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By Colleen Lutolf
Posted on 4/9/09
NEW YORK -- One might be hard pressed to find a CPA who would be opposed to a single set of high-quality, global accounting standards so that everyone—CPAs, investors, analysts, journalists, CFOs—could easily compare the financial health of companies across every industry throughout the world.
But as the NYSSCPA pointed out in its comment letter to the Securities and Exchange Commission (SEC) regarding a proposed roadmap that, if adopted, would replace U.S. Generally Accepted Accounting Principles (GAAP) with International Financial Reporting Standards (IFRS) by 2016, “quality” should be the SEC’s primary concern when it comes to a single set of global standards. And as far as comparability goes, well, we’re not there yet, either, according to the Society.
“We support the goal of establishing a single set of high-quality, global accounting standards in order to enhance comparability of financial information and the efficiency and effectiveness of capital formation and allocation,” the Society’s comment letter states. However, an SEC decision to replace U.S. GAAP with IFRS should be “based on the quality of the accounting standards and not just on the desire to conform accounting standards worldwide.”
The roadmap, if approved, would commit the SEC to make a decision in 2011 whether to require all U.S. public companies to file their financial statements in IFRS by 2016. It would also allow approximately 110 U.S. companies to file their financial statements in IFRS as early as this year (for 2010 filings).
If the commission adopts the international standards as promulgated by the International Accounting Standards Board (IASB), it would become mandatory for U.S. public companies to file their financial statements in accordance with IFRS, starting with large, accelerated filers (issuers that have a common equity with a value of at least $700 million) in 2014; accelerated filers would file in IFRS in 2015, and 2016 would become the mandatory filing date for all other public companies.
Throughout the SEC roadmap, readers are constantly reminded that the SEC—at least the SEC that issued the roadmap in November under former commission chairman, Christopher Cox—believes a single set of high-quality accounting standards would “benefit investors” because it would increase transparency and lead to better comparability across markets.
The SEC, in a February 2000 concept release, even defined
what it believes “high-quality accounting standards” are: They “consist
of a set of neutral principles that require consistent, comparable,
relevant and reliable information that is useful for investors.”
But is that what U.S. investors will get if the proposed roadmap is
approved in 2011—the year the SEC said it will determine what,
if any, progress was made toward reaching seven milestones that must
be reached before IFRS would be adopted?
Although the roadmap, at 165-pages long and ½-inch thick when printed, provides U.S. public issuers a guide to get to IFRS, the NYSSCPA believes it doesn’t present “in sufficient detail, the methodology and criteria expected to be applied to the milestones in assessing the adequacy of IFRS in meeting the needs of preparers, users, and auditors,” according to the Society comment letter, which was drafted by the Society’s IFRS Roadmap Task Force and sent to the SEC March 5. “Before requiring the adoption of IFRS, the SEC should establish clear criteria on which decision makers, preferably a committee consisting of a cross-section of representatives from the preparer, user and auditor communities, will assess the quality of IFRS.”
The task force is chaired by Robert E. Sohr and includes members of the Financial Accounting Standards, the International Accounting and Auditing, and the SEC Practice committees. The comment letter’s principal drafters were David Bender, Robert A. Dyson, Hisham A. Kader and Anna Zubets.
The SEC first proposed the idea—and some details—of an “IFRS roadmap” in August 2008 at one of the commission’s public meetings, but the actual roadmap wasn’t made publicly available until November. And as most people now know, the world, even in August 2008, was a different place—Bear Stearns was gone, but Lehman Brothers was still standing, albeit already on shaky legs.
If CFOs were already concerned about costs associated with moving
to IFRS in August, that concern has most likely grown in the current
economic climate. The SEC estimated costs for companies to transition
to IFRS to be approximately $32 million each.
“
The current economic crisis is unprecedented in its global reach, and
its depth and duration are hard to predict at the moment,” the
comment letter said. “It would be reasonable to conclude that
the monetary and human capital costs of the transition to IFRS could
be burdensome to entities with limited resources and prohibitive for
some smaller entities, even over a period of many years.”
The Society suggests, as an alternative approach to the roadmap, to delay mandatory IFRS conversion and, instead, “vigorously continue convergence efforts” with the Financial Accounting Standards Board (FASB) and the IASB.
Convergence Continues
In 2002, the FASB and the IASB entered into the Norwalk Agreement, a joint commitment that set long-term goals for both standards setters to undertake in an effort toward creating a single, high-quality set of global accounting standards. The 2006 Memorandum of Understanding between the FASB and the IASB set a specific set of milestones to be achieved by 2008, but despite progress, some of those convergence projects have been delayed.
“ If you look at the convergence plan, most of the projects are scheduled to be finished by 2011, so actually I thought the roadmap was a pretty good one,” said Zubets, a member of the Financial Accounting Standards Committee. She made it clear that her comments were her own opinions and that she was not speaking for the rest of the IFRS Roadmap Task Force. “But by no means will the converged standards be identical to [U.S.] GAAP. I don’t think the convergence efforts will get you to 100 percent identical standards.”
“The roadmap says that the SEC will make decisions on the milestones in 2011, one being whether sufficient convergence has been achieved,” said William M. Stocker III, a member of the IFRS Roadmap Task Force and chair of the International Accounting and Auditing Committee. “The SEC’s—at least the SEC as constituted when it issued the roadmap—opinion of what sufficient convergence is would be a lot less than what the task force would think of as sufficient convergence. Even though we would agree that sufficient convergence going forward would be a good idea.”
The Society’s comment letter suggests that the SEC consider whether IFRS meets or exceeds the quality standards established by the FASB’s concepts statements, which contain the objectives and concepts of financial reporting in the U.S.
“Departure from those statements should be carefully considered and accepted only when IFRS principles are superior or, at least comparable,” the Society comment letter drafters stated.
“We’re saying that the SEC should ensure the IASB’s conceptual framework is as rigorous as FASB’s,” Zubets said. “It’s not to say that the IASB’s isn’t good enough, just that the SEC should ensure the framework is as rigorous as FASB’s before we adopt IFRS in the U.S.”
That the IASB remains independent is also a Society concern.
“In recent actions the IASB permitted retroactive reclassification of financial assets out of the held-for-trading category, which allowed companies to ‘cherry-pick’ assets with significant losses and reverse those losses out of net income,” the comment letter stated. “Questions about IASB’s ability to weather political pressures raise serious issues about its ability to issue high-quality standards.”
However, the FASB is now also facing that same political pressure and seems to be bending to it, Zubets said.
“It seems Herz changed his stance on the issue,” she said. “Seeing what’s happening in the U.S. to me is a little worrying. If there’s a substantial difference” between the IASB’s actions after being subjected to political pressure by the European Union and FASB coming up with new staff positions that would change the way fair value is measured after being pressured by Congress, Zubets said, “right now, I don’t see one. Though it does seem on paper that FASB is more independent—the IASB is funded by donations and FASB is not.”
Stocker said the FASB is absolutely more independent than the IASB.
“There was no public comment [period]” when the IASB changed its rules, Stocker said. “FASB wouldn’t [change] anything without going through the whole [amendment] process. There’s still more of a process and more independence with FASB.”
Stocker added that pressure on the FASB can only come from Congress or the SEC, while the IASB can be pressured by various countries and their public company regulating entities, including the EU, Japan and China, in addition to the U.S. Congress.
Although the FASB did allow for a public comment period for the amended guidance on how to measure fair value if the market is distressed, it was reduced to three weeks, and most of the comment letters the FASB listed on its Web site were not from investor groups or CPAs, who have been vocal supporters of fair value in the press, but from those who have historically been lobbying for its suspension—bankers, insurance companies and credit unions.
Comparability
The Society also takes issue with the SEC’s claim that IFRS adoption presents the United States with two benefits: improved comparability with non-U.S. reporting entities and providing management with greater judgment in preparing its financial information.
According to the SEC, a single set of accounting standards will allow investors to more easily compare information and will put them in a better position to make informed investment decisions; yet elsewhere in the roadmap the SEC states that IFRS provides a “relatively lesser amount of guidance and greater optionality” which “may reduce comparability of reported financial information, as different issuers may account or provide disclosure for similar transactions or events in different ways.”
“While desirable, these attributes appear inherently contradictory,” the Society drafters write in their letter.
“A ‘relatively lesser amount of guidance and greater optionality’ also implies greater reliance on the integrity of a company’s management,” said Bender, a member of the SEC Practice Committee and a principal drafter. “Consequently, the user of a financial statement may have to be more savvy in his or her reading and use of financial statements.”
Like Zubets, Bender said he was providing his own perspective on comparability issues in the IFRS roadmap and not speaking for the entire task force.
“The benefit for the U.S. and the entire world is supposed to be good quality financials, increased comparability, making it easier for countries to do better financially and communicate financially, but I think a person is narrow-minded to believe that particular countries are not going to focus IFRS on their own needs,” he said. “And I also believe the U.S. will be one of the few countries which effectively will pick up IFRS in its pure state, although I understand that Australia is currently doing this, which will make comparability somewhat difficult again.”
“One of the key things we talk about in the comment letter is that there is a problem with the whole argument for IFRS in that it increases comparability among companies and we have our doubts whether it really does that,” Stocker said. “Even if all the statements are in IFRS, there are usually many differences between any two IFRS statements than between any two U.S. GAAP statements.”
IFRS does not seem to be consistently applied from country to country, according to the comment letter, since the number of allowable options is conducive for the regulatory agencies in each country to interpret IFRS pursuant to their respective needs and business environments and for preparers and auditors to use incorporate their customary pre-IFRS practices into the financial statements. The Society suggested the SEC compile and summarize these variations in IFRS across jurisdictions. It also suggested current U.S. laws and regulations could lead to the United States’ developing its own national version of IFRS, “which would further reduce comparability.”
Bender said he believes that a single set of international accounting
standards will provide more transparency and comparability for investors,
but not right away.
“
I think it will, but not in 2011,” he said.
The Society does support the SEC’s proposal to allow voluntary early adoption of IFRS by a limited number of U.S. users starting this fiscal year.
The roadmap proposes limiting optional early use of IFRS to the top 20 companies in industries deemed to be IFRS industries; “however, we believe that the eligibility criteria should be changed to allow a more representative sample of U.S. companies to early adopt IFRS,” the Society wrote in its comment letter.
The Society believes the definition should be based on the percentage of companies in an industry using IFRS and should allow small as well as larger companies to participate in early adoption.
Society Chooses Plan B
There are two proposals in the roadmap with respect to U.S. GAAP disclosure information by issuers that elect to use IFRS financial statements in their commission filings.
“Proposal A” would require a U.S. issuer to provide reconciling information from U.S. GAAP to IFRS according to the IFRS 1 standard in a footnote to its audited financial statement. This information includes the restatement of and reconciliation from prior years’ financial statements and related disclosures, according to the SEC.
IFRS 1 requires that entities explain how the transition from previous GAAP to IFRS affects its reported financial position, financial performance and cash flows.
An example the SEC gives is that of a U.S. issuer filing an annual report for the year ending Dec. 31, 2009 in accordance with IFRS for the first time. The issuer would include a reconciliation of its reported equity from U.S. GAAP to IFRS as of Jan. 1, 2007 and Dec. 31, 2008 and a reconciliation for the year ending Dec. 31, 2008 of its reported total comprehensive income. After the initial reconciliation, the issuer would not be required to provide any reconciliation in future filings with the commission, according to the SEC.
“Proposal B” would require U.S. issuers to provide the same reconciling information as Proposal A, except it would also disclose on an annual basis certain unaudited supplemental U.S. GAAP information covering a three-year period. The reconciliation would relate to all annual periods covered by IFRS audited financial statement information covering a three-year period.
The SEC said Proposal B “increases the likelihood that U.S. issuers would maintain U.S. GAAP controls, procedures, and books and records, for periods after the election to report in IFRS.”
Although the SEC provides two options for commenters,
it adds that Proposal A “would not appear to promote the ability of U.S. issuers
to revert back to U.S. GAAP, since U.S. GAAP information would not
have been required to be accumulated or disclosed. …”
“
The concern with Proposal A is that if you allow some companies to
file in IFRS and you don’t require any GAAP-based information,
eventually those companies are going to have all their systems in IFRS
and not have anything in place to allow them to easily convert back
to U.S. GAAP” if the SEC doesn’t adopt IFRS, Zubets said. “Fast
forward to 2011, they can’t convert back to U.S. GAAP and you
could have companies screaming that conversion would cost millions
of dollars, which would place additional pressure on the SEC to allow
the use of IFRS in the U.S.”
Stocker agreed.
“You’d have a group of significant companies that had switched to just IFRS reporting, many of them would lose their historical data to [be able to] easily switch back and, therefore, provide a strong constituency to adopt IFRS in 2011,” he said.
The Society likes Proposal B, but it would prefer the supplemental U.S. GAAP information to be audited.
“Why do you want a financial statement audited? Because you want to have investors to have comfort that the information is fairly stated,” Zubets said. “The concern would be that the U.S. GAAP information would not be accurate.”
Although Proposal B would be more costly for companies and therefore may deter some of them from early adoption, the Society felt the benefits of adopting under Proposal B outweighed the drawbacks.
“Most importantly, IFRS to U.S. GAAP reconciliations over a meaningful period of time will provide the commission with important data to be considered as part of its decision process in 2011,” according to the Society’s response. The reconciliations will also be helpful in educating U.S. financial statement preparers and the investing community about differences between IFRS and U.S. GAAP.
If the SEC does allow early adopters to begin issuing their financial statements in IFRS this year, IFRS education and training will need to increase, the Society commenters said.
Up until now, IFRS training and education – through sponsored formal training programs or on-the-job training -- has been limited to stakeholders who interact with companies that issue IFRS-compliant financial statements, the Society said in its comment letter. “However, this organic or informal approach to IFRS education and training will probably not be adequate to support the adoption of IFRS in the U.S. within the timeline detailed in the roadmap.”
“We’re not just talking about students,” Bender said, “but people the many professionals who are in the industry for a long time, many who will have a hard time changing to a new system,” Bender said. People such as me, when one day, someone says, ‘You’ve got to review something in accordance with IFRS’ [they’re] going to be challenged to understand and apply this new way of accounting.
“Work expands to fill the time allowed for it,” Bender said. “So if the SEC pushes the adoption timeline into the future, people will not take early action to learn about and adopt IFRS. However, if people realize they have a year and a half left, all of a sudden, people will get rolling because people are resourceful. It’s pretty surprising how free enterprise responds to our needs.”
With a new SEC chair—Mary L. Schapiro was appointed by President Obama earlier this year—Stocker said IFRS has been a much less urgent agenda item on the SEC’s priority list. Add to that a $65 billion Ponzi scheme missed by SEC inspectors and the vilified fair value standards, and the SEC has its hands full.
However, the process toward convergence continues to move forward. The comment period for the IFRS roadmap, after being extended in February, closes April 20.
Colleen Lutolf is editor of The Trusted Professional. She can be reached at clutolf@nysscpa.org.
Keep Clicking: Add your opinion to the conversation on the Society’s IFRS Roadmap comment letter already underway at the NYSSCPA’s CPA.Blog.
