In July, the SEC released its long-awaited Staff Report containing recommendations concerning the potential switch to International Financial Reporting Standards by US issuers of financial statements: Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers.
The Work Plan contains various factors relevant to a decision by the Commission as to whether, when and how US issuers should transition to a system incorporating IFRS. Although the report provides a thorough discussion of the issues pertaining to IFRS in the United States, it does not include a recommendation on whether US public companies should be allowed or required to adopt IFRS for financial reporting, nor should it be construed as an indication of an official SEC position. The SEC is expected to make a recommendation regarding IFRS; however, no timetable has been established.
A summary of the Staff’s findings follows:
Development of IFRS
The Staff Report acknowledges significant progress toward the development of a comprehensive set of accounting standards, but notes that certain areas continue to be underdeveloped, including accounting for extractive, insurance and rate-regulated industries. The report also acknowledges that US GAAP contains areas where additional guidance is required; however, the gaps in IFRS are greater.
The SEC Staff acknowledged recently implemented changes that will address the maintenance of IFRS standards and provide authoritative guidance on issues; however, the Staff is uncertain at this point whether these changes will be effective.
IASB Use of National Standard Setters
The Staff Report states, “In order to develop accounting standards that could be incorporated in multiple jurisdictions, the IASB needs to understand the intricacies of a number of distinct domestic reporting and regulatory systems. This challenge can be difficult in the best of circumstances.” The Staff acknowledges that the IASB has procedures for interacting with national standard setters. Further, the IASB has procedures for interacting with national standard setters on individual projects, and meets with a significant number of national standard setters periodically to discuss accounting issues and IASB projects. However, the Staff believes the IASB should consider even greater reliance on national standard setters: “The national standard setters could assist with individual projects for which they have expertise, perform outreach for individual projects to the national standard setter’s home country investors, identify areas in which there is a need to narrow diversity in practice or issue interpretive guidance, and assist with post-implementation reviews.”
Global Application and Enforcement
The Staff Report acknowledges the perceived benefit of a single set of high-quality, globally accepted accounting standards, such that investors can read a set of financial statements for any company, understand its financial results and make comparisons to those of other companies. However, to derive such benefits, it is imperative that such standards are consistently applied and enforced. The results of the Staff’s review of financial statements prepared in accordance with IFRS showed that the application of IFRS could be improved to narrow diversity. As stated in the report, “The Staff believes that the financial reporting community, including the SEC, can be a constructive influence on the consistent application and enforcement of IFRS.”
Governance of the IASB
As might be expected with a global organization, the IASB does not have a mandate to establish standards for any single capital market. Therefore, with respect to US investors and capital markets, “the Staff believes that it may be necessary to put in place mechanisms specifically to consider and to protect the US capital markets – for example, maintaining an active FASB to endorse IFRSs.”
Status of Funding
Because the IFRS Foundation is a private, not-for-profit organization, it lacks a funding mechanism, and “the Staff’s most significant concern about the funding approach is the continued reliance on the large public accounting firms to provide funds to the IASB.”
As stated in the report, “The Staff observed that investor education on accounting issues and changes in the accounting standards is not uniform. Regardless of the ultimate determination by the Commission as to whether to incorporate IFRS, the Staff will consider how investor engagement and education related to the development and use of accounting standards could be improved.”