After years of build-up to prepare U.S. companies for an eventual shift to international accounting rules, the Securities and Exchange Commission equivocated on the topic last week, reminding accountants that adoption is not imminent, and certainly not a foregone conclusion.
Schapiro
In addressing a conference of the American Institute of Certified Public Accountants on Dec. 6, SEC Chairman Mary Schapiro reaffirmed that the agency still plans to make a final decision about adopting International Financial Reporting Standards sometime in 2011—but she also scrupulously avoided dropping any hints of what she and her fellow commissioners may ultimately decide. If the SEC does decide to mandate IFRS adoption, she said, U.S. corporations will get at least four years to prepare for the change.
The SEC staff published a progress report in October on its IFRS “work plan” to gauge all the specific challenges U.S. filers would face in moving to an IFRS world. That report said the staff is still studying how other countries apply IFRS, to get a sense of how IFRS would fit in U.S. capital markets.
Carnall
At last week's AICPA conference, Wayne Carnall, chief accountant in the SEC's Division of Corporation Finance, said the objective of the Work Plan is to focus especially on comparability. The study looks at comparability not only across national jurisdictions but also across industry sectors, he said. “We want to determine if an oil and gas company in the United Kingdom would be comparable to an oil and gas company in the U.S.”
Jill Davis, an associate chief accountant at the SEC, said she is picking through the financial statements of listed and non-listed companies in 20 different countries and 30 different industrial sectors. The sample of companies is derived largely from the global Fortune 500 list, she said, focusing on the largest companies that use IFRS. Only about 20 percent of the companies in the study are currently listed on U.S. exchanges.
SEC staff said the study seeks to analyze the accounting policies companies have developed under IFRS—especially where IFRS relies on management judgment, where IFRS doesn't provide specific guidance, and where companies have chosen to rely on other guidance such as national standards or other literature to develop their policies.
“We can have international standards without the United States, but we can't have global standards without the United States ... We'd have European standards, Chinese IFRS, Japanese IFRS, and we'd be back to where we were 10 years ago.”
—David Tweedie,
Chairman,
IASB
Paul Beswick, deputy chief accountant at the SEC, said he hasn't reached his own conclusion yet about whether and how the U.S. should adopt IFRS, but at the moment he sees a lot of wisdom in a prolonged convergence process. He speculated that the United States could adopt IFRS one standard at a time, which he described as a “condorsement” approach.”
“This approach is worthy of consideration and may work in the U.S. for various reasons,” most notably because the United States has a strong standard-setting process of its own in the Financial Accounting Standards Board, he said. Other countries such as India are trying that approach themselves, he noted. “They've indicated they may not fully adopt IFRS if they believe an exception is warranted,” he said.
Those words are a big step back from the SEC's position in 2007, when it agreed to drop the requirement that foreign filers using IFRS also reconcile their financial statements to U.S. Generally Accepted Accounting Principles. At that time, the SEC was adamant that it would accept IFRS filings only when they adhered to IFRS as written by the International Accounting Standards Board, not national variations of IFRS. “The purpose of the requirement to use the IASB-approved version is to encourage the development of IFRS as a uniform global standard, not a divergent set of standards applied differently in every nation,” the SEC said when it dropped the reconciliation requirement.
Tweedie
Now the soon-to-retire IASB chairman, Sir David Tweedie, openly worries that IFRS will devolve into a diffuse collection of national standards if the United States doesn't get on board with IFRS soon. He and the European Commission have leaned on the SEC to leave national standards behind and join the IFRS camp. “We can have international standards without the U.S., but we can't have global standards without the U.S.,” he said. “IFRS might disintegrate. We'd have European IFRS, Chinese IFRS, Japanese IFRS, and we'd be back to where we were 10 years ago.”
CONVERGENCE PROGRESS
The following excerpt is from SEC Chairman Mary Schapiro's speech before the AICPA on Dec. 6:
... we are focusing on accounting standards and convergence. Because, investors should be able to make accurate comparisons and judgments regardless of an entity's line of business, ownership status or corporate domicile.
And so, the SEC continues to monitor the progress being made by the FASB and the IASB on the convergence of international accounting standards. As expected, the path towards convergence has proved steep and winding at times. But both Boards have responded to the challenges.
FASB and IASB launched intensified efforts to deliberate issues jointly in monthly meetings, which will allow Board members to discuss and resolve issues face-to-face.
They have increased efforts to work through unified project teams, which include members of both Boards.
And, both have committed to periodic public reports on the status of their efforts.
I believe these actions will continue to increase the effectiveness of the collaborative efforts by the Boards ...
Convergence is a top priority for the SEC. But, as both Boards recognize, the resulting standards—in addition to being uniform—must be high-quality improvements over current standards.
Constituent review and comment are important parts of a process that will produce standards that investors need.
Source
Mary Schapiro Statement at AICPA Conference (Dec. 6, 2010).
Still, Beswick struck a cautious tone. The United States has a huge and diverse base of corporations, with an equally diverse variety of cost-and-benefit considerations to consider. “If a change is more gradual, the smaller companies can learn from the larger companies so the cost of implementation could be decreased,” he postulated. “We're serious in considering the broad objectives in a way that minimizes the cost ultimately borne by the U.S. investing public.”
To illustrate where SEC staff still has concerns about IFRS application, Davis said the staff has assembled a “top 10” list of issues it most frequently questions when reviewing the financial statements of non-U.S. companies filing under IFRS. That list includes financial instruments, asset impairments, financial statement presentation, operating segments, revenue, income taxes, PP&E (property, plant, and equipment), employee benefits, provisions and contingent liabilities, and consolidated financial statements. Those are often the same sore spots SEC staff flag when reviewing financial statements filed under GAAP, she added.
Given the ongoing study and the lack of determination around IFRS, Beswick implored accounting firms to be careful about how they portray IFRS to their clients. He said he has viewed sales materials and advertising by large firms touting IFRS capabilities and describing how painful and difficult it will be to adopt IFRS. “The implication is you won't be able to convert without outside help,” he said. “These kinds of scare tactics have the potential to put the profession in a bad light and reinforce some of the myths about conversion to IFRS.”
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