In a progress report released Friday, the SEC staff details its progress thus far and remaining research and analysis to be done as the commission considers whether, when and how to allow domestic issuers in the U.S. to use IFRS.
The SEC staff’s first update draws no major conclusions. It highlights concerns among regulators that now rely on U.S. GAAP as a basis for their reporting regimes about the impact of a shift to IFRS and worries over the funding mechanism for the International Accounting Standards Board (IASB).
The 44-page report details staff efforts and its list of to dos across six major areas the commission is weighing.
- Development of IFRS for the U.S. domestic reporting system
- Independence of standard setting
- Investor understanding and education regarding IFRS
- Examination of the U.S. regulatory environment that would be affected by a change in accounting standards
- The impact on issuers, such as changes to accounting systems and contractual arrangements
- Human capital readiness
Earlier this year, the commission signaled that it would make a determination in 2011 about the use of global standards by U.S. public companies following completion of the SEC’s IFRS work plan and the convergence projects agreed to by FASB and the IASB.
The SEC has stressed the importance of having a well-funded standard setter with a governance structure to support the independent development of global standards for the “ultimate benefit of investors.” According to the progress report, the SEC staff is analyzing how the IASB and its parent organization, the IFRS Foundation, are funded through review of “publicly available data and outreach to foreign regulators.” The assessment will involve current, planned and proposed funding mechanisms. The staff is also in the process of considering a range of possibilities with respect to contributions to the IFRS Foundation and the IASB from the United States.
“Based on current existing funding commitments, the IFRS Foundation has indicated that it could be in an operating deficit for fiscal year 2010,” the progress report states. “In addition, the IFRS Foundation indicated it could expect a $4 million funding ‘gap’ with respect to its self-determined contribution target for the United States.”
The SEC staff estimates that just 25% of jurisdictions that use IFRS as part of their financial reporting system contribute to the IFRS Foundation, while two of the largest contributors in 2009 were the U.S. and Japan, neither of which has formally incorporated IFRS for domestic issuers. Voluntary contributions from the U.S., primarily from large American companies, have been the largest country-specific source of funds to the foundation, the report says.
Regarding potential changes to the regulatory environment, the report says the staff “has identified a consistent area of concern and focus for many regulators. That is, the method of any incorporation of IFRS is exceedingly important due to the prominence of ‘U.S. GAAP’ references currently in U.S. laws, contractual documents, regulatory requirements and guidelines, and similar documents. Therefore, regulators have expressed that if U.S. GAAP is the mechanism used for incorporation of IFRS into the financial reporting system for U.S. issuers, this would resolve a number of the more significant issues currently identified in the Staff’s outreach.”
Industry regulators are, among other things, concerned about the general lack of industry-specific standards and practices in IFRS, according to the report. Work is also being done to analyze federal and state tax impacts, audit regulation and standard setting and broker-dealer and investment company reporting.
The staff will analyze the potential effects on U.S. private companies of IFRS becoming part of the U.S. financial reporting system by, among other things, studying how other jurisdictions have handled the private company impact and reviewing existing studies that have assessed whether there should be separate standards for private companies, the report says.
The staff will meet with members of accounting firms of all sizes to “discuss their expectations regarding availability and cost of audit services and understand how they intend to address client concerns in this regard,” the staff reported. “Also important in this assessment is an understanding of how the firms have incorporated IFRS into their quality control systems, including hiring, staffing of audits, professional advancement, and any changes in these areas that are planned for the future.”
According to the report, the staff is evaluating the role of national standard setters in jurisdictions using IFRS, in part to identify potential future roles for FASB should the commission decide to incorporate IFRS into the U.S. financial system. It is also studying the approaches other countries have used to incorporate IFRS.
To draw conclusions regarding the auditability and enforceability of IFRS, the staff is “analyzing trends in error corrections and accounting-related enforcement actions in the United States and abroad to determine whether use of IFRS may impair auditor and regulator efforts.” For example, the staff intends to assess the extent to which financial reporting-related enforcement cases under U.S. GAAP rely on the level of prescriptive guidance in accounting standards to determine whether the accounting standards (be it U.S. GAAP, IFRS, or another set of standards) themselves play a significant role in SEC enforcement activities, the report states.
The staff’s comparison of U.S. GAAP to IFRS is expected to provide insight into whether use of IFRS might diminish comparability of financial statements, and if so, in which areas.
It’s unclear when the next progress report will be released. The SEC has said the reports will be made periodically. If the commission next year decides to incorporate IFRS into the U.S. financial reporting system, the first time that U.S. companies would be required to report under such a system would be no earlier than 2015.
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