The Financial Accounting Foundation has sent a comment letter to the Securities and Exchange Commission supporting the so-called “condorsement” approach to incorporating International Financial Reporting Standards into the U.S. financial reporting system, but with some important changes.

The SEC staff issued a paper in May containing a work plan describing how such an approach might work (see SEC Releases Work Plan for How IFRS Transition Might Work). “Condorsement,” a portmanteau word combining convergence with endorsement, would allow IFRS to be incorporated one standard at a time into U.S. GAAP as the Financial Accounting Standards Board and the International Accounting Standards Board agree on a converged solution.

The board of trustees of the FAF, which oversees FASB, issued a comment letter on Tuesday effectively backing the approach described by the SEC staff, but with a few important caveats that would preserve the role of FASB and the authority of the SEC in the standard-setting process and give FASB the ability to preserve some exceptions for U.S. companies during the transition.

The FAF reportedly consulted with high-level SEC officials before sending out its letter, and its letter is expected to be influential in any decision by the commissioners on what approach will ultimately be adopted. The SEC commissioners are expected to issue at least a statement, if not a final decision, by the end of the year on whether or not to proceed with incorporating IFRS into U.S. financial reporting. In their letter, the FAF board of trustees reiterated their support for ultimately using IFRS, which FASB has been in the process of converging with U.S. GAAP for nearly a decade.

“With these recommendations, the Financial Accounting Foundation makes clear its support for the incorporation of IFRS into U.S. GAAP,” wrote FAF chairman John J. Brennan. “The trustees believe that the SEC’s staff paper of May 26 represents a sound path forward in moving the United States to a set of high-quality, globally comparable, international accounting standards. That said, we are recommending several important enhancements that we believe will improve the processes outlined in the SEC staff paper and, importantly, increase acceptance of the plan by constituents in the United States. The trustees’ recommendations would entrust to the IASB the primary role of creating new accounting standards applicable to the U.S. capital markets, while the SEC and the Financial Accounting Standards Board (FASB) remain active participants in the creation of those standards and the final arbiters of U.S. GAAP.”

Under the condorsement approach outlined in the SEC staff paper's work plan, FASB “would participate in the process for developing IFRS, rather than serving as the principal body responsible for developing new accounting standards or modifying existing standards under U.S. GAAP.”

However, the FAF is recommending a different role for both FASB and the SEC under which they would retain “sovereign authority in financial reporting standard-setting for the U.S. capital markets,” according to Brennan.

In addition, the FAF realistically foresees some differences in U.S. and international standards remaining in the near term and recommends that the standards at least be comparable, if not identical. The condorsement approach in the SEC staff paper envisions that the U.S. would move to a “single set of high quality globally accepted accounting standards” by incorporating IFRS into U.S. GAAP during a transition period of five to seven years. The FAF recommendations contemplate that the “most developed capital markets,” including the United States, would have “highly comparable (but not necessarily identical) financial reporting standards” for “the foreseeable future.”

“The recommended approach is premised on the belief that although the pursuit of a single set of global accounting standards is a worthy objective, a more practical goal for the foreseeable future is to achieve highly comparable (but not necessarily identical) financial reporting standards among the most developed capital markets that are based on a common set of international standards,” wrote Brennan.

In addition, the FAF recommended broader ability to make changes in IFRS. Under the condorsement approach in the SEC staff paper, FASB modifications of IFRS standards “should be rare and generally avoidable” and FASB would exercise its authority to make changes in IFRS for the U.S. “in only unusual circumstances.”

Under the FAF recommendations, on the other hand, FASB would incorporate new major IFRS standards into U.S. GAAP if “that standard improves the quality of financial reporting in the U.S.” Other IFRS standards would be incorporated if they “maintain the quality of financial reporting in the U.S., but ….also advance global compatibility of financial reporting.” Criteria for incorporation would be the same as the criteria historically applied to new standards by the FASB and SEC.

Asked about the FAF comments, SEC chief accountant James Kroeker told reporters at a Financial Executives International conference in New York on Tuesday that he had seen the letter but not yet studied it closely. “I think it’s a constructive response to one potential approach in the staff paper,” he said. “The enhancements, I think, are consistent with a number of recommendations across the spectrum from investors to preparers and others saying there are areas that could be improved if we did X or Y.” He emphasized the need for a "robust process" in ensuring that any remaining differences between U.S. GAAP and IFRS be made clear and transparent until a converged solution is reached. Kroeker had participated in the creation of the SEC staff paper on which the FAF commented.

Separately, in other FAF news, FASB members Russell Golden and Lawrence Smith were re-appointed to second five-year terms on Tuesday, and Jan Sylvis was re-appointed to a second five-year term on the Governmental Accounting Standards Board, which the FAF also oversees.

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access