This article was first published in the october 2012 International edition of Accounting and Business magazine.
On 13 July 2012, staff from the Office of the Chief Accountant of the US Securities and Exchange Commission (SEC) released their final report on its 2010 work plan that was intended to provide direction on if, how and when to incorporate International Financial Reporting Standards (IFRS) into US generally accepted accounting principles (GAAP).
However, the final report didn’t really provide any guidance to the waiting corporate/audit and standard-setting community on when the SEC might make a final decision. It would appear that the SEC, after two years of consultation and information gathering, has not yet been able to complete its analysis.
The introductory note to the final report states: ‘Although the staff report is constructive and an important contribution, the work plan did not set out to answer the fundamental question of whether transitioning to IFRS is in the best interest of the US securities markets generally and US investors specifically.’ It also said: ‘Additional analysis and consideration of this threshold policy question is necessary before any decision by the commission concerning the incorporation of IFRS into the financial reporting system for US issuers can occur.’
So with 2012 coming to a close, observers are wondering whether this final report, the last of a long to-do list on the part of the SEC staff, has really forwarded the IFRS agenda much at all. The Chartered Financial Analyst (CFA) Institute suggests that while the final paper is comprehensive, much of it is redundant. More specifically, it says that ‘there is really nothing within the document which is new or not already known to those who closely monitor these issues’. Furthermore, with respect to the list of challenges the staff have identified in adopting IFRS in the US, they ‘as identified are not new per se’, and not ‘substantially different than those of any developed economy which has converted to IFRS’. And, ultimately, the report fails to discuss ‘how the challenges identified can, or should be addressed and over what time horizon…’
The trustees of the IFRS Foundation echo these sentiments. According to chairman Michel Prada: ‘While recognising the right of the SEC to determine the method and timing for incorporation of IFRS in the US, we regret that the staff report is not accompanied by a recommended action plan. Given the achievements of the convergence programme inspired by repeated calls of the G20 for global accounting standards, a clear action plan would be welcome.’
Moreover, he says: ‘For the benefit of US and international stakeholders, the trustees look forward to the SEC resolving the continued uncertainty regarding the US’s commitment to global accounting standards.’
Programme has moved on
As for Hans Hoogervorst, chairman of the International Accounting Standards Board (IASB), he cautions the US that the days of developing IFRS in concert with US GAAP are over, that new interested standard-setting bodies are coming on board, and if it doesn’t get with the IFRS programme soon, the US Financial Accounting Standards Board will get left behind in the global standard-setting process.
‘The IASB has started working on a new agenda,’ he says. ‘The era of convergence is coming to an end. We are revamping our institutional structure 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.’
Others see the lack of SEC guidance as rather risky business on the part of the US regulators, lest they think that the US still has the clout it used to have in the global capital markets. Sir David Tweedie, president of the Institute of Chartered Accountants of Scotland (ICAS) and primary driver of IFRS as past chairman of the IASB, comments: ‘The Asian markets are growing. The US is in relative decline compared to them, and I suspect that’s going to continue for several years yet. And in terms of capitalisation, they’ve already passed the US. So as all these markets start to grow, the US share of capitalisation is going to continue to fall. And therefore, I suspect the importance of the market – it’s still very important, still the biggest in the world, but in regional terms it’s not.
‘So I think we have to be blunt about it. The move to IFRS is now irrevocable, two-thirds of the G20 use it. Half of the world’s top 500 companies use it. They’re not going to go back. It’s not going to be US GAAP. It’s too complicated, too big and the rest of the world doesn’t want 17,500 pages of US GAAP, compared to 3,000 of IFRS. That’s where the difference will be. The rest of the world will be happy to say, okay America you sit there, and when you’re ready you think about it and let us know, and then if you’re not ready… we’ll just crack on.’
Across the pond, the reviews are mixed. In response to the SEC report, Barry C Melancon, president and CEO of the American Institute of Certified Public Accountants (AICPA), says: ‘The AICPA has long supported the goal of a single set of high-quality, global financial reporting standards to be used by public companies in the preparation of transparent and comparable financial reports throughout the world. The AICPA believes that IFRS is best positioned to become those global standards.’ Therefore, he encourages the SEC to let US companies have a choice and to do it soon. More specifically: ‘We urge the commissioners to consider the staff report with expedience,’ and ‘also urge the commissioners to allow US public companies the option to adopt IFRS.’
On the other side of the fence, as the final SEC staff paper points out, there are many American companies that don’t want IFRS in America at all. They point out that there are also many concerns about IFRS, and perhaps most significantly is that ‘pursuing the designation of the standards of the IASB as authoritative was, among other things, not supported by the vast majority of participants in the US capital markets’.
Financial Executives International (FEI) has repeatedly called for caution in the adoption of IFRS. More specifically, it supports continued analysis of the situation. In its 16 July press release, it comments: ‘We do not feel the SEC should feel compelled to act on the matter of whether, and if so how, to incorporate IFRS standards into US GAAP, until such time as the commissioners feel they have conducted sufficient outreach and study to make a well-informed decision that will stand the test of time.’
FEI further expressed its reluctance to bring this to a final conclusion in its response to a G20 Communiqué that called for the US FASB and the IASB to ‘meet their target of issuing standards on key convergence projects by mid-2013, at the latest’. More specifically, it says: ‘While we do feel it is helpful and desirable to have goals and timetables for the projects, we believe that such well-intended encouragement can be construed as setting a deadline.’ One has to question first what the difference between a set timetable and a deadline is, and, second, why a deadline is necessarily a bad thing?
As for how things will proceed from here, it’s likely to be another year before we hear anything one way or another from the SEC. As Tweedie points out, the final report ‘wasn’t a no decision but rather was no decision, so there’s a very good prospect that they will proceed down this road’. However, he also notes that the chances of a decision forthcoming in the next 12 months are fairly small. ‘You’ve got the election coming up and obviously you don’t want to go into a law-making mode before that. Then if you have changes in the composition of the SEC commissioners, they’ll take six months at least to get up to speed. And there will still be massive legislation to work their way through.’
We’ll be keeping a close watch on any future developments.
The goal of the IFRS Foundation and the International Accounting Standards Board (IASB) is to develop a single set of high-quality, understandable, enforceable and globally accepted financial reporting standards based on clearly articulated principles.
In pursuit of this goal, the IASB works in close cooperation with stakeholders around the world, including investors, national standard-setters, regulators, auditors, academics, and others who have an interest in the development of high-quality global standards.
Progress towards this goal has been steady. All major economies have established timelines to converge with or adopt IFRS in the near future. The international convergence efforts of the organisation are also supported by the G20 which, at its September 2009 meeting in the US, called on international accounting bodies to redouble their efforts to achieve this objective within the context of their independent standard-setting processes. In particular, it asked the IASB and the US Financial Accounting Standards Board to complete their convergence project.
Source: IFRS Foundation and IASB website
Ramona Dzinkowski is an economist and business journalist