The Securities and Exchange Commission has released two eagerly anticipated staff papers comparing International Financial Reporting Standards with U.S. GAAP and analyzing IFRS in practice at foreign companies.
The two documents, posted on the SEC’s Web site on Wednesday, are crucial steps in the SEC’s work plan for considering the possible incorporation of IFRS into the U.S. financial reporting system. The SEC commissioners are expected to issue a statement by the end of the year, and perhaps vote, on whether or not IFRS can be adopted by U.S. companies or whether the converged standards will be gradually endorsed, or “condorsed,” to make them part of U.S. GAAP.
In May, the SEC staff issued a paper describing a possible method of incorporating IFRS through endorsement (see SEC Releases Work Plan for How IFRS Transition Might Work). That was the first of the staff papers envisioned in the work plan. The staff papers are expected to help the SEC commissioners with their decision on whether to give the go-ahead to IFRS. The new papers showed that both sets of standards remain far apart in fundamental ways, and that IFRS is not applied uniformly around the world.
The first of the newly released documents, “A Comparison of U.S. GAAP and IFRS,” explores standard by standard how the two systems differ. It describes the status of the convergence efforts of the Financial Accounting Standards Board and the International Accounting Standards Board in aligning various standards as part of their memorandum of understanding and outside the MoU. For some of the more active projects, such as financial instruments, which are undergoing changes, the document omits comparisons.
The second document, “An Analysis of IFRS in Practice,” examines how a sampling of foreign companies have used IFRS in their filings with the SEC, and summarized areas that drew comments from the SEC’s Division of Corporate Finance as part of its disclosure review program. The SEC staff looked at accounting principles, presentation of financial statements, and accounting for assets, liabilities, shareholders’ equity, revenue, expenses, broad transactions, and certain industry-specific matters. The staff paid attention to matters such as transparency and clarity of disclosures, compliance with applicable accounting standards, and the comparability of financial statements.
The SEC staff found that company financial statements generally appeared to comply with IFRS requirements, but not always, and it said the transparency and clarity of the financial statements could be enhanced.
“For example, some companies did not provide accounting policy disclosures in certain areas that appeared to be relevant to them,” said the paper. “Also, many companies did not appear to provide sufficient detail or clarity in their accounting policy disclosures to support an investor’s understanding of the financial statements, including in areas they determined as having the most significant impact on the amounts recognized in the financial statements. Some companies also used terms that were inconsistent with the terminology in the applicable IFRS. Further, some companies referred to local guidance, the specific requirements of which were often unclear. Consequently, certain disclosures presented challenges to understanding the nature of a company’s transactions and how those transactions were reflected in the financial statements.”
The SEC staff also noted that in some cases, the disclosures (or lack thereof) also raised questions as to whether the company’s accounting complied with IFRS.
Diversity in the application of IFRS presented challenges to the comparability of financial statements across countries and industries, the SEC staff found. In some cases, the “diversity appeared to be driven by the standards themselves, either due to explicit options permitted by IFRS or the absence of IFRS guidance in certain areas,” said the SEC staff. “In other cases, diversity resulted from what appeared to be noncompliance with IFRS. The diversity arising from the standards themselves was, at times, mitigated by guidance from local standard setters or regulatory bodies that narrowed the range of acceptable alternatives already permitted by IFRS or provided additional guidance or interpretations. This diversity also was mitigated by a tendency by some companies to carry over their previous home country practices in their IFRS financial statements. While country guidance and carryover tendencies may promote comparability within a country, they may diminish comparability on a global level.”