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The SEC Staff Report on IFRS

Kicking the Decision Down the Road

Mary-Jo Kranacher, MBA, CPA/CFF, CFE

For those who have been waiting for the SEC's policy decision on whether—and if so, how and when—International Financial Reporting Standards (IFRS) will be incorporated into financial reporting for domestic issuers, the July 13, 2012, final staff report, “Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers,” does not provide an answer (http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final-report.pdf). In this case, however, the SEC's indecision speaks volumes: most people seem to agree that, having a single set of high-quality global accounting standards, applied and enforced consistently, makes good business sense on a conceptual level, but achieving this goal has been elusive.

The SEC staff explored various options, ranging from “no action, to incorporating IFRS, to pursuing the designation of the standards of the IASB [International Accounting Standards Board] as ‘generally accepted’ for purposes of U.S. issuers' financial statements.” According to the report, the vast majority of participants in the U.S. capital markets do not support the adoption of IFRS as authoritative; thus, it seems that the last option on the SEC's list is off the table, at least for now. The report cited the following primary obstacles to incorporating IFRS:

  • A desire to maintain some level of jurisdictional control over accounting standards setting in order to ensure the suitability of IFRS within the U.S. framework

  • The burden of direct conversion to IFRS, including the cost of updating accounting policies, systems, controls, and procedures

  • The significant effort required to change references from U.S. Generally Accepted Accounting Principles (GAAP) to IFRS throughout the various laws, regulations, and private contracts that would be affected.

Report Recommendations

Given these obstacles, the SEC staff focused their efforts on recommending conditions that would likely enhance a potential U.S. transition to IFRS. The staff recommendations included the following:

  • Developing IFRS in those areas that are underdeveloped, such as the insurance industry

  • Providing timely, authoritative guidance on issues arising from current IFRS

  • Using national standards setters to “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”

  • Enhancing the consistent global application and enforcement of standards

  • Creating mechanisms that specifically consider and protect the U.S. capital markets

  • Obtaining funding from U.S. sources, whereby the IASB's reliance on the large public accounting firms would be eliminated

  • Improving investor engagement and education regarding the development and use of accounting standards.

Convergence

Over the past decade, the IASB and FASB have made significant progress in their efforts to minimize the differences between IFRS and U.S. GAAP. But despite years of work on the convergence project, some significant discrepancies still exist. Among these are the methodology for recognizing and measuring asset impairment losses; the threshold (i.e., GAAP's “likely” versus IFRS's “more likely than not”) for recognizing certain nonfinancial liabilities (e.g., contingencies); asset (re)valuation; the use of last-in, first-out (LIFO) for inventory costing; the timing of recognition for research and development costs; the difference in accounting for uncertain tax positions; and “asset componentization” (i.e., separate depreciation for each component of an item of property, plant, and equipment).

Going Forward

Although making a decision on whether to incorporate IFRS into the U.S. financial reporting system was beyond the scope of the staff report, the work plan does establish the groundwork for a possible endorsement-like approach toward IFRS in the United States. With the issuance of the work plan, how far are we from a single set of high-quality global accounting standards? Probably too far for its supporters and too close for its opponents.

As always, I welcome your comments.

The opinions expressed here are my own and do not reflect those of the NYSSCPA, its management, or its staff.

Mary-Jo Kranacher, MBA, CPA/CFF, CFE. Editor-in-Chief, ACFE Endowed Professor. Fraud Examination, York College, The City University of New York (CUNY), mkranacher@nysscpa.org.

 
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