Financial Reporting

  The AICPA recommended to the SEC that U.S. public companies be allowed the option of adopting use of IFRS as the commission weighs a possible future framework for incorporating IFRS into the U.S. financial reporting system.


The SEC requested the comments when it issued its staff paper, Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers, on May 26. The staff paper is available at


“Whether or not the SEC decides to incorporate IFRS into the U.S. financial reporting system through an endorsement/ convergence approach, we believe U.S. issuers should be given the option to adopt IFRS as issued by the IASB,” Paul V. Stahlin, then-AICPA chairman, and Barry C. Melancon, AICPA president and CEO, said in a four-page letter to the SEC.


“An adoption option would provide a level of consistency in the treatment of U.S. companies and foreign private issuers that report under IFRS that does not exist today, and would facilitate the comparison of U.S. companies that elect IFRS with their non-U.S. competitors that use IFRS. Furthermore, giving U.S. companies an option to adopt IFRS as issued by the IASB would be another important step towards achieving the goal of incorporating IFRS into the U.S. financial reporting system. Anecdotal evidence suggests that the number of companies that would choose such an option would not be such that system- wide readiness would become an issue,” Stahlin and Melancon said.


The SEC’s request for comments on incorporating IFRS into the U.S. financial reporting system sets the stage for a possible decision by the commission later this year that may set parameters for convergence of IFRS with U.S. GAAP and a phased timeline for U.S. adoption of IFRS.


The comment letter, which is available at, notes several issues to address in conjunction with the adoption of IFRS:


Endorsement. The Institute supports an endorsement approach that would retain FASB as the “U.S. standard setter to facilitate the incorporation of IFRS into U.S. GAAP.” If the SEC adopts an endorsement approach that allows the SEC and FASB to modify or supplement IFRS, the letter recommends “that the threshold for modifications to IFRS be set high so that, as stated in the Staff Paper, modifications would be a rare occurrence.”


Prospective application. The Institute supports prospective application of the endorsed standards “wherever possible,” but the comments note that this is “incompatible” with IFRS 1, First-time Adoption of International Financial Reporting Standards, which requires retrospective applications with certain specific exceptions and exemptions. This would require “the SEC and its staff to work with the IASB to accommodate the needs of U.S. issuers in making the transition to IFRS.”


Transition. The Institute raised concerns about the transition plan outlined by the SEC, noting that a long, drawn-out process of endorsing standards would be costly and disruptive, and would 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.


Regulatory environment. Any transition to IFRS would be a “comprehensive undertaking” that would require “changes in the auditing and regulatory environment.” The Institute encourages the PCAOB to seek “greater harmonization of its auditing standards with International Standards on Auditing issued by the International Auditing and Assurance Standards Board.”


Role of FASB. The Institute said FASB “should be focused on working with the IASB in the development of high-quality financial reporting standards and on developing authoritative implementation guidance and interpretations with the IASB.” But the letter expresses concern that educational guidance should not be the board’s “central mission” since it may be viewed as authoritative when it is not intended to be seen as such. “Implementation or interpretive guidance should be developed as part of the standard setting activities with the IASB.”


Private companies. The letter also restated the Institute’s support of the recommendations of the Blue-Ribbon Panel on Standard Setting for Private Companies, which issued a report in January (available at that called for establishing a separate board for developing exceptions and modifications to current U.S. GAAP for private companies. “If a separate board was established, FASB could focus on the endorsement of IFRS into the U.S. financial reporting system for public companies in a more effective and efficient way.”



  FASB issued Accounting Standards Update (ASU) no. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, that the board said simplifies how public and nonpublic entities test goodwill for impairment.


The amendments permit an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test described in FASB Accounting Standards Codification Topic 350. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The more-likely-than-not threshold is defined as having a likelihood of more than 50%.


The guidance also includes examples of the types of factors to consider in conducting the qualitative assessment.


Under current practice, entities are required to test goodwill for impairment, at least annually, by first comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is to be performed to measure the amount of impairment loss, if any.


FASB said the amendments address private companies’ concerns about the cost and complexity of the goodwill impairment test.


The guidance also includes examples of the types of events and circumstances to consider in conducting the qualitative assessment. More information is available in the Aug. 12 edition of FASB in Focus, available at


The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after Dec. 15, 2011. Early adoption is permitted. The ASU is available at



  The International Accounting Standards Board (IASB) published proposals to define investment entities as a separate type of entity that would be exempt from the accounting requirements in IFRS 10, Consolidated Financial Statements.


Investment entities are commonly understood to be entities that pool investments from a wide range of investors for investment purposes only. Currently, IFRS 10 would require consolidation if an investment entity controls an entity in which it is investing.


However, when developing IFRS 10, investors commented that this would not provide them with the information they need to assess the value of their investments, the IASB said in a press release. To address this issue, the exposure draft proposes criteria that would have to be met by an entity to qualify as an investment entity. These entities would be exempt from the consolidation requirements and instead would be required to account for all their investments at fair value through profit or loss. The ED also includes disclosure requirements about the nature and type of these investments.


This project is being undertaken jointly by the IASB and FASB. Both boards’ proposals are broadly aligned. However, FASB is considering proposing that the exemption would extend to cases in which the investment entity is owned by a larger group that is not itself an investment entity. The IASB said that FASB will publish its own ED later.


The ED is open for comment until Jan. 5, 2012. The IASB said FASB will align its comment period with the IASB’s to ensure joint redeliberations. A podcast on these proposals and a high-level summary are available on the IASB’s project page ( If adopted, the proposals would be integrated into IFRS 10.



  The IASB is seeking public input on the strategic direction of its future work program.


A consulting document ( asks open questions to gather views on the IASB’s future work program from all those involved in or affected by financial reporting. In particular, the IASB seeks feedback on how it should balance the development of financial reporting with the maintenance of IFRS and—with consideration of time and resource constraints—those areas of financial reporting that should be given the highest priority for further improvement.


“Up until now, the agenda of the IASB has largely been determined by the need to support a first wave of jurisdictions adopting IFRSs and the completion of our program to improve IFRSs and align them with U.S. GAAP,” said IASB Chairman Hans Hoogervorst in a news release. “With this work largely completed, our attention can now turn to new issues that may require our attention. We seek your views to get the balance and the direction of our future work plan right.”


The IASB will accept comments on its future work program until Nov. 30.


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