Officials with the Securities and Exchange Commission are taking a wait-and-see attitude toward incorporating International Financial Reporting Standards into the U.S. financial system, even as an increasing number of foreign companies file their financial reports with the SEC using IFRS.
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A pair of SEC officials spoke about the status of IFRS in the U.S. during a panel discussion Tuesday at Financial Executives International’s 31st Annual Current Financial Reporting Issues conference in New York, while adding the standard disclaimer that they are only speaking for themselves and not for the SEC. Paul Beswick, acting chief accountant in the SEC’s Office of the Chief Accountant, reviewed the results of the SEC’s staff reports on IFRS, including the final report which outlined many of the problems with IFRS. So far, the SEC commissioners for whom the reports were prepared have not yet made any formal decision about whether to move forward with incorporating IFRS.
“When thinking about sufficient development of IFRS, some areas that the staff focused on were the comprehensiveness of IFRS, the auditability and enforceability and then the comparability among jurisdictions,” said Beswick. “One of the things that both preparers and investors told us was if the information isn’t comparable across jurisdictions, is it really worth it making this effort to go to a single set of standards?”
He noted that the final staff report was issued on Friday, July 13. “We acknowledge that we issued a report on Friday the 13th,” said Beswick. “It was the Friday before I got named acting chief. You could kind of flip that the other way and [say] it was Jim Kroeker’s last day as chief accountant, so one could then say he wasn’t allowed to leave until he got the report out.”
“I think a number of people were surprised that the final staff report didn’t have a recommendation to the commission,” Beswick added. “I think it’s important to understand that wasn’t really the intent of the work plan. The intent of the work plan really was to be more information gathering, to help inform the commission’s thought process. It is important to highlight, though, that the staff noted, looking directly to the IASB would be a challenge in the U.S. And I think we cited three specific reasons in the report. One is influence on standard-setting. As we surveyed the 42 largest capital markets in the world, only two of them—and they were two of the smallest ones—looked directly to the IASB. All the other ones had what I refer to as a ‘suitability mechanism’ to make sure that the IFRS standards are suitable for their capital markets.”
The SEC staff also looked at the burden of conversion. “One of the things we learned in reaching out to a number of specialized industries is that references to U.S. GAAP are buried in literally thousands of pages of U.S. law and U.S. regulations,” said Beswick. “That’s not to say the staff was entirely downbeat on further incorporating IFRS into the U.S. markets. We thought the focus should be more on an endorsement mechanism. But that doesn’t mean it’s a fait accompli. There are still challenges even under an endorsement mechanism.”
Among those drawbacks are fostering a greater consistency in application and enforcement, maintaining U.S. influence in the standard-setting process, and the funding mechanism for the International Accounting Standards Board.
“I think one of the things that took people a little by surprise in the final staff report was the commission’s statement at the front of the report that the commission, while appreciating all the hard work of the staff, wasn’t coming to a final policy decision,” said Beswick. “It wasn’t meant to make a recommendation on the final policy, the threshold policy question.”
Beswick acknowledged that there are benefits in the endorsement mechanism, as it retains influence to make sure the U.S. voice is heard in the standard-setting process. “That’s one of the things, as we did our outreach, we heard pretty consistently: a concern that the uniqueness of the U.S. capital markets needs to be appropriately reflected in the standard-setting process,” he added. “We also thought that an endorsement mechanism might be able to lessen the burden on conversion.”
Beswick noted that Canada has recently converted to IFRS, using a so-called “Big Bang approach.”
“They set a date and said, ‘On this date, everyone is going to incorporate IFRS into their financial reporting,’ and then they quickly started carving out certain industries because IFRS didn’t work in those industries,” Beswick pointed out. He noted that FEI is leading a study in Canada analyzing the cost of converting to IFRS. “I think that will be an interesting data point for people just because Canada is probably the most similar to the U.S. capital markets in that they have an equivalent of [Sarbanes-Oxley Section] 404 and the approach to financial reporting is much more similar in Canada than in some of the other jurisdictions,” said Beswick.
In terms of the development of IFRS, Beswick noted that the SEC staff was fairly positive in its final report about the efforts that the IASB has undertaken over the past 10 years with the standards. “They generally are perceived to be high quality,” he said. “However, there are some notable gaps that continue to exist in IFRS. Regarding the interpretive process, that’s one of the things that we heard loud and clear across all constituents, including overseas, that the interpretive process needs to be improved. The IASB has recently made some changes to their equivalent to the EITF [Emerging Issues Task Force], IFRIC [IFRS Interpretations Committee], and we’re hopeful that process results in more timely addressing of interpretive issues.”
The SEC staff acknowledged in their final report that there have been some notable steps to try to increase global application and enforcement of IFRS, Beswick pointed out. The European Securities and Markets Authority, which oversees all 27 security regulators in Europe, has made efforts to foster greater comparability amongst preparers. In terms of independent standard-setting for the benefit of investors, both the IFRS Foundation and the Monitoring Board of financial regulators overseeing it have both undergone some corporate governance reviews in the last two years, Beswick noted.
“While we think that these are definitely improvements, one of the things that the staff wants to see is how they function,” he added. “Anytime you talk about corporate governance, there’s what’s written down on paper and what actually happens. And I think what we hear is still concern in the U.S. about how it’s going to function in reality. So we’ve been continuing to monitor that.”
The SEC’s final staff report noted that there is a wide spectrum of investor understanding of IFRS, both large and small. “When you talk about the largest investors in the country, they’re already using IFRS in many cases, and they use financial statements that have been prepared under IFRS and make capital decisions based on that,” said Beswick. “But then you think about some of the smaller investors and they don’t have a real understanding of IFRS.”
If the commission were to decide to move forward with IFRS, there would need to be mechanisms in place to improve investor understanding of IFRS, Beswick noted.
In terms of the impact on the regulatory environment, Beswick acknowledged they were surprised about that too. “We clearly understood the importance of U.S. GAAP to the banking regulators,” he said. “We’ve had a long history of that. But we identified many other regulatory agencies that rely on U.S. GAAP as the starting point for their regulatory regime. To give you an example, FERC [Federal Energy Regulatory Commission] relies on U.S. GAAP in the context of overseeing the utilities, the insurance industry.”