The US regulator, the Securities and Exchange Commission, has recently produced a staff paper on 'condorsement', an idea which first saw the light of day at the end of last year. Back then Paul Beswick, deputy chief accountant at the SEC, said that he was always being asked: 'What do I think the model looks like if the Commission decides to incorporate IFRS into the US capital markets for domestic companies'. And he then went on, without making any commitments to any particular future course of action, to describe what he thought would be 'a reasonable approach for the US'.
And this was where the word 'condorsement' made its debut. 'In our October update we highlighted that the majority of jurisdictions are following either a convergence or an endorsement approach', he said. 'In my opinion, if the U.S. were to move to IFRS, somewhere in between could be the right approach. I will call it a "condorsement" approach. Yes, I admit I just made up a word. And by the way, the patent is pending as we speak'.
Now we have some more formal and extensive thoughts on how it might work. Under the overall rubric of a : 'Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for US Issuers', and with the snappy subtitle of: 'Exploring a Possible Method of Incorporation', the idea is laid out in full.
Essentially what the staff paper does is explain what a route through the middle way might look like. It would be a journey into the land of compromise. But that is only to be expected. The whole issue of bringing the US into the IFRS fold where the rest of the world is largely now working is fraught. The largest organisations, recognising that their subsidiaries around the world already operate under IFRS, are mostly keen to join in. Smaller companies, for a wide variety of reasons, are often not so enthusiastic.
Hence 'condorsement'. This is how the staff paper explains the idea and its implications: 'This approach to incorporation is in essence an Endorsement Approach that would share characteristics of the incorporation approaches with other jurisdictions that have incorporated or are incorporating IFRS into their financial reporting systems. However, during the transitional period, the framework would employ aspects of the Convergence Approach to address existing differences between IFRS and US GAAP. Importantly, the framework would retain a US standard setter and would facilitate the transition process by incorporating IFRSs into US GAAP over some defined period of time (e.g., five to seven years)'.
This is a way of squaring the circle without upsetting any vested interests too much. In particular the US standard-setter, the FASB, would continue to have a role. 'The FASB', the paper suggests, 'would continue to promulgate US GAAP primarily through its endorsement of standards promulgated by the IASB'. It is a way of reassuring smaller corporate organisations that their voice will still be heard. As the paper says in its overview of the benefits and risks of this approach: 'Incorporation of IFRS through the framework could advance the United States toward the broader objective of a single set of high-quality, globally accepted accounting standards, while enabling US constituents to more effectively manage the costs and efforts necessary to reach that objective, through phased transition to and, in many cases, prospective application of IFRSs'.
But the paper also recognises a serious downside when it comes to the largest corporate organisations in the US. 'However', it says, 'some US issuers might contend that a gradual transition would not be in their best interest or in the interests of their investors, particularly in the absence of an option to voluntarily report under IFRS today. Through its outreach, the Staff has been informed that certain US issuers may prefer date-certain, full adoption of IFRS or at least have the option to move to IFRS using a big-bang approach. In many cases, these issuers are among the largest multinational corporations with foreign subsidiaries that have already incorporated or are prepared to incorporate IFRS into their local financial reporting systems. Therefore, these issuers may have financial and human capital resources to facilitate a big-bang incorporation of IFRS. For these issuers, the slower pace of gradual transition may be viewed as unnecessary, and any benefit diminished by the complexities of operating in an environment of change for an extended period'.
And it then goes on to say that: 'Additionally, a gradual transition to IFRS could be perceived by certain constituents as evidence of a current lack of US commitment to fully incorporate IFRS. A transition plan that was executed over some period and that was deliberately designed to allow for change based on unknown future circumstances could introduce elements of uncertainty into the US overall commitment to transition. This uncertainty may cause certain foreign constituents to question whether the ultimate goal of IFRS incorporation would be achieved successfully in the United States despite any assurances provided by those integral to the transition plan'.
The word 'uncertainty' is not something which enthuses global businesses. And, as the staff paper points out, there is more uncertainty, if not downright confusion, possible in this approach. 'A further risk associated with a gradual transition to IFRS is that such a strategy could cause confusion for US constituents during the transition period', it says. 'Until the date at which US GAAP was fully aligned with IFRS (potentially five or more years into the future), US GAAP would be an evolving set of standards that was neither US GAAP as applied currently, nor IFRS as issued by the IASB. During the transition period, US constituents would need to actively monitor progress on the transition plan and stay abreast of the potentially frequent changes made to US GAAP. As noted previously, the measure of success of any approach to incorporation would include focus on whether US constituents were provided meaningful and understandable financial information during transition. This measure of success could be impacted adversely if the pace and volume of change during transition was a source of confusion'.
The SEC wants feedback on its 'condorsement' paper before the end of July. But it is abundantly clear from the paper that the SEC staff believes 'condorsement' comes into the category of a 'could do' idea for now, rather than a 'should do'. And it is also clear that the SEC is committed to the option of IFRS being the effective financial reporting language for the US, bringing it into line with the rest of the world, within a few years time. That option is still there, 'condorsement' or not. The patent on 'condorsement' may be pending for a while longer.
Robert Bruce June 2011