IFRS: Current situation and next steps

On July 13, 2012, the Staff of the SEC's Office of the Chief Accountant published its final report (the "Staff report") on its IFRS Work Plan.

What is in the Staff report on IFRS?

First, what's not in the Staff report is worth noting. The Staff report does not include a final policy decision, or even a recommendation, as to whether IFRS should be incorporated into the US financial reporting system, or how such incorporation should occur. The Work Plan was not intended to provide an answer to the threshold question of whether a transition to IFRS is in the best interests of US capital markets and US investors. Instead, it is an important information-gathering step in the SEC's decision-making process.

The Staff report also does not address whether US public companies should have the option to adopt IFRS on a voluntary basis. However, the Staff report does state that investors are generally in agreement that companies should not be permitted to adopt IFRS early, because it would compromise comparability with US companies applying US GAAP.

In the Staff report, the Staff indicates that IFRS is generally perceived to be of high quality. However, there are areas where gaps remain (for example, accounting for rate-regulated industries and oil and gas industries), and inconsistencies exist in the application of IFRS globally. The Staff also believes that improvements can be made to the IFRS interpretative process and the enforcement and coordination activities of regulators across territories. Finally, although it acknowledges progress has been made, the Staff believes enhancements should be made to the IASB's coordination with individual country accounting standard setters and the IASB's funding process.

What conclusions are reached?

The Staff report states that adopting IFRS as authoritative guidance in the United States is not supported by the vast majority of participants in the US capital markets, and would not be consistent with the methods of incorporation followed by other major capital markets (for example, the endorsement process followed by the European Commission).

On the other hand, the Staff found there to be substantial support for exploring other methods of incorporating IFRS (such as the endorsement method) that demonstrate the US commitment to the objective of a single set of high-quality, globally accepted accounting standards.

Background

In early 2010, the SEC published a statement of continued support for a single set of high-quality, globally accepted accounting standards, and acknowledged that IFRS is best positioned to serve this role. The SEC initiated an IFRS Work Plan at that time to obtain information relevant to the determination of whether, when, and how IFRS might be incorporated into the US financial reporting system. The Work Plan identified six key areas of consideration:

• Sufficient development and application of IFRS for the US domestic reporting system (addresses IFRS comprehensiveness, consistency of application, and enforceability);
• The independence of standard-setting for the benefit of investors (addresses the IASB's governance structure);
• Investor understanding and education regarding IFRS;
• Examination of the effects on the US regulatory environment resulting from a change in accounting standards;
• The impact on issuers, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations and accounting for litigation contingencies; and
• Human capital readiness.

In May 2011, the SEC Staff published a paper exploring one possible method of incorporating IFRS into the US financial reporting system, involving an active FASB incorporating IFRS into US GAAP over an extended period of time (the "endorsement" method). Under this method, the FASB would remain the US standard setter and potentially endorse new IFRSs into the US financial reporting system. Additionally, the FASB would also consider existing IFRSs during a multiple-year period, and consider how to conform US standards to them where there are differences. The Financial Accounting Foundation (FAF), which oversees the FASB, submitted a letter to the SEC that largely supported the endorsement method, but provided some recommended changes. The most significant proposed modification is that the goal of the endorsement process outlined by the FAF is to achieve US GAAP that is highly comparable (but not necessarily identical) to IFRS.

In November 2011, the SEC Staff subsequently published two additional papers, one examining the remaining differences between the US GAAP and IFRS frameworks and another on the application of IFRS in practice.