Condorsement: FASB's Potential New Role Under IFRS

In part three of this exclusive JofA interview, FASB Chairman Leslie Seidman shares her thoughts on how FASB might function in an IFRS world.

JofA: Last fall at the AICPA National Conference on Current SEC and PCAOB Developments, Paul Beswick, one of the SEC’s deputy chief accountants, introduced the concept of “condorsement” in the context of the discussion on whether the U.S. will adopt IFRS. In your view, what does “condorsement” mean?

Seidman: I am very appreciative of the fact that the SEC is taking such a thoughtful path to evaluating whether and how to incorporate IFRS into U.S. GAAP. I think it is a very, very important decision that they’re making, and I really am grateful for the robust process that they’re using to make this decision.

My understanding of the idea that Paul Beswick mentioned at the SEC conference, which he dubbed “condorsement,” involves a few key points. First is that the FASB and the IASB would continue to work on the MOU (Memorandum of Understanding) projects, and try and reach converged standards on those topics, which I am obviously very supportive of.

He also suggested that the FASB would undertake no new projects. That the FASB would evaluate the remaining differences between U.S. GAAP and IFRS, and evaluate whether those IFRS standards are suitable for the U.S. with a pretty high threshold to what “suitable” means. In other words, you tend to approach it assuming that they would be suitable for the U.S. and have

to have some very good reasons why they would not be.

Now that evaluation could be done over a period of time or in a relatively short period of time. I can understand how, because IFRS is already accepted in the United States, that you could view that particular aspect of this proposal as not being mission critical.

I think that last piece is very important, that we would go through the remaining differences between U.S. GAAP and IFRS and have a critical evaluation of the significance of those items from both a quantitative standpoint and a qualitative standpoint. By qualitative, what I mean is that we would have discussions with investors about whether they care about these differences or not, because I think that can really help inform the path that we take about adopting or incorporating IFRS into U.S. GAAP.

One of the things that the FASB has learned in recent years in our discussions with investors is that there are some issues that they care deeply about and other issues that they care less about. So I think it’s very important to have that data before we make a decision about whether to adopt an IFRS standard, whether to try and converge the IFRS—with the IFRS standard, or whether to let the difference stand. It could well be that it’s just not important other than from an operational or an efficiency standpoint.

Then part of [Beswick’s] approach was that new international standards would be set by the IASB, but that the FASB would manage the process for the U.S. to be an active participant in the development of those standards—again, ultimately, be the entity that would recommend whether it is appropriate for the U.S. to incorporate this standard or not. Now, my hope would be in a role like that that the FASB would be an active participant along the way, so that any “endorsement” process would be perfunctory at that point in time.

In other words, I would not be supportive of an approach where we weigh in at the end, and potentially be disruptive. Also, I think that would potentially lead to cases where we would not end up with the goal of consistent standards around the world. So I think the advantages of the approach that he has laid out is that it’s a very deliberative approach to identifying and evaluating the specific differences.

I think it can minimize any unintended consequences of a shift from IFRS into U.S. GAAP. I think it avoids a big bang for us. It potentially can minimize the transition costs of our country making such a significant change.

It allows the U.S. issues to be dealt with in a very deliberative fashion, including, what are we going to do with the LIFO difference, for example? What are we going to do with rate regulation, which is very important in the United States? I think a phased methodical approach, such as what Paul suggested, has those advantages.

On the risk side of the equation, I think that it has the potential to increase the risk of national GAAP, the point that I just made that if the role of the U.S. standard setter is sort of an afterthought, I think you have that potential. But I think there are ways to mitigate that risk, for example, by having the FASB be an active participant in the process, and by setting very clear and rigorous criteria for when a difference would ever be warranted.

The one piece of it that I’m not so happy about is that the FASB would not enter into any new projects. I’m not ready to sign up for that. I think that there can be cases, domestically, where we have an urgent financial reporting matter. I still think there is value in having boots on the ground for the FASB to address the issue expeditiously and hopefully cooperatively internationally so that we don’t end up with U.S. flavor per se. But I’m not ready at this point to say that there’s no role for the FASB to be having particular standard-setting activities.

I also think that on something like, for example, our disclosure framework project, which we are currently working on by ourselves, even in the context of an international standard-setting arrangement, the FASB and other national standard setters can be working on very important projects like disclosure framework that ultimately can feed into an international financial reporting system.

So, we can be undertaking very important developments and other improvements that would hopefully be embraced internationally or at least set the stage for research and thought processes that might have value and be accepted around the world.

JofA: One of the things that we hear from readers is that users, and especially preparers, are more interested not in when the standard is going to be issued but when the standard is going to be effective, and how much time they’ll have to implement it. Can you offer any insights?

Seidman: We had a joint board meeting with the IASB on this topic [March 2], the purpose of which was for the staff to report back to us on the feedback they received on that. I have a few key points to make in response to that.

The first is that the feedback that was received internationally differs from the feedback that we received here in the U.S. Generally speaking, the feedback that the IASB received was that their constituents would prefer to adopt the major MOU projects at one time.

We received much more mixed feedback in the U.S. We do have some entities who would prefer to adopt the standards sequentially. Then we have others who, for systems efficiency reasons, would prefer to do it all at once. Investors also had mixed views, but generally they supported retrospective transition, and they requested good disclosures to help them understand the accounting changes and the effect on trends.

One thing that was common in the responses that we got was strong desire for adequate lead time between the issuance of the standard and the date that it would become effective. While we did not make any specific decisions [at our March 2 joint meeting with the IASB] about that, we want to send a strong signal to people that our plan is to provide a generous amount of time between the issuance of the standard and the date that it would become effective, so that companies and the advisers that they use to help them implement standards will have enough time to understand the proposal, plan for the transition, and test the quality of their implementation before it would go live.

It is not a simple decision to make because it depends on the particular method of transition that we would require. For example, if we were ever to say that the standard is effective prospectively, then you need relatively less time to transition to the standard. Whereas, if we were to say, “recast your financial statements for a couple of years to incorporate this change,” you need a lot more time to transition to the standard.

So, it’s subject to a couple of things. Number one, what method of transition? Number two, are we going to roll these standards out sequentially or in one fell swoop? Number three, what’s the extent of change that we’re proposing? The exposure draft represented significant change in many respects for all of the projects.

To the extent that we make changes through these re-deliberations, but simplify the approach that was in the proposal, or at any rate, reflect less change relative to current U.S. GAAP, people will need less time to transition to the new standards. But having said that, it’s absolutely our intent to have an orderly, well-understood transition to these new standards, which involves a certain amount of lead time, so that people can feel comfortable they’re going to have a quality transition.

I will also say that we did not specifically discuss whether private companies and other smaller entities might have additional time beyond what I’m even indicating now. We will discuss that at a later date.

Condorsement: FASB's Potential New Role Under IFRS

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