”

—Susan Callahan,

Manager of Accounting Policy and Special Studies,

Ford Motor Co.

FASB on Convergence

Leslie Seidman, chairman of FASB, said an indefinite convergence process is not viable, politically or practically. Convergence is a good way to wrap up the big changes that are in the works for revenue recognition, leasing, insurance, and financial instruments, she said, but the process is too difficult administratively and technically to remain effective in the long run.

Instead, Seidman explained, FAF says the SEC should retain the U.S. GAAP label and charge FASB with endorsing international standards for use in the United States while working with the International Accounting Standards Board on further refinements. FASB would continue to set standards in the United States where international standards are silent or inadequate for U.S. purposes.

“It is not in the best interest of our investors to withdraw GAAP in areas where there are no clear accounting standards under IFRS,” she said. “That means we would be following U.S. GAAP in some areas until IASB takes on a project and sets a new standard for the world … I would envision that when we think the IFRS standard is of the same quality as U.S. GAAP, we would propose adopting the IFRS standard.”

KROEKER ON ACCOUNTING STANDARDS

Below is an excerpt from SEC Chief Accountant James Kroeker's speech on global accounting standards:

[T] staff has at this point completed or is in the final stages of completion of what I would consider the majority of the “field work” related to the Work Plan. In that regard, the staff recently issued two progress reports in the form of Staff Papers. The first is a comparison of the differences between U.S. GAAP and IFRS. The second is an analysis of the use of IFRS in practice around the globe. I am very pleased by the work of the staffs in the Division of Corporation Finance and OCA on these papers, and I encourage you to study these two reports, both of which are available on the SEC's Website. Shelly Luisi and Nili Shah will walk you through the highlights later today.

We remain committed to completion of a final comprehensive report on our Work Plan, consistent with the high caliber of reporting embodied in our previous progress documents. In that regard, the staff will need a measure of a few additional months time to produce a final report. At the same time, the staff is in the process of developing an approach for Commission consideration. Given the number of things on our agenda, I cannot give you a precise schedule. I can tell you that we will do so carefully and thoughtfully, being guided by an ideal that produces the maximum benefit for the investing public and the capital markets.

I can also tell you that I am encouraged about the potential prospects of IFRS incorporation, particularly as I consider and reflect on the input received on the May staff paper exploring a potential incorporation approach.

However, as with the completion of the MOU projects, I believe that the passage of a grain of sand in the hour glass of time is not nearly as critical as ensuring that we take this opportunity to establish a strong and lasting framework. A framework that I believe should:

Demonstrate a high level of support for U.S. commitment to continued development and use of global consistent high quality accounting standards;

Provide both in fact and in substantive operation clear U.S. authority over standards applicable in the U.S. capital markets;

Provide for and facilitate a strong U.S. voice in the process of establishing global accounting standards;

Be responsive to the economic and other impacts of change;

Consider whether to retain “U.S. GAAP” as the basis for U.S. financial reporting, thereby mitigating the costs and complexity of introducing a new set of standards under regulatory regimes, contractual documents, and U.S. laws under which compliance with U.S. GAAP is often specifically contemplated.

Source: SEC.

Seidman urged a more cautious transition to IFRS partly because of what the SEC staff discovered when it studied the application of IFRS in countries where it is already required, described in another staff paper published in November. The staff found financial statements prepared under IFRS generally comply with the standard, but reflect inconsistencies across different countries as well as some problems with transparency and clarity. “I would seriously question the cost-benefit of switching our country to a standard that we know is not applied consistently around the world,” she said.

Han Hoogervorst, chairman of IASB, agrees that long-term convergence isn't practical and welcomes U.S. consideration of an endorsement approach—to a point. “The key to making this model work is setting an appropriately high threshold for non-endorsement,” he said. “If we end up with carve-outs left and right, the gains of adopting IFRS will remain elusive.” Ideally, he said, the SEC would set a clear timeline for completion of an initial endorsement process and at the same time allow an early adoption of IFRS for “a number of U.S. companies.”

D.J. Gannon, national leadership partner for IFRS regulatory and public policy at Deloitte, says the pressure from companies like Ford highlights the difficult issues the SEC must balance. “Whether you call it convergence or endorsement, how do you make this whole process cost beneficial for companies?” he asks. “A company like Ford that is global in nature and raising capital in other parts of the world is very different from a domestic-only footprinted company.”

Another Big 4 partner, Lisa Filomia-Aktas at Ernst & Young, says the best action companies can take now is simply stay informed and continue to follow FASB's work with the IASB on the major changes taking shape for revenue recognition, leasing, and financial instruments.  “Do a high-level assessment of what these rules would mean to you so you can comment back to FASB and IASB on what makes sense,” she says. “There are going to be a lot of exposure drafts coming out, so it's very important to understand what those proposals would mean.”