Staff of the Securities and Exchange Commission expect to publish three papers in the coming weeks regarding their study of International Financial Reporting Standards and issues tied to possible adoption of those standards in the United States.

In a conference presentation at Compliance Week 2011, Shelly Luisi, senior associate chief accountant at the SEC, said the staff is developing papers for public study and comment that would examine a possible framework for incorporating IFRS into U.S. financial reporting. Staff members also are developing a comparison of U.S. and international accounting rules and a review of financial statements prepared under IFRS. “We're hoping to get more information out to the public,” she said.

The first paper would look at a possible framework or time line for eventually adopting IFRS in the United States, dividing adoption into three major phases that would occur over five to seven years, Luisi said. It's in line with the “condorsement” approach that SEC Deputy Chief Accountant Paul Beswick described in December, where the SEC would continue to monitor the convergence effort to eliminate major differences in accounting standards, then endorse or adopt international standards individually as the SEC deems them ready for use in the United States. However, Luisi noted the SEC is trying to get away from the “condorsement” phrase that Beswick coined. “We're trying to stick to words that are in the dictionary,” she said.

Luisi said the SEC would focus the first phase on standards that could be adopted with a straightforward cut-over to the international standards. The second phase would focus on the major accounting standards that are in revision now as the Financial Accounting Standards Board and the International Accounting Standards Board rewrite rules for revenue recognition, leasing, financial instruments and insurance, among others. The final phase would focus on any remaining standards not adopted in the first two phases.

The publishing of a paper for comment doesn't necessarily mean the SEC is fully sold on the transition method, Luisi said. “This is just one method of transition,” she said. “There are other methods of incorporating that are still very much under consideration, but this paper would explain this approach a little better so we can have a dialogue about it.”

SEC staff members also are working on an updated, detailed study of where there are still differences between U.S. Generally Accepted Accounting Principles and IFRS, Luisi said. With the study, the staff is working to determine whether IFRS standards are of “adequate quality” to meet U.S. financial reporting needs, she said.

Finally, the staff is working on a detailed analysis of IFRS filings to get a sense of the quality of accounting produced under IFRS, according to Luisi. The study doesn't look exclusively at U.S. listed companies that are using IFRS, but it does limit the analysis to financial reports written in English. The study focuses on the comparability of companies that report under IFRS, and it seeks to determine what kind of choices companies are making when IFRS gives them alternatives.

Mark Shannon, an associate chief accountant in the SEC's Division of Corporation Finance, said at the conference the staff's focus these days in reviewing financial statements is heavily linked to loss contingency disclosures, income taxes, and segment and related disclosures. In loss contingencies, the staff is responding to a request from the FASB to more rigorously enforce compliance with existing accounting rules so the accounting rule maker can better determine whether the rules are adequate or need revision. The staff is flagging plenty of financial statements where reasonably possible losses are not fully disclosed, said Shannon, or where reported actual losses were not foretold as might be expected in an earlier period.

SEC staff also is looking for problems in tax accounting, especially inconsistencies that would suggest companies might be sheltering U.S. income in offshore subsidiaries to avoid paying U.S. income tax on those earnings. As an example, said Shannon, many companies are reporting very low effective tax rates for non-U.S. subsidiaries while also reporting little or no deferred tax associated with those subsidiary earnings. “We've been asking a lot of questions about the impact of repatriation on liquidity,” said Shannon, especially focusing on the total amount of cash and short-term investments held by those subsidiaries where companies have said those earnings were permanently reinvested.

Valuations around deferred tax assets also are scrutinized, said Shannon. The assumptions companies describe regarding deferred tax assets and whether they should be marked down with a valuation allowance should be consistent with assumptions described elsewhere, he said, such as management discussion and analysis, conference calls with investors and analysts, and other areas of accounting such as impairments.

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