SEC to Allow Foreign Issuers to File in IFRS
Fate of U.S. Issuers Still to Be Decided

By Colleen Lutolf

NEW YORK—The road to a single global financial accounting standard may be getting shorter, but some opponents of a recent SEC ruling are left wondering why what they think should be a multiyear project is moving forward in just a few months.

The SEC voted on Nov. 14 to allow foreign private issuers to file their financial statements using International Financial Reporting Standards (IFRS) without reconciling them with U.S. generally accepted accounting standards (GAAP). The SEC’s unanimous decision requires issuers who choose to file in IFRS instead of U.S. GAAP to file their statements in accordance with the International Accounting Standards Board (IASB).

“The proposal is premised on the commission’s long-held view that a single set of international accounting standards would help investors to better understand and draw comparisons among investment options,” SEC Chairman Christopher Cox said on Nov. 14. “And it would be better than if they had to deal with a multiplicity of national accounting standards.”

Allowing foreign private issuers to file their financial statements using international standards would also facilitate cross-border capital formation by reducing costs and regulatory burdens for issuers, Cox added.

One may be hard-pressed to find someone within the profession opposed to a single global accounting standard—in fact, it is a commitment to converging U.S. GAAP with IFRS that has led some, including the NYSSCPA and the Financial Standards Accounting Board (FASB), to oppose the timing of the new rule.

“The move by the SEC undermines how effectively the process continues,” Edward Ichart, chair of the NYSSCPA’s Financial Accounting Standards Committee, said after the SEC adopted the rule. “The negative consequence is that it will slow down the convergence process and provide less incentive for a robust give and take [on the issues facing convergence].”

Ichart, members of his committee and Mitchell J. Mertz, a member of the Society’s SEC Practice Committee, in September drafted a comment letter in response to what was then an SEC concept release on the now-approved rule. The SEC’s goal was to move toward a single standard, yet investors are “now going to have two different agencies issuing pronouncements and both are going to be accepted by the SEC,” Ichart said.

It will make comparing financial statements more confusing for the investor, he added.

Although the Society took a stand against the SEC proposal, it suggested that the SEC eliminate the requirement for U.S. issuers if it voted to eliminate the reconciliation requirement for foreign issuers.

“All issuers should be afforded the same option,” the drafters stated in their comment letter.

Those drafters were joined by William M. Stocker III, chair of the Society’s International Accounting and Auditing Standards Committee, to respond to a July SEC concept release that requested public comment on allowing U.S. public issuers to file financial statements in IFRS without reconciling with U.S. GAAP.

IFRS: Where Did It Come From?

IFRS evolved from the International Accounting Standards (IAS) in the late 1990s, Stocker said. Sometimes it’s talked about that IFRS is principles-based more than rules-based, but nobody set out to say, ‘Let’s have principles-based standards.’ I think it’s accidental. It’s just a historical legacy.

What gave the IFRS its push into the mainstream as a valid international standard was the 2001 European Commission (EC) decision that made IFRS the required standard for all of its countries listed on stock exchanges, Stocker said.

“This gave it enough of a base to give it value from a comparability standard,” he said. “It became a critical mass because there were so many countries reporting in it that other countries outside the EU [started using it], but it still had its roots in its broad, easy, loose standards.”

Asked if principles-based standards are more subjective than rules-based standards, Stocker answered, “Definitely. They’re designed to be. Certainly a lot of people who are trying to do what’s required find it easy to use rules-based than principles-based [standards]. They know they made the right judgment and don’t want to be second-guessed.”

To rein in the loose ends, Stocker said, the SEC may end up refining IFRS. Although in some areas, U.S. GAAP is more principles-based than the international standards, Stocker said.

“Both in U.S. GAAP and IFRS you have to disclose related-party transactions,” he said. “U.S. GAAP is more principles-based in its definition of what a related party is: it’s any party who is likely to have motivation to make a transaction at arm’s-length,” Stocker said. “In IFRS you get into specific rules as to who is the related party and who isn’t.”

IFRS in the U.S.

Although an intent to create a single global accounting standard is not a new idea, the convergence process in the U.S. began in earnest in 2002, when FASB and IASB entered into the Norwalk Agreement, a joint commitment that set long-term goals for both standard setters to undertake in an effort toward creating a single, global standard. The 2006 Memorandum of Understanding between FASB and the IASB set a specific set of milestones to be achieved by 2008, according to a Nov. 7 comment letter from FASB to the SEC regarding the two concept releases.

Since 2002, FASB and the IASB have issued standards to reduce or eliminate differences between IFRS and U.S. GAAP regarding inventory, nonmonetary transactions, share-based payments, segment reporting and the use of a fair-value option to simplify the accounting for financial instruments, according to FASB.

“Permitting extended periods of choice between U.S. [GAAP} and IFRS results in a two-GAAP system that creates unnecessary complexity for investors and other users of financial information,” according to a FASB comment letter sent to the SEC.

FASB also suggested the SEC identify and implement changes to sustain the IASB and to secure it as an independent global body.

“We believe the current funding levels and staffing mechanisms of the IASB are not adequate for the tasks it will face if the improved version of IFRS becomes the single set of global accounting standards,” FASB said in its letter to the SEC.

“Moreover, current funding sources appear unstable and they give rise to independence concerns.”

Currently, the IASB is funded through voluntary contributions from preparers and accounting firms. “Its current funding mechanism appears inconsistent with the mechanisms envisioned in Section 108 of the Sarbanes-Oxley Act,” FASB said.

Stocker agreed that there “does seem to be a contradiction” regarding who has standing and how that could be challenged by an investor group. FASB is funded by mandatory payments by U.S. issuers, he said. “As far as providing independent funding sources, you could arrange that it’s funded by the U.S., but I don’t know that the U.S. would want to subsidize the rest of the world or if the IASB would even accept that. I really don’t know. I can’t say I understand the politics of it.”

Not a lot of public U.S. issuers are going to file using IFRS, said Daniel J. Noll, the AICPA’s director of accounting standards and a member of the NYSSCPA. That is one of the reasons the AICPA is supporting the SEC’s recent decision and its proposal that U.S. public issuers also be allowed to use IFRS in their SEC filings.

“We believe there are not going to be many U.S. companies who will flip the switch and go over [to IFRS],” he said. “We made a suggestion the SEC do a survey in effect to [study how many companies] will flip. We said that the key to our position is that before you flip the switch, we owe it to the whole financial reporting system that that switch is ready to be flipped. To make sure we’re right and not wrong, we should somehow get a sense of the U.S. public marketplace.”

When asked if the AICPA would withdraw its support if an SEC study determined that many more U.S. companies were ready to file in IFRS than the AICPA initially believed, Noll said the AICPA’s withdrawal “would depend on how wrong we are and what would need to take place in the system.”

As for IASB independence concerns, Noll pointed to a Nov. 7 combined statement issued by the International Organization of Securities Commissions (IOSCO), Cox, and European and Japanese securities commissioners announcing that the International Accounting Standards Committee (IASC) Foundation Trustees, the overseers of the IASB, will review the foundation’s constitution in 2008 to “strengthen the foundation’s governance framework, while emphasizing the continued importance of an independent standard-setting process.”

When asked if the AICPA had any concerns with why the IASB’s independence issues weren’t addressed before the SEC approved IFRS for foreign private issuers, Noll said again that it was the AICPA’s position that there were not going to be that many companies filing in IFRS at this point in time.

“IASB is independent; it is a question to what degree,” Noll said. “We support the efforts [to] strengthen the structure and whatnot. It’s an important part of the pie.”

The organization has stated that U.S. private issuers should still be required to file with the SEC using U.S. GAAP.

Another concern of the Society on allowing U.S. public issuers to file using IFRS was the preparedness of U.S. accounting firms.

“Allowing U.S. companies to follow IFRS will likely result in an ever greater concentration of audits being performed by ‘Big Four’ public accounting firms,” the Society’s comment letter states. “This raises another red flag regarding adopting such a proposal in the near future.”

“That’s why when we responded, we said we felt this was all a bit premature,” said Mertz, who also is the vice chair of the Society’s Accounting and Auditing Oversight Committee.

IFRS ‘with an Accent’

Mertz said he believed the SEC is reacting to political concerns that the domestic markets aren’t doing well due to the United States’ rules-based regulations.

“I think they thought doing this may … make U.S. markets more attractive to foreign companies,” he said. “It’s still going to be a problem because the [version of] IFRS that the SEC said is allowable is the generic brand—it can’t be adjusted for local changes that a lot of countries will put in.”

The Society recommended in its comment letter on foreign issuers that the SEC carefully consider the use of consistent IFRS standards around the world before adopting the rule.

“As [a] principles-based standard, IFRS allows for options in accounting treatment,” the comment letter stated. “As a result, interpretation of IFRS around the world varies and is often influenced by countries’ previous local GAAP as well as regional industry practices. These inconsistencies give rise to what has been termed ‘IFRS with an accent.’”

Even when preparers and regulators insist they are following the IASB version of IFRS, their financial statements reveal regional GAAP influences.

Because IFRS is principles-based and U.S. GAAP more rules-based, the Society stated that IFRS lacks detailed guidance, “which can result in varied and divergent accounting practices. . . [T]he principles-based guidance under IFRS could unintentionally foster abuse.”

The Society, the New York State Board of Public Accountancy, the National Accounting State Boards of Accountancy (NASBA) and FASB all opposed the SEC proposals that would allow U.S. public issuers to file their financials without reconciling them to U.S. GAAP, but Samuel P. Gunther, who sits on the New York State Board of Public Accountancy, said the issue is moot.

When the state board voted to support NASB’s position on the SEC’s concept release and U.S. issuers, Gunther, as well as two other state board members, Dena G. Williams and Patricia A. Crecco, opposed the measure. The measure passed 13–3.

“If the SEC has taken a position that foreign issuers can use IFRS, therefore investors are adequately protected,” Gunther said. “Why are they not adequately protected if U.S. issuers decide to use IFRS reporting? That would, to me, be taking an inconsistent stance.

“I don’t agree with using IFRS because of all sorts of difficulties in monitoring use of standards, but my own personal belief is that it can’t be stopped.”

The SEC scheduled a roundtable discussion on allowing U.S. issuers to file with the IFRS on Dec. 13. Another roundtable is planned for Dec. 17.

Rule amendments applying to foreign issuers filing with the SEC in IFRS will take effect 60 days after they are published in the Federal Register and will apply to financial statements covering years ended after Nov. 15, 2007, according to the SEC.w

Colleen Lutolf, Editor, can be reached at clutolf@nysscpa.org.