SEC Considering Support for Supplemental Use of IFRS

Securities and Exchange Commission chair Mary Jo White said the SEC is considering a recommendation from SEC chief accountant James Schnurr that would allow for the supplemental use of International Financial Reporting Standards by U.S. companies in addition to their U.S. GAAP financials.

“With respect to the issue of possible further use of IFRS in the United States, as I have said in the past, I believe it is important for the Commission, as a Commission, to make a further statement about its general views on the goal of a single set of high-quality global accounting standards—a topic that the Commission itself has not spoken on since 2010,” White said at the American Institute of CPAs’ Conference on Current SEC and PCAOB Developments on Wednesday. “At this conference last year, Jim Schnurr discussed the possibility of allowing domestic issuers to provide IFRS-based information as a supplement to GAAP financial statements without requiring reconciliation. This proposal has the potential to be a useful next step, and the staff has now developed a recommendation for the Commission’s consideration, which staff will be discussing with all of the Commissioners so that we can determine the path forward.”

One SEC commissioner, Michael Piowar, told attendees at a Financial Executives International conference last month that the approach is ”worthy of serious consideration,” and while the specific details would need to be worked out, the SEC “should take this additional step forward.”

At the AICPA conference, White noted that since 2007, the SEC has permitted foreign private issuers to include financial statements prepared in accordance with IFRS, as issued by the IASB, in filings with the SEC without requiring reconciliation to U.S. GAAP, and today, over 500 issuers representing trillions of dollars in aggregate market capitalization report to the SEC using IFRS.  “The Commission staff monitors and reviews the application of those standards in filings with the SEC in the same manner that it monitors and reviews the application of GAAP, making IFRS very much a focus in the SEC’s work,” White added.

Schnurr also addressed the conference, saying, “As I mentioned at this conference last year, Chair White asked me to make a recommendation to her as to what action, if any, the Commission should take regarding the further incorporation of IFRS into the U.S. capital markets. The staff will be in discussions with the Commissioners regarding certain regulatory changes that would facilitate the ability of domestic issuers to provide IFRS-based information as a supplement to U.S. GAAP financial statements.”

In the meantime, he believes the Financial Accounting Standards Board and the International Accounting Standards Board should continue their convergence efforts.  “In the near term, I encourage the FASB and IASB to continue to focus on converging the financial accounting standards,” said Schnurr. “In my view, continued collaboration is the only realistic path to further the objective of a single set of high-quality, global accounting standards. This collaboration should include the FAF, IFRS Foundation, FASB, and IASB along with appropriate outreach to the various jurisdictions that use the accounting standards. The converged revenue recognition standard is a good example of where, through collaboration, we expect to see improved financial reporting. The transition from a reporting model that currently consists of industry specific and at times disparate models, to a single comprehensive model grounded in core concepts and clear principles is a shift that has the potential to benefit investors by providing more decision useful information.”

SEC deputy chief accountant Julie Erhardt discussed how the U.S. is already engaging with the IASB on developing international standards. “The first observation that I have is that the U.S. was a strong supporter and active participant in the global accounting profession’s decision to convert the former volunteer-based International Accounting Standards Committee into the permanently-staffed IASB,” she said. “If nothing else, this genesis suggests that there are many companies and organizations in the United States with a connection to the IASB’s work and the ongoing international efforts to support it. This would suggest to me that we in the U.S. should continue to be actively involved with IFRS. Or by way of metaphor, we should continue to water the tree that we helped to plant. Two ways that the SEC staff itself helps to do this today are to serve as an Observer to the IASB’s IFRS Advisory Council and to serve on behalf of IOSCO as an Observer to the IFRS Interpretations Committee.”

Erhardt argued that the U.S. needs to continue to play a role in developing international standards. “I would next observe that the U.S. is perceived as a perennial leader on financial reporting policy matters, possessing a lot of historical perspective as well as current real world experience,” she said. “I think this leads to the conclusion that those in the U.S. may have financial reporting related experiences that others do not, and of course others have experiences that those in the U.S. do not. The potential benefits to everyone of sharing their experiences across borders would suggest to me that the U.S. should, and for that matter can’t afford not to, be involved with the work of the IASB. The question then becomes how to harness the unique U.S. experiences to support the work of the IASB. Certainly, the Financial Accounting Standards Board does some of this by its participation in the IASB’s Accounting Standards Advisory Forum and the SEC staff does as well via its leadership of and participation in IOSCO’s multi-country Committee on Accounting, Audit and Disclosure. Also, for example, there are those from the audit firms who participate in the work of the IFRS Interpretations Committee. “

Erhardt sees a number of benefits for the U.S. in staying involved in developing international standards. “The third observation I would like to make is at more of a grass roots level,” she said. “This observation is how I see that the U.S. benefits from IFRS today. Perhaps understandably I first think of the SEC’s decision to allow IFRS reporting by its foreign private issuers without reconciliation to U.S. GAAP. This decision provided the opportunity for the U.S. capital markets to have a common financial reporting framework on which the listed foreign companies could prepare their financial statements."

She acknowledged that the relationship between FASB and the IASB has been changing, but a further statement by the SEC might provide some reassurance. “Among at least some within the accounting profession overseas there may be concern when it comes to the intentions of the U.S. for engagement with IFRS now that the known terms of engagement, as set out by the FASB and IASB convergence work program, are running their course,” said Erhardt. “If U.S. involvement with IFRS is now to come in a completely ad hoc manner, this could give rise to concerns that there is no memorialized intention or longer term plan for parties from the U.S. to stay engaged with and be supportive of IFRS. A further statement by the Commission on global accounting standards, as discussed by the Chair earlier today, might help to provide reassurance and clarity in this regard. Moreover, I think U.S. practitioners could look for ways to provide input directly into the IASB’s work. This would give the IASB direct input from the U.S. companies and firms that are affected by and benefit from the current reach of IFRS. This input could also be helpful in fostering even further convergence between IFRS and U.S. GAAP.”

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