Securities and Exchange Commission chief accountant James Schnurr is rethinking a proposal he made last December that the SEC allow U.S. companies the option of providing some information, such as revenues, using International Financial Reporting Standards as a supplement to U.S. GAAP without requiring reconciliation.
Schnurr had made the proposal last December at an American Institute of CPAs’ Conference on Current SEC and PCAOB Developments in Washington, D.C. (see SEC Considers Supplemental Use of IFRS by U.S. Companies). However, at a Financial Reporting Conference in New York on Thursday at Baruch College’s Robert Zicklin Center for Corporate Integrity, Schnurr said he had reconsidered the proposal.
[IMGCAP(1)]“Subsequent to my comments at the AICPA conference in December, the staff has heard reactions from a number of different constituents: preparers, investors, auditors, regulators and standard-setters,” he said. “In many cases, this was the first time these constituents had discussed their views on IFRS with the staff since the completion of the work plan in 2012. I can tell you that I found the exercise helpful, particularly since I was not at the Commission during the staff’s previous work on this issue. From my vantage point, I found the discussions helpful, and I can confirm that many of the observations I noted in December about U.S. constituents’ views on IFRS appear to continue to exist today.”
Among those questions were why a company would spend the time and money to provide IFRS-based information on a voluntary basis, and what are the benefits of providing such information? They also wondered whether the SEC was still committed to the objective of a single set of highquality, globally accepted accounting standards.
During the discussions, Schnurr and his staff learned that there was virtually no support for having the SEC mandate IFRS for all registrants, and there was little support for the SEC to provide an option allowing domestic companies to prepare their financial statements under IFRS. However, he noted there is continued support for the objective of a single set of highquality, globally accepted accounting standards. He plans to make a recommendation in the near future to SEC chair Mary Jo White on how to proceed on the question of IFRS, although he did not specify exactly when that will be.
“My goal is to deliver on my commitment to Chair White in the near term,” he said. “The staff is currently developing a recommendation, and I am hopeful that we will be able to provide some clarity to investors.”
However, his earlier proposal to allow U.S. companies to provide some information in accordance with IFRS appears to be off the table for now. He believes that the Financial Accounting Standards Board and the International Accounting Standards Board need to continue to work together cooperatively on moving toward the goal of a single set of high-quality global accounting standards.
Schnurr acknowledged that there have been disagreements between the two boards on some key issues, but he pointed to areas where they continue to work closely together.
“I recognize there are some people who believe the spirit of cooperation has run its course and that we are starting to observe the boards move in different directions,” he said. “However, some of the standard setting agenda items the FASB is currently addressing contradict the idea that cooperation has ended. While the FASB has certainly started adding more FASB only’ projects to its standard setting agenda, I would suggest the FASB still very much considers IFRS in setting its agenda and during its deliberations.”
Schnurr believes the relationship between the two standard-setting boards is at a crucial stage. “It is fair to say the FASB and IASB collaborative relationship is at a critical juncture,” he said. “How often and what kind of interaction is going to occur after the leasing standard is finalized and issued? What happens to the Norwalk Agreement? Ultimately, how the boards decide to interact in the future is important. I believe that, for the foreseeable future, continued collaboration is the only realistic path to further the objective of a single set of high-quality, global accounting standards. In making my recommendation to Chair White about IFRS, and as the Commission considers how best to resolve or lessen the uncertainty existing today, we will collectively need to consider the best approach forward for the boards to continue their collaboration to support the objective of a single set of high-quality globally accepted accounting standards.”
Schnurr responded to a question from Accounting Today about what his recommendation to White would be on the use of IFRS information, and he referrred to the earlier proposals of either mandating or allowing the use of IFRS by U.S. companies. “Similar to the comments I made in December, I think there are real impediments to those two alternatives,” he said. “Given the outreach that we had with respect to various constituents, people indicated that there was actually no interest in those two alternatives. So I think those would probably not be my recommendations.”
Schnurr was asked if he had a timeframe for when he plans to deliver his recommendations to White. “We’re pretty close to getting that to the Chair’s office,” he said. “From that point, there is still a fair amount of process.” He observed that things take a lot longer in the public sector than the private sector.
Schnurr later told reporters that he might include in his proposal the use of some supplemental IFRS information, such as for credit losses. FASB and the IASB have arrived at different approaches to accounting for credit losses on impaired loans under U.S. GAAP and IFRS in their financial reporting standard project. Regulators and investors might find such information useful, but it would require some rulemaking from the SEC to allow it.
“I do think, if you look out, particularly for the credit impairment standard, you obviously would have a difference for the non-credit-impaired loans under IFRS,” he said. “I believe there are going to be regulators and users that will want to know what the comparable measure is. So for, let’s say, Deutsche Bank, if they report under IFRS, they’re going to want to know what their full lifetime expected losses are under U.S. GAAP. The regulators are going to want to know that. The users are going to want to know that because they’re going to want to compare Deutsche Bank to JPMorgan. I envision that while there might not be an immediate voluntary publishing of that information, that there will be users and regulators that will begin asking for it. And typically when those people ask for that information, they get it. If that is the case, it’s actually important for the Commission to do something right now to eliminate the impediments of doing what is considered to be a non-GAAP measure.”
FASB vice chairman James Kroeker, who formerly held Schnurr’s job at the SEC, spoke alongside him at the conference. Kroeker defended FASB’s current focus on its simplification initiative, acknowledging that it has met with some resistance, but he pointed out that others criticize the complexity of many accounting standards. He gave the example of some simplification proposals that FASB has made for inventory accounting.
[IMGCAP(2)]“That isn’t to say that you shouldn’t be critical of the suggestions that we have for simplification,” said Kroeker. “If there is a simpler way, if what we’re proposing doesn’t make sense, let us know. But I suspect as we move forward on these, it would be helpful to keep in mind that when you bemoan the simplification suggestions that we improve, and if you don’t have a better suggestion, just think about the complaining that we have about complexity in the financial reporting system. I don’t say that because I think people have been largely critical of the initiative. There has been broad support for it. I think it’s helpful as we think about the simplification—and this is the ask’ or this is what you could do—is not just think about a simplification solution in the narrow circumstance, or how it directly impacts you, but what does our financial reporting system look like five years from now, 10 years from now, 15 years from now? If the suggestions for simplification—accounting that is understandable—were actually put into practice, any suggestion may impact you. There is a cost to change. If we’re going to simplify, we’re going to have change. So think about it in a broader context as you provide us with meaningful input on how to move financial reporting forward.”
Kroeker said FASB is looking for input on what to do after it completes its major convergence projects with the IASB. “We find ourselves at the FASB at the end of an era on several major projects: leases, financial instruments and revenue recognition,” he said. “Although we have much on our agenda, the completion of those projects also causes a reflection point of what should we be spending our time on as we move forward at the FASB. What projects should we be addressing today that will impact companies five years from now? We’re going to go through the standard process that we always do of seeking input from our advisory committees, like FASAC [the Financial Accounting Standards Advisory Council]. We’ll do the triennial FASAC survey. We’ll also take a new step this year, at least for the FASB, which I believe is unprecedented, and do a broad consultation request to the public of what areas in financial reporting should we be spending time on? Where do we need to improve financial reporting? Should the focus be on simplification or are there other projects that we ought to be taking on?”
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