The Monitoring Board of international regulators overseeing the IFRS Foundation has chosen Japanese regulator Masamichi Kono as its chairman, while also choosing a new way to assess the membership criteria.

Kono had been acting chairman of the Monitoring Board and the Monitoring Board simply elevated him from acting chair to chair. Kono represents the Japan Financial Services Agency on the Monitoring Board.  He is also the chairman of the International Organization of Securities Commissions Board and vice commissioner for international affairs of the JFSA.

Friday’s announcement came after a February 6 meeting of the Monitoring Board in Brussels.  The Monitoring Board met with IFRS Foundation chairman Michel Prada to discuss Foundation funding and the creation of the Accounting Standards Advisory Forum.  Separately, the Monitoring Board agreed on its approach to assess current and prospective members against the membership criteria, as contemplated following its governance review of the IFRS Foundation.

The meeting effectively gave the SEC another three years to decide on support for IFRS as the membership criteria will not be re-assessed until 2016. A U.S. decision was eagerly anticipated in recent years, but fallout from the financial crisis and rulemaking around the Dodd-Frank Act and the JOBS Act left the SEC with a crowded agenda. The meeting will also expand membership on the Monitoring Board to allow more participation from emerging markets.

The Monitoring Board also acknowledged that, historically, the use of IFRS was motivated by an interest in facilitating capital-raising on a cross-border basis. However, the Monitoring Board anticipates, over time, a more prominent role for IFRS in domestic reporting regimes. Accordingly, beginning with the 2016 periodic review of members against the membership criteria, the Monitoring Board will evaluate the mechanisms used in member jurisdictions to integrate IFRSs into the reporting regimes for domestic issuers and the extent to which they contribute to the prominence of IFRSs in the member’s capital market.

The revised membership criteria appear to allow for the chair of the Securities and Exchange Commission to remain a member of the Monitoring Board, even though the SEC has not held a vote on whether it would allow U.S.-based companies to use International Financial Reporting Standards. SEC commissioner Elisse Walter is the current SEC chair on an interim basis since the departure of Mary Schapiro late last year, although President Obama has named former New York federal prosecutor Mary Jo White as his nominee to replace her.

The SEC, however, accepts financial filings in IFRS from hundreds of foreign companies and dropped a requirement several years ago for them to first reconcile the figures with U.S. GAAP.

In evaluating the use of IFRS, the Monitoring Board agreed that the member’s commitment to international accounting standards should be evidenced by the jurisdiction mandating or permitting the use of IFRS.  Further, such use should result in prominent application of IFRS in the relevant market.

The SEC did not immediately respond to a request for comment.

The Monitoring Board published a final report on the review of the IFRS Foundation’s governance on Feb. 9, 2012.  The report identified a number of enhancements to the governance framework and included an action plan for their implementation.  The decision to expand the Monitoring Board’s membership and begin periodic assessment of members against the Monitoring Board’s membership criteria required further development of an evaluation process and assessment measures, which were finalized at the Monitoring Board’s Feb. 6, 2013 meeting.

The Monitoring Board agreed on the following main points regarding assessment of members against the membership criterion regarding the use of IFRS and for assessment processes and consequences of not meeting the membership criteria.

a. The jurisdiction has made a clear commitment to moving towards application of IFRS and promoting global acceptance of a single set of high quality international accounting standards as the final goal.  This commitment is evidenced by the jurisdiction mandating or permitting application of IFRSs to consolidated financial statements of companies raising capital in its relevant market with the effect of actually exhibiting prominence of IFRS application, or having made a decision on a transition to such a status to take place in a reasonable period of time.

b. The IFRS to be applied should be essentially aligned with IFRS developed by the IASB, with possible exceptions limited to cases where certain standards or parts thereof are not relevant for economic or other conditions or could be contrary to public interest in the jurisdiction. Any flaw in following due process in developing certain standards or parts thereof could also allow for exceptions or temporary suspensions.

Quantitative Elements:
c. The jurisdiction can be regarded a major market for capital-raising in the global context based on the size of market capitalization, the number of listed companies and cross-border capital activity.

Qualitative Elements:
d. The jurisdiction makes financial contributions to the setting of IFRS on a continuing basis.
e. The jurisdiction has in place and in operation a robust enforcement mechanism to ensure proper implementation of relevant accounting standards.
f. The relevant national or regional standard-setting body, where it exists, is committed to actively contributing to the development of IFRS.