Overview
The staff of the Securities and Exchange Commission (SEC) has published a Staff
Paper1 outlining a possible approach for incorporating IFRS into the US financial
reporting system. This approach was first described by Deputy Chief Accountant,
Paul Beswick, in December 2010 colloquially referred to as “condorsement”.
The approach would establish an endorsement protocol for the Financial Accounting
Standards Board (FASB) to incorporate new or amended IFRSs into US GAAP. During
a defined transition period (e.g., five to seven years), the FASB would eliminate
differences between IFRS and US GAAP through standard setting.
The staff notes that this approach is one of several ways that IFRS could be
incorporated into the US financial reporting system and that the SEC has not yet
decided whether to move ahead with incorporation. SEC Chairman, Mary Schapiro,
has indicated the SEC expects to make this decision in 2011.
The SEC expects to make a decision in 2011 on whether, and
if so, when and how to incorporate IFRS into the US financial
reporting system.
Background
The SEC staff has been studying issues
outlined in its 2010 Work Plan2 to help the
Commission decide whether, and if so,
when and how to incorporate IFRS into
the US financial reporting system.
As noted in the staff’s October 2010
Progress Report3 on its Work Plan and
again in the Staff Paper, other jurisdictions
have generally incorporated or intend to
incorporate IFRS into their reporting
requirements for listed companies by
either: (1) full use (without intervening
review) of IFRS as issued by the IASB; or
(2) use of IFRS after a national or
multinational incorporation process, which
could lead to the full use of IFRS as issued
by the IASB or to a local variation of IFRS.
Note that local variations of IFRS would not
constitute compliance with IFRS as issued
by the IASB.
Jurisdictions using a national
incorporation process generally have
either converged their local standards
with IFRS without fully incorporating IFRS
(the convergence approach) or they have
endorsed IFRS by incorporating individual
IFRSs into their local standards (the
endorsement approach). In his speech
in December, Mr Beswick proposed
combining these two approaches.
Framework
The staff notes that the following
approaches for incorporating IFRS have
been discussed:
• Full adoption of IFRS on a specified date
without any endorsement mechanism
• Full adoption following a transition period
• An option for US issuers to apply IFRS
And
• Continued convergence of US GAAP
with IFRS
The SEC staff believes the approach
described in its paper could achieve the
goal of a single set of high-quality
accounting standards and could minimise
the cost and effort needed to incorporate
IFRS into the financial reporting system
for US issuers. Under this possible
framework, the FASB would be retained as
the US standard-setter and IFRS would be
incorporated into US GAAP during a
transition period of, for example, five to
seven years. At the end of this period, the
objective would be that a US issuer
compliant with US GAAP should also be
able to represent that it is compliant with
IFRS as issued by the IASB. Following the
transition period, the SEC staff envisages
the roles of the FASB and the SEC and
their constituents as follows:
Role of the FASB in the US
The SEC staff believes the US should
play an active role in international
standard-setting, proactively identifying
financial reporting issues and ensuring
that US interests are addressed. The staff
believes the FASB would be best suited to
fill this role. The staff envisages the FASB
participating in the development of IFRS,
rather than focusing on developing or
modifying US GAAP.
The Staff Paper describes the FASB’s role
in international standard setting as:
• Providing input and support to the
International Accounting Standards
Board (IASB) in standards development
• Advancing the consideration of US
perspectives
• Incorporating IFRS into US GAAP
through an endorsement process
• Educating US constituents about IFRS
2In the endorsement process, the FASB
would have the authority to modify or add
to the requirements of IFRSs. However,
the staff said it expects modifications to
be rare. Any modifications would be
subject to an established protocol, which
could consider whether a standard meets
an established threshold (e.g., a threshold
that considers the public interest and
the protection of investors). The FASB
would also retain the authority to add
supplemental or interpretive guidance to
US GAAP as needed.
Role of the SEC
The SEC would continue to oversee the
FASB and would actively follow — but
not directly oversee — the IASB’s
standard-setting activities. The staff notes
that, under any incorporation approach,
the SEC would continue to be responsible
for protecting investors, maintaining fair,
orderly and efficient markets and
facilitating capital formation. The SEC
would therefore maintain its authority to
prescribe accounting principles and
standards for US issuers. However, the
staff would expect to issue guidance or
interpretations infrequently to avoid
conflict with IFRS.
Role of US constituents
To ensure that US constituents have a
voice in the IASB’s standard-setting
process, the staff says they would have
to engage with the IASB, as they now do
with the FASB. While the FASB would
continue to operate and would work with
the IASB, individual constituents should
not rely on the FASB’s interaction with
the IASB to ensure that their opinions
are heard.
Transition to IFRS
The Staff Paper describes a possible
transition period during which current
US guidance would be replaced with the
guidance in IFRS. IFRS would be fully
incorporated into US GAAP following an
implementation programme developed
and executed by the FASB, under the
oversight of the SEC. The paper discusses
possible transition plans for three
categories of standards.
MoU projects
The FASB and IASB plan to complete
certain joint projects described in the
Memorandum of Understanding (MoU) in
2011. The Staff Paper assumes that the
projects will result in reasonably converged
standards.
IFRSs subject to standard setting
The FASB would identify IFRSs expected
to be issued or significantly modified
in the near term. The FASB would
participate in the IASB’s standard-setting
process for these standards, and US GAAP
in these areas would remain unchanged
until the IASB issues new or modified
standards. The FASB would review the
new or modified standards to assess how
to incorporate them into US GAAP.
IFRSs not subject to standard setting
The FASB would first assess IFRSs that
are not subject to standard-setting for
incorporation into US GAAP. The FASB
would then determine whether these
IFRSs should be incorporated into US
GAAP at the same time or whether they
should be phased in. If the FASB chose to
phase them in, the FASB would need to
carefully manage the transition. The
transition plan for these IFRSs would allow
for prospective application when possible.
Benefits and risks
The Staff Paper describes the benefits
and risks of this approach, including:
• The framework may allow for a flexible
transition that is tailored to the needs
of US constituents, but any benefits
might evaporate if the transition plan is
not well-developed, comprehensive and
responsive to changing circumstances.
• The framework could provide a gradual
transition that would cost less than
incorporating all of IFRS at a point in
time, but some US issuers may prefer
full adoption or the option to adopt IFRS
on a single date. A gradual transition
also could be perceived as a lack of
US commitment to IFRS and could
potentially confuse US constituents
during the transition period.
• The framework could provide greater
investor protection than direct
incorporation of IFRS. However, if
modifications to IFRS are more
than infrequent, the US would risk
developing its own version of IFRS.
• The framework retains US GAAP as
the basis of financial reporting for
US issuers, which would be significant
because of US laws, regulations and
contracts that cite US GAAP.
How we see it
Many questions remain about how this
approach would be implemented. The
transition the staff envisages, for
example, might conflict with the general
premise of IFRS 14, which requires
companies to apply IFRS as if it had
always been followed. Because of this
requirement, it may be difficult for US
issuers to meet the staff’s stated goal of
asserting compliance with IFRS as issued
by the IASB. Also unclear is how the
FASB would determine what is in the
best interest of the public and investors
and what would happen if the FASB and
the IASB cannot agree.
Monday, June 6, 2011
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