In August 2008 the U.S. Securities and Exchange Commission (SEC) published a proposed “Roadmap” for the adoption of International Financial Reporting Standards (IFRS) for U.S. companies, to replace U.S. GAAP (Generally Accepted Accounting Principles) on a timetable that established several milestones to be achieved by 2011 as the basis for moving ahead toward a transition to IFRS beginning in 2014. In 2010 a “Work Plan” was established to determine whether, when, and how the current financial reporting system for U.S. companies should be transitioned to a system incorporating IFRS. With the 2010 Work Plan the SEC affirmed its desire to keep moving toward IFRS adoption. By July 2012, however, the Staff of the SEC had concluded that essential milestones on the road to adoption of IFRS presented a greater challenge than may have been contemplated. In a Final Report issued July 13, 2012 on the SEC 2010 Work Plan for incorporating IFRS into the U.S. financial reporting system the Staff quashed near-term prospects that IFRS would replace U.S. GAAP. Since then there has been little outward progress, and more recently SEC Chair Mary Jo White called upon the SEC’s Chief Accountant to now make a recommendation as to what action, if any, the SEC should take regarding the further incorporation of IFRS into the U.S. capital markets.
On May 7, 2015, speaking at the Baruch College Financial Reporting Conference, SEC Chief Accountant James Schnurr addressed current thinking with respect to IFRS, including the key question whether the SEC is still committed to the objective of a single set of high-quality, globally accepted accounting standards. Although he noted, based on interactions with constituents including investors, auditors, regulators and standard-setters, that there is “virtually no support” to have the SEC mandate IFRS for all
U.S. public companies, and little support for the SEC to provide an option allowing U.S. companies to prepare their financial statements under IFRS, there nevertheless remains support for the objective of a single set of such globally accepted accounting standards.
He further observed that while differences still exist, significant progress has actually been made in “converging” IFRS and GAAP. He also expressed optimism about the future and the prospect of continued collaboration between U.S. and international standards setters. For the foreseeable future, however, Schnurr offered that “continued collaboration” toward converging standards is the only realistic path to further the objective of a single set of high-quality global accounting standards, with the clear implication being that the road set out upon in 2008 has come to the end, and there will be no recommendation that IFRS now be adopted in the United States.
FASB, IASB and “Convergence” of Standards
In the 2008 roadmap, the SEC focused heavily on the on-going “convergence” of accounting standards in a process first undertaken in 2002, when an agreement was reached between the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to work together in the development of the highest quality compatible accounting standards that could be used for both domestic and cross-border financial reporting. Continuing success of the “convergence project” was identified as an essential milestone in the projected adoption of IFRS for some U.S. companies as early as 2014. The convergence project was not, however, aimed at conversion to IFRS as a single standard. It could only eliminate differences between U.S. GAAP and IFRS wherever possible, and set the stage for conversion to a single standard once a sufficient degree of uniformity had been achieved between the standards setters.
Skeptics have suggested that the two sets of standards would never be able to achieve uniformity. In his May 7, 2015 speech, Chief Accountant Schnurr observed that : “[W]hen the topic of IFRS for domestic issuers is raised, the discussion seems to quickly transition to convergence, or lack thereof, often with an adversarial ‘U.S. GAAP versus IFRS’ tone.” And indeed, in its 2012 Report on the SEC Work Plan, the Staff observed that pursuing the designation of IASB standards as authoritative was not supported by the vast majority of participants in the U.S. capital markets. Speaking to the present situation, Schnurr emphasized that while there are opposing positions of FASB and IASB on some standards, there are also standards that have successfully converged, and that generally, convergence efforts have brought standards “closer together” in the last decade. That said, he also recognized that “there are some people who believe the spirit of cooperation has run its course and that we are starting to observe the boards move in different directions.” Though expressing some optimism on continuing progress in convergence, Schnurr also characterized the collaborative relationship between FASB and IASB as being at a critical juncture, and he cautioned:
[T]he convergence projects are entering the final lap of the race, and constituents are going to be anxious to see how those standards are implemented. Further, stakeholders are interested to see how the boards will interact in the future and how much coordination and cooperation will exist.
The focus thus remains on convergence of account standards, an on-going process about which there is obviously some doubt being expressed, whether by the Chief Accountant or participants in U.S. capital markets generally. Without true convergence between U.S. GAAP and IFRS standards, and the implementation and application of converged standards, there is no basis upon which a transition to IFRS by domestic companies is realistic. All things considered, it is reported that in responding to a question from the audience at the Baruch College conference, Chief Accountant Schnurr, stated that plans to mandate IFRS, or to provide companies with the option to use them, probably will not be his recommendation to SEC Chair White.
Under the heading of “Future Prospects.” Chief Accountant Schnurr reflected on more than a decade of FASB and IASB collaboration based on a common objective not only to eliminate differences between IFRS and U.S. GAAP wherever possible, “but also to achieve convergence in accounting standards that stood the test of time.” That has not happened. The 2008 SEC Roadmap led nowhere, and indeed, more than a year ago former SEC Chairman Christopher Cox, under whose leadership the SEC initiatives proceeded, declared that too much time has gone by with little meaningful progress on adoption of IFRS, and “the high tide of American enthusiasm for IFRS has receded.”
Some say now in the wake of Chief Accountant’s Schnurr’s remarks that the death knell for the effort to fully converge IFRS and U.S. GAAP has been sounded. That is unlikely. Developing high quality and unbiased accounting standards that promote transparency and that are viewed as credible by all markets and improve the efficiency of global capital markets is an objective that can only drive continued collaboration. As the Chief Accountant told his audience on May 7, 2015, “continued collaboration is the only realistic path to further the objective of a single set of high quality, global standards.” What seems clear, however, is that any SEC agenda for IFRS adoption will be scrapped for the foreseeable future in favor of support for the continuing work of FASB and IASB on convergence. Whether that effort retains vitality as the SEC now completes the withdrawal of support for adoption of IFRS in the U.S. that began in 2012 is a more difficult question, as Chief Accountant Schnurr himself recognized when he observed that ultimately, how the boards decided to interact in the future is important. That, of course, remains to be seen.