SEC staff issues final staff report on IFRS work plan
On July 13, 2012, the SEC's Office of the Chief Accountant issued a final staff report on its Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers. This report summarizes what the SEC staff learned in conjunction with carrying out its work plan, which was originally issued in February 2010. While this report reiterates the U.S. commitment to the objective of a single set of high-quality globally accepted accounting standards, it does not provide a final recommendation to the SEC with respect to whether U.S. issuers should be required or allowed to apply International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). However, the report does include the following key observations about constituents' views with respect to application of IFRS by U.S. issuers:
- There is not sufficient support among constituents at this time for designating IFRS as the authoritative standards in the U.S. without an endorsement mechanism.
- There is substantial support among constituents to continue exploring the incorporation of IFRS into the financial reporting system for U.S. issuers using a method other than designating IFRS as the authoritative standards in the U.S. One such method might involve an endorsement mechanism whereby the Financial Accounting Standards Board (FASB) has to endorse an IFRS before it becomes part of U.S. generally accepted accounting principles (GAAP).
The report also includes the following seven significant themes noted by the SEC staff during its completion of the work plan:
- Development of IFRS. The SEC staff noted that IFRS are generally considered high quality by the global financial reporting community, but that continued development is needed in certain areas, such as accounting by insurance entities, extractive industries and rate-regulated enterprises. By the same token, the SEC staff noted that U.S. GAAP also contains areas in which continued development is needed, such as push-down accounting and accounting for government grants. However, the perception among U.S. constituents is that more development is needed with respect to IFRS than U.S. GAAP, particularly as it relates to industry-specific guidance.
- Interpretive process. Based on its outreach, the SEC staff concluded the IFRS Interpretations Committee (IFRIC) (the interpretive committee of the IASB) should do more to address issues on a timely basis. The SEC staff acknowledged that steps recently were taken to address this issue, but also noted that it is too early to determine if those steps will be sufficient.
- IASB's use of national standard setters. The SEC staff concluded that the IASB should consider greater reliance on national standard setters to assist in understanding how its standard-setting activities affect the various domestic reporting and regulatory systems that rely on IFRS.
- Global application and enforcement. The SEC staff reviewed financial statements prepared in accordance with IFRS in an attempt to assess the degree of consistency with which IFRS is applied in practice. While the SEC staff concluded the financial statements reviewed generally appeared to comply with IFRS, they also concluded that improvements could be made throughout the financial reporting community to narrow the diversity that occurs in global application of IFRS.
- Governance of the IASB. Overall, the SEC staff noted that governance of the IASB is reasonably balanced between overseeing the IASB and allowing it to function independently. The SEC staff also noted that the IASB is like other global organizations in that it does not have a mandate to focus on any single capital market when it is establishing standards. As a result, the SEC staff noted that it may be necessary to put in place specific mechanisms to consider the needs of and protect U.S. investors and U.S. capital markets. The SEC staff suggested that one such mechanism could be an active FASB focused on endorsing IFRS.
- Status of funding. The SEC staff expressed concerns about the approach used to fund the IASB, noting that its most significant concern in this area is the continued reliance on funds from the large public accounting firms.
- Investor understanding. The SEC staff observed that investor education on accounting issues and changes in accounting standards lacks uniformity. The SEC staff will consider improvements that could be made with respect to educating investors on accounting-related matters and involving investors in the standard-setting process.
As indicated earlier, the report issued by the SEC staff does not provide a final recommendation to the SEC with respect to whether U.S. issuers should be required or allowed to apply IFRS as issued by the IASB. The report also does not indicate whether a formal recommendation is forthcoming from the SEC staff or the timing of any formal recommendation. As a result, it is not clear what the SEC staff's or SEC's next steps are (or the timing of those steps) with respect to whether U.S. issuers should be required or allowed to apply IFRS as issued by the IASB.