The Securities and Exchange Commission staff released its work plan Thursday for how International Financial Reporting Standards might be incorporated into the U.S. financial reporting system.

The work plan was issued with the caveat that the SEC commissioners themselves have not yet made the decision on whether to incorporate IFRS into the U.S. financial reporting system, much less how. That decision is expected to be made later this year. The work plan issued Thursday is mainly the SEC staff’s way of “exploring a possible method of incorporation.”

“The Commission has not yet made a decision as to whether and, if so, how, to incorporate IFRS into the financial reporting system for U.S. issuers,” said the document, which was issued by the SEC’s Office of the Chief Accountant. “While the Staff’s work on the Work Plan continues, including assessing the quality of the standard setting process, the focus of this Staff Paper is to outline a possible approach for incorporation of IFRS into the U.S. financial reporting system, if the Commission were to decide that incorporation of IFRS is in the best interest of U.S. investors. This Staff Paper does not provide an extensive discussion of a potential timeline of incorporation. That is not to diminish the importance of the timing of incorporation but reflects the fact that the timeline for incorporation is a separate consideration.”

The document lays out a framework for how incorporation might work, and explains the approach taken in some other countries that have worked on adapting to IFRS, as well as alternatives, such as the notion of “condorsement,” which SEC Deputy Chief Accountant Paul Beswick first described last December.

It starts out, however, by explaining a framework that might be used. “The framework explored in this Staff Paper is predicated on several principles. First, U.S. GAAP would be retained, but the Financial Accounting Standards Board (“FASB”) would incorporate IFRS into U.S. GAAP over a defined period of time, with a focus on minimizing transition costs, particularly for smaller issuers. The FASB would incorporate newly issued or amended IFRSs into U.S. GAAP pursuant to an established endorsement protocol. This would require a change to how the FASB currently operates. Similar to other jurisdictions, the endorsement protocol would provide the Commission and the FASB the ability to modify or supplement IFRS when in the public interest and necessary for the protection of investors. Such framework would share many key features of other major jurisdictions’ processes for incorporating IFRSs into their respective national financial reporting frameworks. However, whereas many countries chose to align existing accounting standards with IFRS through a “first-time adoption” of IFRS and thereafter keep pace with new or amended IFRSs through endorsement procedures, the framework explored in this Staff Paper would include a transitional period during which existing differences between IFRS and U.S. GAAP would be eliminated through ongoing FASB standard-setting efforts.”

Deloitte partner D.J. Gannon thinks the SEC staff's ultimate recommendation to the commission will determine what happens with the U.S. incorporation of IFRS. The commissioners may not even need to vote on an IFRS roadmap by the end of the year unless extra rulemaking is required, and the work plan so far does not seem to require any rulemaking. The only thing needed then may be a recommendation from the SEC staff in the Office of the Chief Accountant on how to proceed. The work plan is open to outside comment, however, and the SEC staff is soliciting feedback on the document.

"The commission staff has been pretty clear in its progress report that it’s looking at all kinds of approaches," said Gannon. "The staff has spent a fair amount of time developing this approach and trying to fine-tune it, and I think this is a direction they certainly may head in. They want to get feedback and one of the points of this paper is to solicit input."

The SEC staff is asking for comments to be sent by July 31.

"Regardless of the approach, the goal is still the same," said Gannon. "The goal is where you have a single global standard, and there are different ways of doing that. You can just outright adopt, or you can take an approach like this, more of a piecemeal basis using the standard-setting process to bring IFRS into the U.S. GAAP codification. So at the end of this process, the commission paper talked about, in five to seven years, U.S. issuers would be in a position to assert compliance with not only the U.S. GAAP codification, but also IFRS."

 

 

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