Next the SEC staff looked at the audit regulation and standard-setting process and reached out to the Public Company Accounting Oversight Board and to the large accounting firms. “One of the things we learned is that there are already FPIs [foreign private issuers] that are getting audits on PCAOB standards using IFRS, so we thought from the approach of an endorsement mechanism, it wasn’t going to impact audit regulation and audit standard-setting significantly,” said Beswick.

The SEC also considered the impact on private companies, even though the SEC technically only has oversight over public companies. “One of the things I do like to highlight is the AICPA did recognize IFRS as a basis for which auditors can issue opinions, and they did it in 2007 or 2008,” said Beswick. “In addition, the FASB has made changes to their processes in response to a Blue-Ribbon Panel where they’re going to further think about how private companies are going to be impacted by their standard-setting process.”

Exit Strategy
As for the impact on issuers, Beswick said the SEC received a lot of helpful feedback from them. “Not surprisingly, there were a couple of things we heard from issuers,” he added. “One was sort of change fatigue. The FASB and the IASB are working on some of the most fundamental standards in terms of accounting, and I think there is concern that there is a certain level of fatigue in the system. We keep having exposure drafts, and people spend a lot of time providing helpful comments. So one of the things we heard is that this needs to be done in a rational manner that doesn’t overtax the system. Also, there’s a real concern about the cost of conversion and the burden it might have, and it’s something the staff is acutely aware of.”

In terms of human capital readiness, Beswick said it is largely dependent on whatever method the SEC would use in terms of further incorporating IFRS.

“One of the things we do need to acknowledge is that IFRS is used in the U.S. capital markets,” he noted. “There are close to 500 FPIs that are now using IFRS, and there are also a significant number of subsidiaries of foreign companies, so the use of IFRS is expanding. But that doesn’t mean that should then drive whatever decision the commission should make. I thought somebody made a good point. Before we make this determination, we need to think about an exit strategy. They compared this to the E.U. and the euro and said, ‘Several years ago, the idea of a euro was a great idea, but then when they ran into problems, they didn’t have a great exit strategy.’ So we need to have an exit strategy. If we take the next steps, one of the things we need to think about is what if this doesn’t work and how would we resolve that? I thought that was an important thing the staff really took to heart.”

SEC Corporate Finance Perspective
Craig Olinger, deputy chief accountant of the SEC’s Division of Corporate Finance, spoke alongside Beswick and said the SEC has about 9,000 domestic registrants, mostly using U.S. GAAP, and 1,000 foreign registrants, some of which use IFRS and some U.S. GAAP. Most Canadian companies are now using IFRS or are preparing to switch to IFRS. Companies in Europe are mostly using IFRS, while offshore companies in island nations and China are mainly using U.S. GAAP. Israeli companies are mostly using U.S. GAAP, although some use IFRS. Other parts of the world are using a mixture of IFRS, U.S. GAAP and their home countries’ versions of GAAP, which still need to be reconciled with U.S. GAAP. “That number is shrinking, with most of them moving over to IFRS,” Olinger added.

He said the SEC has seen issues with some of the foreign registrants, particularly those whose operations are in China. “They tend to have interesting consolidation structures,” he said. “VIE [variable interest entity] type issues can come up, and revenue recognition. Some of these are incorporated offshore and they are foreign private issuers. But there are literally hundreds that are domestically incorporated, but their operations are in China as well. There are some interesting revenue recognition issues there, because business practices can be pretty different, and even things that seem pretty basic in the United States aren’t automatically the way things are done over there. We’ve seen some ICFR [internal controls over financial reporting] issues. The question about the basic ability to prepare U.S. GAAP compliant statements when you’re in an environment that’s fundamentally not a U.S. GAAP one can be pretty interesting. Also there are parts of the world where the PCAOB is not allowed yet to do inspections, so we have some risk factor disclosures that we seek along those lines.”

Olinger noted that IFRS is an area that the SEC’s Division of Corporate Finance needs to deal with, notwithstanding the status of whether it is ultimately going to be incorporated into U.S. GAAP. “With hundreds of Canadian companies having come over to IFRS and with other companies coming, we have 400 to 500 companies on IFRS, so it’s number 2 next to U.S. GAAP in terms of quantity of filers,” he said. “So we do look at it carefully. We review IFRS [filings] with the same scope of review that we would do with a domestic issuer. We look for full compliance. We train our staff on IFRS. We try to stay current with what’s going on with IFRS, just as we do with U.S. GAAP. We consult the OCA [Office of the Chief Accountant] on IFRS matters, just as we consult with them on U.S. GAAP matters.”

Olinger noted that the frequent comment areas for IFRS filers are fairly similar to those for U.S. GAAP filers. “It tends to be driven by the nature of their business activities and the complexity of their instruments or the complexity of their business combinations, things like that more so than anything that’s unique to IFRS as a different set of standards,” he said.

Olinger noted that the SEC sometimes send comments to filers on the IFRS 1 standards, which relate to companies that are adopting IFRS for the first time, particularly for Canadian companies. “The population of Canadian companies coming over is a little different,” Olinger observed. “Our pre-existing IFRS filer population had been largely European, mostly big companies, and now we have a lot more smaller Canadian companies, a lot of them in the extractive industry, and those companies tend to have issues of their own, regardless of the GAAP. I think the Canadian regulators have paid a lot of attention to the first-time adoption in Canada, and that’s a good thing. What we’re tending to see in review is probably not so much the IFRS application issues per se, but more the reporting issues where our rules intersect with Canadian rules, like is the assertion of IFRS as issued by the IASB appropriate, the assertion you need to make in order not to reconcile with U.S. GAAP. We’ve seen some things in selected data putting the Canadian GAAP side by side with the IFRS figures, and of course we have some prohibitions against that. So far, there are not a ton of IFRS application issues, but we are continuing to pay attention there.”

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