If you read MFA’s recent Financial Reporting Alert, SEC Issues Two Staff Papers on Work Plan Convergence of Global Accounting Standards, there are a few key points worth noting.
- The Securities and Exchange Commission (SEC) Staff Papers provide additional information for the Commission to review before it decides whether to incorporate International Financial Reporting Standards (IFRS) into the U.S. financial reporting system.
- The Staff Papers do not take a position on whether IFRS should be incorporated into the U.S. financial reporting system.
- The SEC staff did not analyze topics currently subject to joint standard setting by the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB).
- While the staff found that financial statements prepared under IFRS generally appear to comply with its standard, the staff noted that disclosures about accounting policies could be clearer and more transparent and that comparability is challenging due to diversity in the application of IFRS.
- Nonetheless, the staff also noted some topical areas where a majority of companies applied certain requirements of IFRS in a consistent manner, thereby contributing to greater comparability on a global basis.
With regards to IFRS, two key activities are coming to a conclusion, both of which have continually been delayed and are long overdue.
The Convergence Project
The IASB and the FASB are nearing completion of their targeted convergence for major joint projects. The IASB and the FASB have been working together since 2002 to achieve convergence of IFRS and U.S. GAAP (generally accepted accounting principles). In June 2010, the IASB and the FASB announced a modification to their convergence strategy, responding to concerns from stakeholders regarding the volume of draft standards due for publication in close proximity. The strategy retained a June 2011 target due date to complete those projects for which the need for improvement of IFRS and U.S. GAAP was the most urgent, while identifying those projects for which a later completion date would be appropriate because they address matters believed to have a relatively lower priority or for which further research and analysis is necessary. Regardless of the outcome of IFRS in the U.S., the IASB believes that further convergence projects are not the best solution and that the time and effort required of these activities is not an effective use of their time.
Adoption of IFRS in the U.S.
The Commission has not yet made a decision as to whether and, if so, when and how to incorporate IFRS into the financial reporting system for U.S. issuers. Currently on the table for discussion are three different approaches:
- Full adoption of IFRS on a specified date, without any endorsement mechanism;
- Full adoption of IFRS following a staged transition over several years; or
- An option for U.S. issuers to apply IFRS in a piecemeal fashion.
Although the SEC has not committed to when they will make a decision on IFRS, it could be as early as 2012. There currently is pressure from various international bodies to do so. Foreign countries that are for the adoption of IFRS in the U.S. are lobbying for full adoption on a specified date.
A recent Bloomberg article provides details about a revealing January 5, 2012 interview with SEC Chairman Mary Schapiro and former SEC Chairman Arthur Levitt (to air on Bloomberg Radio):
Shapiro said, with regards to the agency’s efforts of potentially blending U.S. accounting practices with a unifying system of International Financial Reporting Standards that a decision will be made “in the next few months.” […] “There are some hurdles that have to be passed before we’re going to be comfortable making the ultimate decision about whether to incorporate IFRS into the U.S. reporting regime,” she said. Sticking points include the independence of the International Accounting Standards Board and “the quality and enforceability of standards,” she said.
The future of IFRS in the U.S. rests with the Commission’s decision. All aspects of adoption are being carefully considered. While the IASB and the FASB have made significant strides with the convergence project, it has been a long haul. As the two Staff Papers mentioned in our recent Alert highlight, there is still much to be done to fully converge. At the end of the day, that may foretell the downfall of IFRS in the U.S.
Both of these activities impact public companies and if you are looking for further insight, they were discussed at MFA’s recent webinar, The Changing Landscape for Public Companies. A recording of the webinar is available here.
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