SEC: Still a Ways to Go on IFRS

Good news for overworked accounting departments out there: The Securities and Exchange Commission is just as overworked as you and won’t be ready to push forward with adopting International Financial Reporting Standards any time soon.

The SEC staff has published its first progress report on its plan for evaluating the effect of incorporating IFRS into the financial reporting system for U.S. issuers. The report’s details show that the staff has been busy carrying out the “Work Plan” outlined by the SEC earlier this year, but still has a long way to go.

The agency is supposed to make decisions in 2011 on whether, when, and how to adopt IFRS for U.S. companies. Those decisions will hinge on completion of the Work Plan unveiled by the staff in February and the status of projects by the Financial Accounting Standards Board and the International Accounting Standards Board to converge their standards. The SEC has promised, however, that if it ultimately does decide to adopt IFRS reporting for U.S. companies, that won’t start until at least 2015.

A crucial question, then, is whether the Work Plan will be finished early enough to give SEC leaders time to ponder their final decision. The answer right now: “Many of the staff’s efforts are currently in process and are not expected to be completed until 2011, particularly as they relate to consideration of the sufficient development and application of IFRS for the U.S. domestic reporting system and the independence of standard setting for the benefit of investors,” the report states.

The Work Plan also covers four other areas to help the staff evaluate the scope, timing, and approach to changes necessary to incorporate IFRS: investor understanding and education regarding IFRS; examination of the U.S. regulatory environment that would be affected by a change in accounting standards; impact on issuers, including changes to accounting systems and contractual arrangements, corporate governance considerations, and litigation contingencies; and human capital readiness.

The staff is analyzing three factors in its evaluation of whether IFRS is sufficiently developed to be the single set of globally accepted accounting standards for U.S. issuers: comprehensiveness, its ability to be audited, enforceability, and comparability of IFRS financial statements within and across jurisdictions.

An ongoing concern highlighted by SEC officials has been the funding of the IASB oversight body. According to the report, the effort to achieve long-term funding commitments for the IFRS Foundation is not complete. “Based on current existing funding commitments, the IFRS Foundation has indicated that it could be in an operating deficit for fiscal year 2010 … and could expect a $4 million funding ‘gap’ with respect to its self-determined contribution target for the United States,” the report states. So far, fewer than 25 percent of the countries that have incorporated IFRS in some form have agreed to contribute to the IFRS Foundation. The two largest contributors in 2009 were the United States and Japan—neither of which has formally incorporated IFRS into their domestic financial reporting systems.

As part of the Work Plan, the staff is also looking at the process used by other jurisdictions to implement IFRS. While some countries adopt IFRS as issued by IASB without approval by any local body, most have taken a “national incorporation” approach, which the report says allows for more flexibility in addressing country-specific issues, but could result in differences in application. Those countries fall into two camps: those that converge their local standards with IFRS without a firm commitment to adopt it fully (which China is doing), and those that employ some form of “local endorsement” (which the European Union is doing).

Multiple Moving Parts

Schapiro

“When looking at the bigger picture, the most significant work over the next couple of years will be implementing the ‘converged’ standards—in particular, the standards on revenue, leasing, and financial instruments.”

—D.J. Gannon,

Deputy Managing Partner for U.S. Regulatory and Public Policy,

Deloitte

As the SEC states in its report, the timetable for a green light to use IFRS depends heavily on convergence efforts by FASB and IASB. The boards have recently modified the timetable and priority of standards on their joint agenda, delaying some projects, which could be a setback for IFRS readiness. To give stakeholders time to provide input, the Boards plan to publish a number of anticipated major exposure drafts in phases, delaying completion of certain projects beyond their original June 2011 target date. However, SEC Chairman Mary Schapiro has said the adjustments shouldn’t impact the staff’s analyses under the Work Plan.

Joint projects still slated for completion by June include financial instruments, revenue recognition, leases, presentation of other comprehensive income, fair-value measurement, balance sheet netting of derivative and other financial instruments, and consolidation of investment companies. Projects on financial instruments with characteristics of equity, financial statement presentation, and presentation of discontinued operations have been delayed. The boards haven’t yet determined the timing of projects related to the consolidation of voting interest entities and derecognition.

Gannon

“When looking at the bigger picture, the most significant work over the next couple of years will be implementing the ‘converged’ standards—in particular, the standards on revenue, leasing, and financial instruments,” says D.J. Gannon, deputy managing partner for U.S. Regulatory and Public Policy at Deloitte.

WORK PLAN EFFORTS

The following excerpt from the SEC’s Staff Progress Report discusses SEC staff efforts toward converging IFRS and U.S. GAAP:

The Work Plan noted that the Staff will analyze how to promote investor understanding of IFRS, as well as the existing mechanisms used to educate investors about changes in the accounting standards by:

Conducting research aimed at understanding U.S. investors’ current knowledge of IFRS and preparedness for incorporation of IFRS into the financial reporting system for U.S. issuers.

Gathering input from various investor groups to understand how investors educate themselves on changes in accounting standards and the timeliness of such education.

Considering the extent of, logistics for, and estimated time necessary to undertake changes to improve investor understanding of IFRS and the related education process to ensure investors have a sufficient understanding of IFRS prior to potential incorporation.

The Staff is currently researching and analyzing each of these three components. In August, the Commission issued a request for comment that solicits public comment to aid in the Staff’s analysis of these components. The comment period ended on October 18, 2010, and the Staff is reviewing the input from the comment letters received and determining the nature of further public input. In addition, the Staff will consider whether further outreach with investors and others, including those who responded to the

request for comment, would facilitate the Staff’s understanding of investors’ perspectives on these three components.

Additionally, through outreach to foreign regulators, the Staff intends to consider foreign regulators’ experiences with investor perspectives on the three components described above.

The Staff has received initial feedback that indicates that U.S. investor understanding and education has begun to develop, at least in certain instances, with respect to IFRS.

Source

Staff Progress Report on Converging IFRS and GAAP (Oct. 29, 2010).

Understanding the broader impacts of those standards, including the implications of financial information systems, will be important, he says. “Beyond that, addressing the “lingering” differences between IFRS and U.S. GAAP should be less in scope for many companies.”

An earlier proposed roadmap had floated a mandate with an early adoption option for some companies, but the SEC tabled the early adoption concept after issuers balked at the idea of making the investment to switch to IFRS without certainty about whether the SEC would later require it.

Ready and Unwilling

Apparently, that attitude hasn’t changed much. In a recent survey, the overwhelming majority of financial executives said their companies could be ready for a move to IFRS, but wouldn’t switch until mandated, even if early adoption was allowed.

“Company executives obviously are working to get their arms around IFRS,” says Janice Patrisso, KPMG partner and national leader for IFRS.

Among those polled, 57 percent say convergence of U.S. GAAP and IFRS is the best approach to IFRS adoption; 30 percent would like to see a “date certain” established for U.S. adoption of IFRS.

Patrisso says the challenges companies would face in moving to IFRS will differ, depending on the organization, structural make-up and complexity, geographic reach, industry, and culture.

The SEC didn’t indicate when the staff might issue another progress report.

In the meantime, Patrisso says corporate executives should closely monitor the convergence activities of IASB and FASB, as well as SEC consideration of incorporating IFRS into the U.S. reporting regime. They should also consider responding to requests for comment to help the agency in its evaluation. “The changeover to IFRS will not be just an accounting issue,” she says. “It could affect other corporate processes and IT supporting frameworks, and therefore it’s important that companies monitor progress on the IASB-FASB convergence agenda, as well as the SEC progress on its work plan.”