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FINANCIAL REPORTING / INTERNATIONAL

AICPA: Allow U.S. Companies the IFRS Option Now

 

October 6, 2011

AICPA President and CEO Barry Melancon called Thursday on the SEC to immediately allow U.S. companies the option of using IFRS.

 

In a speech at the AICPA/IFRS Foundation Conference on International Financial Reporting in Boston, Melancon said having the option of using IFRS would be “an effective way for U.S. companies, if they so choose, to level the playing field with their international competitors.”

 

Melancon reiterated many of the points made in an AICPA comment letter sent to the SEC in August regarding the commission’s staff paper, Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers. The SEC continues to weigh a possible framework for incorporating IFRS into the U.S. financial reporting system.

 

As that debate continues, a “tremendous disparity” exists between global companies based in the United States, and global companies based virtually everywhere else in the world, Melancon said.

 

The number of U.S. companies that would initially choose to use IFRS would be small, he predicted, thus there would not be a significant impact on system-wide readiness for whatever the SEC decides. “But it would allow us a window to see what the world will look like if the U.S. joins the rest of the world by using a converged or endorsed IFRS rather than exclusively U.S. GAAP,” Melancon said.

 

What follows are additional excerpts from Melancon’s speech:

 

The AICPA stated its views very clearly in the comment letter on the staff paper we sent to the SEC. As a starting point, the AICPA accepts the concept of an endorsement approach for the incorporation of IFRS into the U.S. financial reporting system. We also support the retention of FASB as the U.S. standard setter that will facilitate the incorporation of IFRS into U.S. GAAP. Those are political realities.

 

There are, however, a few practical challenges. First, the staff paper suggests that an endorsement approach would give the SEC and FASB the ability to modify or supplement IFRS, subject to an established protocol. This ability, if applied imprudently, will not result in dual IFRS and U.S. GAAP compliance. It could very likely result in substantial differences from IFRS as used in other developed nations. For this reason, we hope the threshold for modifications to IFRS is set high so that, as stated in the Work Plan, modifications would be a very rare occurrence.

 

We also believe that a long, drawn-out process of endorsing on a one-by-one basis IFRSs not subject to standard setting would be costly, disruptive and create confusion for many constituents. For many companies, particularly smaller issuers, constant changes to accounting requirements over a period of several years would create considerable hardship. That’s why we recommend an endorsement process that would incorporate specific IFRSs not subject to standard setting into U.S. GAAP at one point in time, with a date certain for adoption. This is, of course, after completion of the Memorandum of Understanding priority projects.

 

If IFRS is to serve as a basis for U.S. issuers’ financial reporting, there must also be changes in the auditing and regulatory environments. As we all know, IFRS is less rules based whereas current U.S. GAAP is more rules based. Therefore, second guessing of reasonable professional judgments of preparers and auditors would need to be minimized for IFRS to be viable here.

 

One final thought about the SEC staff Work Plan. The framework as outlined would also directly affect U.S. GAAP for private entities, so this issue needs to be addressed as well. For private companies, we support the recommendation of the Blue-Ribbon Panel on Standard Setting for Private Companies to establish an independent board under the Financial Accounting Foundation that would develop exceptions and modifications to U.S. GAAP. If such a board were established, the FASB could more effectively focus on the endorsement of IFRS into the U.S. financial reporting system and the public company concerns that drive IFRS and GAAP accounting standards. Therefore, we are profoundly disappointed that earlier this week FAF released a proposal that does not include an autonomous board to set changes in GAAP for private companies.

 

These are complicated issues, and any kind of phase-in will take years. No matter what the SEC decides, a tremendous amount of education and training concerning IFRS is going to be needed. That includes IFRS-based financial statements, of course, but also IT systems, stock compensation programs, and tax and auditing issues. We were gratified to see that the SEC has said it would give companies at least four years to comply if IFRS were mandated. But in addition to transition time, dates certain are needed. From the inception of IFRS discussions in the U.S., we have and continue to be a strong proponent for dates certain. As the SEC decides on the work plan issues, the commission should include dates certain for applicability so that preparers and auditors can plan for the transition effectively and efficiently.

 

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