On July 13, 2012, the Office of the Chief Accountant of the Securities and Exchange Commission (SEC) published a final staff report evaluating the implications of incorporating the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB), into the financial reporting system for U.S. companies.
In early 2010, the SEC directed the staff of the Office of the Chief Accountant (the "staff") to develop and execute a work plan to consider specific areas and factors relevant to an SEC determination as to whether, when and how the current financial reporting system for U.S. issuers should be transitioned to a system incorporating IFRS. That work plan was published in February 2010. The final staff report issued this month represents a summary of what the staff has learned in the areas covered by the work plan. Rather than recommend a course of action, the final report describes and compares the characteristics and adoption rates of IFRS relative to standards issued by the Financial Accounting Standards Board (FASB), and lists pros and cons of various methods of convergence.
The report does not recommend wholesale adoption of the IFRS standards based upon consideration of the following factors:
- Influence on Standard Setting. Few jurisdictions have adopted IASB standards without employing measures to ensure the suitability of those standards. Most jurisdictions employ a mechanism which retains some level of control over standard setting, including, for example, standard-by-standard endorsement of IFRS based upon an established threshold.
- Burden of Conversion. Recognizing that any incorporation of IFRS will result in some amount of cost and effort, the staff noted that methods of incorporation other than direct incorporation could lessen total costs required and extend the timeframe for compliance.
- Reference to U.S. GAAP. Staff outreach to industry regulators, legal professionals and others confirmed that U.S. GAAP standards are embedded in numerous laws and regulations and in a significant number of private contracts.
Despite these limitations to fully adopting IFRS, the staff found substantial support for exploring other methods of incorporating IFRS that demonstrate the United States' commitment to adopting a single set of globally-accepted accounting standards.
The remainder of the report summarizes the staff's observations regarding IFRS and IASB, as follows:
- Development of IFRS. IASB has made significant improvements to its standards regarding convergence projects, including revenue recognition and lease accounting. Underdeveloped areas include accounting for extractive industries, insurance and rate-regulated industries. By comparison, U.S. GAAP standards need continued development in the areas of push-down accounting and government grants. When comparing the two standards, the perception among those polled in the U.S. is that the areas needing improvement in IFRS are greater.
- Interpretive Process. The IFRS Interpretations Committee (IFRS IC) is tasked with responding to widespread accounting issues and providing interpretive guidance on IFRS compliance. The staff concludes that "the IFRS IC should do more to address issues on a timely basis."
- IASB's Use of National Standard Setters. The IASB needs to understand the intricacies of each distinct domestic reporting and regulatory system wherein its standards govern. While the IASB meets with national standard setters periodically, the staff concluded that the IASB should consider greater reliance on national standard setters. The staff suggests, for example, that "national standard setters could assist with individual projects for which they have expertise, perform outreach for individual projects to the national standard setter's home country investors ... and assist with post-implementation reviews."
- Global Application and Enforcement. Consistent application of standards is critical to achieving the fundamental goals of globally accepted accounting standards. Such enforcement will require an increased level of cooperation among global and domestic regulators, including the SEC.
- Governance of the IASB. As an international regulatory body, the IASB does not have a mandate to consider its standards with respect to any single capital market. For that reason, "the staff believes that it may be necessary to put in place mechanisms [that] specifically consider and ... protect the U.S. capital markets."
- Status of Funding. The IFRS Foundation is a private not-for-profit organization funded by businesses, nonprofits and governments in fewer than 30 countries. The staff's most significant funding concern is the IFRS Foundation's "continued reliance on the large public accounting firms to provide funds to the IASB."
- Investor Understanding. The report notes that investors currently tend to rely on information provided by issuers, large public accounting firms and publications to understand recent changes to accounting standards. The report indicates that, regardless of the ultimate determination of the SEC regarding incorporation of IFRS, the staff will consider ways to improve investor engagement and education related to the development and use of accounting standards.
The report specifically cautions that it "does not answer the fundamental question of whether transitioning to IFRS is in the best interests of the U.S. securities markets generally and U.S. investors specifically."
SEC Press Release:
SEC Staff Report: