SEC releases reports on IFRS in practice and US GAAP-IFRS differences

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17 Nov 2011

The staff of the United States Securities and Exchange Commission (SEC) have released two additional Staff Papers as part of the SEC's work plan for the consideration of incorporating IFRSs into the Financial Reporting System for U.S. Issuers.

Analysis of IFRS in Practice

The first paper, An analysis of IFRS in Practice, presents the Staff's observations regarding the application of IFRS in practice, based on an analysis of the most recent annual consolidated financial statements of 183 companies across 36 industries which prepare financial statements in accordance with IFRSs. The companies were selected from the Fortune Global 500 (the top 500 companies by revenue) and represented all those which prepared financial statements in accordance with IFRS in English. The 183 companies were domiciled in 22 countries, with the majority (approx 80%) being domiciled in the European Union, but with China and Australia also being represented with more than five companies.

The Staff Paper summarises the research as follows:

The Staff found that company financial statements generally appeared to comply with IFRS requirements. This observation, however, should be considered in light of the following two themes that emerged from the Staff’s analysis:
  • First, across topical areas, the transparency and clarity of the financial statements in the sample could be enhanced. For example, some companies did not provide accounting policy disclosures in certain areas that appeared to be relevant to them. Also, many companies did not appear to provide sufficient detail or clarity in their accounting policy disclosures to support an investor’s understanding of the financial statements, including in areas they determined as having the most significant impact on the amounts recognized in the financial statements... In some cases, the disclosures (or lack thereof) also raised questions as to whether the company’s accounting complied with IFRS....
  • Second, diversity in the application of IFRS presented challenges to the comparability of financial statements across countries and industries. This diversity can be attributed to a variety of factors. In some cases, diversity appeared to be driven by the standards themselves, either due to explicit options permitted by IFRS or the absence of IFRS guidance in certain areas. In other cases, diversity resulted from what appeared to be noncompliance with IFRS... While country guidance and carryover tendencies may promote comparability within a country, they may diminish comparability on a global level.

IFRS - U.S. GAAP comparison

A second paper, A Comparison of U.S. GAAP and IFRS, to provide an assessment of whether there is "sufficient development and application of IFRS for the U.S. domestic reporting system" by inventorying areas in which IFRS does not provide guidance or where it provides less guidance than U.S. GAAP. The Staff reviewed U.S. GAAP accounting requirements and compared those requirements to equivalent or corresponding IFRS requirements, as applicable. The Staff omitted from its review any U.S. GAAP requirements and the IFRS equivalents that are subject to the ongoing joint standard-setting efforts either through the Memorandum of Understanding (MoU) joint standard-setting projects of the FASB and the IASB, or other areas where the FASB and IASB had agreed to work together.

The second Staff Paper notes the staff "generally noted that U.S. GAAP contains more detailed, specific requirements than IFRS" and notes the following fundamental differences between U.S. GAAP and IFRS:

  • IFRS contains broad principles to account for transactions across industries, with limited specific guidance and stated exceptions to the general guidance
  • Fundamental differences exist between the FASB and IASB conceptual frameworks, including their level of authority and the definition and recognition of assets and liabilities

The Staff Paper then provides a broad comparison of the requirements of U.S. GAAP and IFRS, highlighting notable differences. The report notes it does "not include an analysis of the impact that those differences, individually or collectively, may have on the quality of IFRS."

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