In the recently released IFRS Progress Report , 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.
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.
Opening remarks by Sir Bryan Nicholson
Trustee of the IASC Foundation
Sir David and I welcome the opportunity to appear before you today. Sir David is accompanied by Gavin Francis, director of capital markets, the lead IASB staff director on the IAS 39 reform project. Gerrit Zalm, our chairman and your former colleague, apologises for not being able to attend. As one of the eight European-based trustees, I have been asked to accompany Sir David today.Since the beginning of the global economic crisis, the trustees have been actively engaged with the issues raised. We have committed ourselves to taking urgently all the actions necessary within our sphere of responsibility to respond to these issues.
As the crisis unfolded, the negotiations leading to the establishment of a public accountability link to the Monitoring Board were concluded. The Monitoring Board came into being early this year and has played its part in encouraging and supporting swift action by the IASCF. Whilst the European Commission has been present and has participated in our meetings with the Monitoring Board, we would greatly value its full participation in a body it helped to create and hope that may soon be possible.
Conscious of the urgency placed on the reform of IAS 39, the Trustees have strongly supported the need to complete the first part of the reform by year end. We have received regular updates in public meetings to ensure timely completion and fair consideration of stakeholder input. Before handing over to Sir David, I would make four points from the Trustee standpoint about the work to reform IAS 39.
01. The trustees are pleased with the unprecedented scale of the stakeholder engagement that the IASB has undertaken to complete its work, including with prudential supervisors and those tasked with co-ordinating the global regulatory response to the crisis.
02. The IASB has made real substantive adjustments to its original proposals to address issues raised by stakeholders. The Trustees believe these have improved the proposals and aided transparency.
03. The Trustees have been impressed with the pragmatic and listening approach that the IASB has taken.
04. The Trustees believe that the IASB’s developing proposals on a reformed IAS 39 represent a major step forward on a matter that has been contentious for years.
Prepared statement by Sir David Tweedie
Chairman of the IASB
I greatly appreciate the opportunity to speak to you regarding the status of the IASB’s revision of IAS 39. When I appeared before you in June, the Council emphasised the need to have a revised standard available for use this year. I gave a commitment to deliver on this timetable. We will publish the new standard in November.
The new standard on classification and measurement responds directly to the call of the G20 Leaders to ‘reduce the complexity of accounting standards for financial instruments’. As urged by the G20 Finance Ministers in September, we have taken ‘account of the Basel Committee guiding principles on IAS 39 and the report of the Financial Crisis Advisory Group’. Additionally, we have responded to issues raised by this Council regarding impairment and the fair value option and to subsequent concerns raised in the European Commission comment letter of 15 September on our proposals. We are working closely with the European Commission and the European Financial Reporting Advisory Group (EFRAG) to facilitate a smooth endorsement. We have also briefed and received the advice of the Economic and Monetary Affairs (ECON) Committee of the European Parliament.
The main criticisms: training U.S. accountants and auditors by the proposed 2014 deadline would be impossible; the SEC would cede its regulatory power to a global regulator; the standard-setter that wrote the rules — the International Accounting Standards Board — would buckle under political pressure; and compared with U.S. generally accepted accounting principles, IFRS is weak and would therefore invite accounting abuse.
But IASB chairman, David Tweedie, says those old complaints don't conform to current realities. He contends there won't be many differences, in fact, between U.S. GAAP and IFRS by the year 2015 if the current project to converge the two sets of rules continues at its current pace.
The agenda and time line for the convergence project, which was launched seven years ago by the IASB and its U.S. counterpart, the Financial Accounting Standards Board, will be updated at the end of the month during a three-day joint board meeting. As of today, the time line does not extend past 2011 — the year the SEC expects to vote on whether to move forward with mandatory adoption of IFRS, or to abandon the project.
Speaking to reporters at a Deloitte client conference in New York this week, Tweedie said obstacles regarding U.S. education have already fallen. For one thing, IFRS textbooks are already available in English from publishers in the United Kingdom and Australia.
What's more, by mid-2008 each of the Big Four accounting firms — who are major supporters of IFRS — had begun working with colleges to revamp curricula to include IFRS. (The American Accounting Assn., whose members are accounting professors, created a task force two years ago to develop IFRS curricula that could be rolled out to colleges.)
The notion that auditors are unprepared for the change also is a stretch, argued Tweedie. By his lights, any accounting firm that works with big or small multinationals already deals with financials prepared using IFRS. Further, the American Institute of Certified Public Accountants, which develops audit standards for privately held firms, has launched www.ifrs.com, a website aimed at providing its 300,000 members with training, resources, and updates on lobbying efforts on behalf of CPAs.
Last year, the AICPA also recognized the IASB as a standard-setter, which in effect allows U.S. auditors to express opinions on financial statements prepared using IFRS.
"The AICPA put IFRS on the same plane as U.S. GAAP"says Barry Epstein, a CPA and partner with litigation consultancy Russell Novak & Co.
"David Tweedie is right: the Momentum for IFRS is there; it is like a snowball rolling down a hill."
Epstein says the "watershed" event that fueled the creation of the SEC's IFRS roadmap — the proposal to move U.S. companies to IFRS by 2014 — was the 2007 SEC rule that waived the reconciliation requirement for foreign private issuers. As a result, foreign companies listed on U.S. stock exchanges were no longer required to reconcile their IFRS results with U.S. GAAP.
By giving permission "to the visiting team" to use IFRS, the SEC created an outcry among companies and investors for a level playing field that included a plan to allow American companies to file financial results in IFRS, says Epstein, adding that:
"... investors and companies must face the reality that IFRS is here to stay."
But opponents who contend that U.S. GAAP is the global gold standard for transparent and robust financial reporting say the lack of rules and guidance in IFRS invites accounting abuse. Critics taking that view include the New York State Society of CPAs, which, with its 30,000 members, is one of the country's largest groups of accountants.
In a comment letter filed with the SEC about the roadmap, the NYSSCPA panned the proposal, finding the quality of IFRS lacking and the conversion costs too hefty, and claiming that "carve-outs" — the exceptions to IFRS that different countries develop — impair the comparability and consistency of financial statements that investors rely on.
The group also echoed a common complaint heard among IFRS opponents: the IASB caved in to political pressure last year when it allowed companies to retroactively reclassify assets so they could "cherry-pick" those with significant losses and remove them from net-income calculations. Tweedie's retort is that if the IASB hadn't acted to control the rule change, the European Commission would have passed a law that changed the rule in a less desirable way.
The handful of comment letters that CFOs filed with the SEC about the roadmap reveal mixed reactions to IFRS. For instance, C. Bradford Richmond of Darden Restaurants wrote:
" The large majority of U.S. public companies, like Darden, serve primarily domestic customer bases and are adequately capitalized without tapping overseas capital markets. Rather than mandating IFRS for all companies, we believe it would be more appropriate to allow large multinational organizations to adopt IFRS on a voluntary basis."
Similarly, Elyse Douglas of The Hertz Corp. noted:
" In our opinion, there has been no groundswell of public opinion promoting a conversion to IFRS. In fact, we have never heard an investor in our company, any stock analyst covering Hertz, or any lender with which we do business suggest to us that they would prefer we report our results in IFRS."
Conversely, Martyn Webster of XenoPort Inc. wrote:
" If the U.S. remains outside of the IFRS framework, then we will somewhat compromise our ability to participate in, and influence, important matters related to the overall operations of global capital markets."
A new Deloitte survey that polled 150 corporate finance executives concluded that:
- 51% - of the respondents would support the SEC's roadmap for adopting IFRS, if the regulator considered pushing back the mandatory deadline a year, to 2015
- 19% - said they supported the roadmap "as it is"
- 15% - rejected the proposal.
The remaining executives said they were unsure how the SEC should proceed.
Tweedie contends that while some critics claim the SEC will lose power if American companies switch to IFRS, the opposite is true. "The SEC will increase power" if the U.S. moves to IFRS, he says. "The beauty of the SEC is that it is one of the world's most effective regulators, and that puts peer pressure on others."
That pressure will extend to private companies as well, noted D.J. Gannon, a Deloitte partner and the firm's IFRS expert, who also took part in the press briefing. He said that once the SEC acts to require public companies to file results using IFRS, larger private companies will follow in order to keep up with the competition. In addition, lenders to smaller private companies will demand it from their borrowers. "It will take time; we are not going to go from zero to 60 in three months," noted Gannon, who thinks that over the next few years, momentum to use IFRS will grow.
It wasn't until recently that the SEC weighed in on the progress of its own roadmap. Since becoming SEC chair in late January, Mary Schapiro had remained quiet on the subject of the roadmap, a project her Republican predecessor, Christopher Cox, launched during his term. Schapiro's silence led some observers to believe the SEC was backing off from IFRS altogether.
But recent public statements made by Schapiro and James Kroeker, the SEC's chief accountant, assured constituents that the IFRS project had a green light. Schapiro's silence was a way of "establishing her territory [and] showing she was not doing the bidding of the previous Administration," contends Epstein. "I don't think it is possible to stop [the move to IFRS] or delay it. It costs money to keep companies in limbo."
Others, including Charles Niemeier, a member and former acting chair of the Public Company Accounting Oversight Board, have criticized the "rush" to deploy IFRS in the United States. For his part, Niemeier would like to see the IASB-FASB convergence project finished before requiring U.S. companies to file in IFRS. That, he thinks, would ensure that the combined standards remain stringent.
A precipitous exit from GAAP undermines the U.S. regulatory system and places "in jeopardy the thing that gives the U.S. a competitive advantage," he noted at an industry meeting in 2008.
" All research shows that the U.S. is unique in its regulation. No country is as effective.... We have the lowest cost of capital in the world. Do we really want to give that up"?
Additional reporting by: David McCann & Jason Karaian.
by Brooke Masters, Basel : Financial Times
“We must not lose sight of the fact that the purpose of accounting standards is to provide a clear and accurate picture of a company’s financial condition for investors ... I remain committed to the goal of a global set of high-quality accounting standards,” Mrs Schapiro said.
The US remains the most significant country not to have adopted the use of the international standards promulgated by the International Accounting Standards Board, preferring the GAAP standards set by the US-based Financial Accounting Standards Board. US officials have long promised to work towards harmonisation.
Under Mrs Schapiro’s predecessor, the SEC proposed a roadmap suggesting that: "US companies might be able to begin using International Financial Reporting Standards, as soon as 2014". But the global financial crash widened some of the gaps between US and international standards.
US standard setters in April softened fair value accounting rules for banks, which have allowed them to avoid taking paper losses on assets they intend to hold. When the IASB declined to follow suit, some European politicians complained that their financial institutions were at a competitive disadvantage.
"Now, convergence is once again at the top of the agenda".
The Group of 20 leading industrialised nations agreed last month in Pittsburgh on the need for common standards by 2011.
Mrs Schapiro pledged the SEC would do its part, saying that the regulator was reviewing the extensive feedback it had received on last year’s roadmap proposals. She also urged the assembled regulators to fight hard for the regulatory changes needed to prevent a repeat of last autumn’s financial collapse.
“We, as regulators, must not lose our focus on reforming the system,” Schapiro said.
Jane Diplock, chairman of both IOSCO and the New Zealand Securities regulator, praised Mrs Schapiro for pushing ahead on accounting, saying she was “optimistic” that a single standard would be the result.
The American Institute of Certified Public Accountants (AICPA) has recently issued a background document on International Financial Reporting Standards (IFRS).
The growing acceptance of International Financial Reporting Standards (IFRS) as a basis for U.S. financial reporting represents a fundamental change for the U.S. accounting profession. Today approximately 113 countries require or allow the use of IFRS for the preparation of financial statements by publicly held companies. In the United States, the Securities and Exchange Commission (SEC) has issued a proposed roadmap for the possible mandatory use of IFRS for U.S. public companies.
Download the document at:
http://www.ifrs.com/pdf/IFRSUpdate_V8.pdf
