The future of international accounting standards for U.S. public companies remains uncertain after the release in July of a long-anticipated SEC analysis of IFRS.
In a 127-page report released on the final day of Chief Accountant James Kroeker’s tenure, the SEC staff said the global financial reporting community considers the standards produced by the International Accounting Standards Board (IASB) to be of high quality despite areas that need further development.
But the report questioned the funding of the IASB and the timeliness of responses to widespread accounting issues by the IFRS Interpretations Committee. It said adoption would be costly for U.S. public companies.
“U.S. GAAP also contains areas for which guidance is in need of continued development,” the report said, “but the perception among U.S. constituents is that the ‘gap’ in IFRS is greater.”
Nonetheless, many stakeholders view global comparability and consistency in accounting standards to be a higher goal worthy of pursuing. The SEC report said the IASB has made significant progress in developing a comprehensive set of standards.
Some believe that the SEC’s continued indecision on IFRS leaves the United States isolated and limits U.S. companies’ access to international capital. Michel Prada, chairman of the IFRS Foundation trustees, released a statement expressing disappointment that no clear action plan on IFRS is described in the report. Prada said that while the IASB continues to make improvements, other nations with large economies have committed to IFRS despite the issues that concern the SEC.
“We are at a pivotal moment for our organization,” IASB Chairman Hans Hoogervorst said in a statement. “The IASB has started working on a new agenda. The era of convergence is coming to an end. We are revamping our institutional infrastructure to provide for a more inclusive approach to international standard setting. This is the right timing to come on board and participate in shaping the future of global accounting.”
It appears that the SEC has no timeline for further consideration of IFRS. Although SEC spokesman John Nester said the logical next step is a recommendation on IFRS by the staff, there is no timetable for that. The SEC invited comments on its report, which can be sent by email to rule-comments@sec.gov or made through the SEC’s internet comment form at tinyurl.com/7owtnmo. The SEC’s report is available at tinyurl.com/6pjt6tf.
No deadline was announced for the comments; the ultimate decision on IFRS rests with the five SEC commissioners. Experts and observers said that with the upcoming U.S. presidential election in November, it is clear after the report’s release that the SEC will not decide on IFRS until at least the beginning of next year, and perhaps later.
“I can’t see a decision in less than a year,” Xerox Vice President and Chief Accounting Officer Gary Kabureck said in July.
The AICPA has long been a proponent of global standards and believes IFRS is best positioned to become the single set of standards that would create worldwide comparability of financial reports. The AICPA urged the commissioners to consider the staff report with expediency and allow U.S. public companies the option to adopt IFRS for financial reporting. AICPA President and CEO Barry Melancon, CPA, CGMA, said in a statement that an adoption option would facilitate the comparison of U.S. companies with their non-U.S. competitors.
“The world’s capital markets know no borders,” he said. “The participants in these markets need high-quality, transparent, and comparable financial information to enable them to make sound investment decisions.”
FUNDING IS SIGNIFICANT HURDLE
The biggest obstacle to IFRS adoption for U.S. public companies may be the funding of the IASB.
Voluntary funding was critical for the IASB as it got off the ground in the early 2000s; the SEC report said that until 2008, the IFRS Foundation financed the IASB largely through voluntary contributions from a wide variety of participants across the world’s capital markets. The concern with that model is that it leaves the IASB open to the perception that organizations that provide funding could try to influence accounting standards.
Meanwhile, the Sarbanes-Oxley Act of 2002 requires that the body setting accounting standards for U.S. companies be funded through collection of accounting support fees from issuers of U.S. securities. Currently, those fees provide most of the funding for the Financial Accounting Foundation, the parent body of FASB.
If the IASB were the standard setter for the United States, this could create a problem. Membership of the SEC on the IFRS Monitoring Board would be based partly on the IFRS Foundation’s success raising funds from U.S. constituents. But the SEC cannot act as a fundraiser for a private organization, and payment to the IASB could be viewed as a foreign subsidy.
“The commission may be limited from directly funding the IFRS Foundation without an appropriation from Congress,” the report stated.
Meanwhile, although the IFRS Foundation has increased its funding from independent sources, approximately 25% of its 2012 collections were expected to come from seven of the largest accounting firms, according to the SEC report.
This is seen by some as a barrier to true independence of the IASB and its standard-setting process.
MAINTENANCE, APPLICATION, AND GOVERNANCE
The SEC staff also described other concerns in its report:
Maintenance of IFRS. The SEC concluded that the IFRS Interpretations Committee should do more to address accounting issues that arise within the context of current IFRSs and provide timely, authoritative guidance.
Application and enforcement. A review of financial statements found that while they generally complied with IFRS, global application could be improved to narrow diversity in practice. The staff wrote that the financial reporting community, including the SEC, can have a positive effect on the consistent application and enforcement of IFRS.
Use of national standard setters. Greater reliance by the IASB on national standard setters—in order to understand the intricacies of distinct domestic reporting and regulatory systems—is needed, the SEC reported.
Governance of the IFRS Foundation. Mechanisms to consider and protect U.S. capital markets, such as maintaining an active FASB to endorse IFRSs, may be necessary, according to the SEC staff.
FASB AND ENDORSEMENT
A significant portion of the report discussed the barriers to outright adoption of IFRS, contrasting full adoption with an endorsement process that would involve FASB.
Although the SEC could mandate that publicly traded U.S. companies use IFRS as issued by the IASB, the report said that would affect other regulators and may require additional federal and state legislation.
Those requirements could be diminished if FASB assumes an endorsement role. But if FASB is involved, its duties would need to be established from among a wide variety of alternatives. These range from the small role of writing each IFRS into U.S. GAAP as-is and without delay, to the significant duty of considering IFRSs during FASB’s own standard-setting process.
“If I had to guess at this point, ultimately they will kind of head toward this endorsement-type approach,” former FASB Chairman Robert Herz said. “I think the contours of that approach will be important.”
A scenario the SEC staff identified between the two extremes would allow FASB to endorse new or newly modified IFRS standards for incorporation into U.S. GAAP. The “vast majority” could be endorsed without change, but FASB would have the authority to add or modify the IFRS standards subject to a protocol that considers the public interest and protection of investors. In the rare case that IFRS standards had gaps, FASB would be allowed to fill them.
Under the endorsement process, FASB could act as a strong U.S. voice in the interests of U.S. investors, according to the report. To prevent too much divergence from the IASB standards in the United States, the SEC staff suggested the IASB “take U.S. perspectives into greater consideration during the standard-drafting process—resulting in standards that meet the needs of U.S. constituents without the need for modification during an endorsement process.”
In a comment letter sent to the SEC in August 2011, the AICPA accepted the concept of an endorsement approach with FASB as the U.S. standard setter, but has said the threshold for changes to IFRS should be set high so that modifications occur rarely.
TAX IMPLICATIONS
Federal and state tax effects of adopting IFRS are covered briefly in the report. If current federal and state tax law is not amended to reflect IFRS, the report said, companies would be required to track a significantly increased number of book-tax differences. Some companies would also end up paying more tax because IFRS does not permit the use of the LIFO method for inventories, and the Internal Revenue Code requires that a company use the same method of inventory accounting for financial and tax reporting purposes.
A change to IFRS might also require companies to request permission from the IRS to change a method of accounting and might affect computation of U.S. earnings and profits for federal tax purposes. Transfer-pricing policies may also be affected.
The report identified two areas of state taxation that could be affected by IFRS adoption: (1) apportionment of income, if IFRS adoption changed underlying apportionment factors; and (2) taxes based on a company’s net worth or equity, if IFRS adoption affected either of those.
WHO'S READY?
The level of preparedness for a transition to IFRS varies widely, the report said. Many large public accounting firms with an international presence have experts already on staff or have IFRS training programs in place.
The majority of firms, however, would need training or would need to hire IFRS experts as consultants or full-time employees, both costly propositions. The report said most companies’ employees “currently have little or no knowledge of IFRS requirements or developments and are only focused on U.S. GAAP.”
Preparers of financial statements—including about 10,000 issuers that file reports with the SEC—would be significantly affected by a transition to IFRS, the report said.
Issuers generally supported a single set of high-quality, globally accepted accounting standards, the report said. But many issuers expressed concerns about how much change the financial reporting system could absorb. More issuers preferred a managed transition through which FASB would incorporate IFRS into U.S. GAAP. Small issuers, particularly those who do not have global operations, expressed more concern about the transition than bigger issuers who compete globally.
The SEC staff was clear about how difficult the transition could be for some companies. While some standards would be easy to convert, others would require issuers to overhaul accounting systems, controls, and procedures.
WHAT'S NEXT?
The U.S. decision on IFRS is unlikely to remain in flux forever.
“One has to remember that there have been a lot of ebbs and flows in this,” Herz said, “and that as people change in Washington, including at the SEC, things can change.”
As the wait for an SEC decision on IFRS continues, CPAs can turn their international standards focus to the convergence projects on leases, revenue recognition, and financial instruments, some experts say.
FASB and the IASB are working on three key convergence projects. The leases standard will require lots of attention because it will put assets and liabilities stemming from leases on the balance sheet and mean changes for lessees and lessors. The wide-reaching revenue recognition project, among other things, eliminates certain industry-specific guidance and requires businesses to disclose more information about revenue. The boards had been scheduled to issue standards in those two projects plus one on financial instruments by the middle of 2013, but the financial instruments project hit a snag in July.
FASB sought to address some constituent concerns in the project, and FASB Chairman Leslie Seidman said the staff would work expeditiously. But the IASB’s Hoogervorst said it was “deeply embarrassing” that the boards have not come up with an acceptable solution in the project after three years. He expressed concern that the project could unravel.
Xerox’s Kabureck said the convergence standards are the most pressing issues for CPAs with regard to IFRS.
“Those are very pervasive standards affecting an awful lot,” Kabureck said. “And to the extent that someone wants to follow the [FASB and IASB] agendas, I would say your time is better spent on [the convergence standards] than learning the subtle points of all the U.S. GAAP versus IFRS differences on all the other existing standards, absent a specific need to know.”
Meanwhile, the SEC is moving forward with a new acting chief accountant in Paul Beswick, the former deputy to Kroeker who was credited with developing an idea for IFRS adoption called “condorsement.” The name has been scrapped, but its concept survives in the staff report’s consideration of retaining FASB to endorse IFRS standards.
But the future of IFRS in the United States—whether it is condorsement or endorsement, straight-out adoption or full-scale rejection—is not any clearer after the release of the highly anticipated SEC report.
EXECUTIVE SUMMARY
A long-awaited SEC report released in July contained no recommendation on IFRS adoption for U.S. public companies. With a U.S. presidential election taking place in November, experts say no SEC decision on IFRS is likely until at least 2013.
The 127-page SEC report said IASB standards are of high quality despite the need for further development. But the report questioned the IASB’s funding mechanism and the timeliness and appropriateness of the IFRS Interpretations Committee’s responses to widespread accounting issues, and said implementation of IFRS would be costly.
The AICPA, a longtime advocate for global accounting standards, urged SEC commissioners to consider the report with expediency and allow U.S. public companies the option of adopting IFRS for their financial reporting. “The world’s capital markets know no borders,” said AICPA President and CEO Barry Melancon, CPA, CGMA. “The participants in these markets need high-quality, transparent, and comparable financial information to enable them to make sound investment decisions.”
The delay in progress on IFRS adoption means CPAs should turn their international standards focus to the convergence standards that FASB and the IASB are developing on revenue recognition, leases, and financial instruments, experts say.
Ken Tysiac is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at ktysiac@aicpa.org or 919-402-2112.
AICPA RESOURCES
JofA articles
- “A New System for Recognizing Revenue,” Jan. 2012, page 30
- “New IASB Leader Embraces Challenges,” Sept. 2011, page 30
- “Beyond Convergence,” Aug. 2011, page 46
Publications
- IFRS Accounting Trends & Techniques—Global Edition (#WIG-XX, online subscription)
- IFRS Compass: IT Systems Implications (#091038, paperback; #091037PDF, on-demand)
- IFRS Digest: What U.S. Practitioners and Entities Need to Know Now (#041600)
- IFRS Policies and Procedures (#WI699586)
CPE self-study
- IFRS Essentials On-Demand Series (#159723)
- IFRS Update and Review of Complex Topics (#745262)
- Introduction to IFRS: Grasping the Big Picture (#745733)
Conference
Current SEC and PCAOB Developments, Dec. 3–5, Washington
Certificate program
IFRS Certificate Program (#159770)
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