Financial Accounting Standards Board chair Leslie Seidman advocated a cautious transition to International Financial Reporting Standards during a speech Tuesday in which she said the board should retain its control over U.S. GAAP.
Seidman’s speech came a day after an announcement by SEC Chief Accountant James Kroeker in which he said the SEC would delay its long-anticipated decision on whether or not to incorporate IFRS into the U.S. financial reporting system by “a few additional months” (see SEC Postpones IFRS Decision). Her speech was followed by one from International Accounting Standards Board chairman Hans Hoogervorst in which he urged the U.S. to decide in favor of supporting IFRS, calling for “a clear timeline for the completion of the initial endorsement process.”
[IMGCAP(1)]Both Seidman and Hoogervorst appeared to favor an endorsement approach, also known as “condorsement,” in which IFRS would be endorsed one standard at a time into U.S. GAAP once the major convergence projects have been completed. That approach reflected a recent comment letter from FASB’s parent organization, the Financial Accounting Foundation, on an SEC staff paper in May outlining such an approach for transitioning to IFRS (see FAF Recommends Changes in ‘Condorsement’).
“Last month, the chairman of the FAF, on behalf of the board of trustees, and in consultation with the FASB, submitted a letter to the SEC supporting a condorsement approach with some recommended modifications and clarifications intended to address the concerns that were raised by many who offered comments to the SEC staff,” said Seidman, speaking at an American Institute of CPAs conference in Washington, D.C. “Our letter expresses strong support for IFRS becoming the foundation for future accounting standards, but also offers constructive suggestions to mitigate the transition risks that have been identified. In other words, we suggested a modified incorporation approach that could potentially gain broad support in the U.S.”
Under this approach, Seidman explained, FASB and the IASB would complete their priority convergence projects: revenue recognition, financial instruments, leasing and insurance contracts.
The U.S. would then look to the IASB to set new accounting standards, but the two boards would collectively participate in that process, in order to be in a position to endorse the final standards for incorporation into U.S. GAAP.
“We would keep the label ‘U.S. GAAP’ to avoid several practical problems, such as the need to change debt covenants, which often refer to U.S. GAAP as a benchmark,” said Seidman.
FASB would also evaluate the remaining differences between U.S. GAAP and IFRS, and develop a plan to address them. “This is a transition matter, but obviously, a very important element of the overall plan,” Seidman noted, adding that “FASB would retain the ability to set standards for the U.S., if there are topics of considerable importance that are not on the IASB’s active agenda or if the IASB doesn’t provide timely or adequate implementation guidance.”
Seidman seemed to reflect the growing impatience around the world with the convergence process, which Hoogervorst noted has been going on ever since FASB and the IASB signed a memorandum of understanding in 2002, the so-called “Norwalk Agreement.”
“We would very much like to work together with the IASB to complete the priority projects on revenue recognition, leasing, financial instruments and insurance,” said Seidman. “However, we do not believe indefinite convergence is a viable option, politically or practically. As any observer can see, this process is challenging technically and administratively. Plus, we appreciate that the IASB, as an international body, must be responsive to the priorities of other countries that have already adopted IFRS.”
She said FASB would look to the IASB to set new accounting standards for the U.S. “This would put the U.S. on record as accepting IFRS as the basis for its accounting standards, moving forward,” she noted. “The FASB would refrain from setting standards that are on the IASB’s active agenda, and would not be at the table debating new issues jointly. The FASB would, however, play a key role in gathering input, conducting research, coordinating field work, assessing the need for implementation guidance, and managing post-implementation reviews with U.S. stakeholders. The idea is that the IASB would participate in these activities, but FASB would be the focal point for coordination in the U.S.”
Seidman noted that this type of role is followed by other national standard-setters. “In order to ultimately endorse a standard for your country or region, you have to have been an active participant in these processes yourself,” she observed.
[IMGCAP(2)]Hoogervorst agreed that many other national standard-setters are following the endorsement approach. “Endorsement is the model that is used in most other parts of the world, including Australia, Brazil, Canada, Europe and Korea,” he said. “Through this mechanism, the FASB and the SEC retain ultimate responsibility for and control over U.S. accounting standards. It will also ensure a strong role for the FASB in our global system. If we would not have a deep engagement with the FASB, the IASB would obviously run serious risks of non-endorsement.”
However, Hoogervorst warned against the risk of making exceptions and carve-outs in national standards. “The key to making this model work is setting an appropriately high threshold for endorsement,” he cautioned. “This ensures that any deviations are extremely rare. If we end up with non-endorsements and carve-outs left and right, the gains of adopting IFRS will remain elusive. Using full due process, we at the IASB have to make sure that we work in full coordination with national standard-setters, to make sure these deviations do not proliferate. One way to reduce the temptation to deviate from full IFRS as adopted by the IASB is to engage national and regional standard-setting authorities, including the FASB, in all stages of our work.”
He praised the FAF comment letter to the SEC, saying it rightly raised the role of national standard-setters. “The SEC staff paper sets out a good model for working with such standard-setters,” said Hoogervorst. “National and regional standard-setting authorities must be the eyes and ears of the IASB. We must consult with them on a very active basis. Furthermore, I am becoming increasingly convinced that in the future we may have to go beyond pure consultation. A more institutional arrangement for engaging national standard-setters and regional bodies concerned with accounting standards is needed. The FAF comment letter suggested several options that are worth thinking about.”
Hoogervorst echoed Seidman in suggesting that the convergence process had run its course. “Our convergence history with FASB has been extremely useful in getting us to a point where IFRS and U.S. GAAP are much improved and closer together,” he said. “So, it’s tempting to just maintain the status quo. But for the long-term, the status quo is an unstable way of decision making that inevitably leads to diverged solutions or sub-optimal outcomes. For example, let’s look at just one part of the financial instruments project: offsetting. We began in alignment with the FASB, but we’ve ended up in different places. To investors, the balance sheet of many U.S. banks, which are allowed to net derivatives, will look much smaller than that of Asian and European banks, which have to present them gross. Through disclosures we will try to bridge the gap, but I doubt that investors in the U.S. or elsewhere will see it as a satisfactory outcome. At the same time, we at the IASB believe that our conclusion is right for investors. I am sure that Leslie would believe the same for the FASB. The simple truth is that when you have two boards of independently thinking professionals, sometimes they will simply reach different conclusions.”
Hoogervorst emphasized that in a global economy, investors need a global accounting language, and right now IFRS is the “only candidate.” He said the endorsement approach laid out in the SEC’s May staff paper makes sense.
“At the same time, it is important that any such approach has a couple of key characteristics for us to reach our shared goal of a single set of high-quality global standards,” he added. “There should be a clear timeline for the completion of the initial endorsement process. There should also be a presumption that—given full due process and extensive involvement of the national standard-setter—non-endorsement would be very rare indeed. Once the initial process of endorsement is completed, U.S. companies should be able to assert compliance with both U.S. GAAP and IFRS.”
Hoogervorst also asked, as a “festive season request,” that the SEC give serious consideration to allowing U.S. multinational companies an early adoption option to use IFRS.
“It is important for investor protection in the U.S. and internationally that the SEC remains at the forefront of determining financial reporting policy,” he said. “This cannot be done from afar. We need the United States to remain on board. We count on your commitment and you can count on ours.”
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