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SEC staff report on IFRS — summary and reactions

17 Jul 2012

We've posted our summary of the SEC final staff report 'Work Plan for the Consideration of Incorporating IFRSs into the Financial Reporting System for U.S. Issuers', together with an overview of reactions to the report.


Deloitte summary

On July 13, 2012, the SEC issued the final staff report Work Plan for the Consideration of Incorporating IFRSs into the Financial Reporting System for U.S. Issuers. The report marks the culmination of the work the SEC directed the staff to perform in relation to the work plan that the SEC initiated in February 2010. The purpose of the work plan was to consider specific areas and factors that would be relevant to the SEC as to whether, when and how to incorporate IFRS into the U.S. financial reporting system. The SEC staff published a number of reports over the last few years that provide insights on progress, observations and findings pursuant to the work plan. The final Staff report summarises observations and findings and brings them together into a single document.

In completing its analysis, the staff identified the following significant themes:

  • Development of IFRSs – Globally, IFRSs are generally perceived to be high quality standards. While both U.S. GAAP and IFRSs contain areas that are underdeveloped, the perception among U.S. constituents is that the “gap” under IFRSs is greater (e.g., the accounting for extractive industries, insurance, and rate-regulated industries). Progress has been made as it relates to the FASB’s and IASB’s current convergence projects.
  • Interpretive Process – The IFRS Interpretations Committee should do more to address application issues on a timely basis to reduce diversity in practice in the application of IFRSs. Although recent changes to the Committee’s process may address this concern, it is not yet known if the changes will be effective.
  • IASB’s Use of National Standard Setters – The IASB needs to understand different domestic reporting and regulatory frameworks and should consider relying more on national standard setters, e.g., assistance in areas where they have expertise, outreach activities, identifying diversity in practice, and post-implementation reviews. The IASB is in the process of developing a plan to formalise its relationships with National Standard Setters as it contemplates its future agenda.
  • Global Application and Enforcement – Although the financial statements that the SEC staff analysed largely appeared to comply with IFRSs, there is diversity in application of IFRSs globally. Regulators in various jurisdictions would need to work cooperatively to foster consistent application and enforcement of IFRSs.
  • Governance of the IASB – The governance structure of the IFRS Foundation “appears to strike a reasonable balance of providing oversight of the IASB while simultaneously recognising and supporting the IASB’s independence.” Mechanisms may be necessary to consider and protect the U.S. capital market, e.g., by allowing the FASB to endorse IFRSs in the U.S.
  • Status of fundingWhile there has been progress in developing a funding mechanism for the IFRS Foundation, the staff expressed concern about existing funding sources, including the reliance on large accounting firms to provide funding. Currently the funding is provided by “businesses, not-for-profits, and governments in fewer than 30 countries.”  The IFRS Foundation has been unsuccessful in raising sufficient funds for the U.S. portion of the budget.
  • Investor understandingInvestors do not have “uniform” education on accounting issues. Irrespective of any ultimate decision made by the SEC, the staff plans to further explore how investor engagement and education can be improved.

What may be most interesting is not what the final staff report is, but rather what it isn’t. The final staff report does not include a staff recommendation nor does it provide a sense as to what the Commissions’ next steps may be in relation to IFRS.  The final staff report does indicate that the report has not been approved by the SEC and does not necessarily reflect its views and that its publication “does not imply — and should not be construed to imply — that the Commission has made any policy decision as to whether International Financial Reporting Standards should be incorporated into the financial reporting system for U.S. issuers, or how any such incorporation, if it were to occur, should be implemented.” The work plan also “did not set out to answer the fundamental question of whether transitioning to IFRS is in the best interests of the U.S. securities markets generally and U.S. investors specifically.”

Although the work plan is now completed, the final staff report acknowledges that “additional analysis and consideration of this threshold policy question is necessary before any decision by the Commission concerning the incorporation of IFRS into the financial reporting system for U.S. issuers can occur.” Although the completion of the work plan is an important step for the U.S., many questions remain unanswered.

For more information, see Heads Up — SEC issues final report on incorporation of IFRSs.


Reactions to the report

Note: This section of the article is updated periodically to reflect further reactions.

The American Institute of CPAs (AICPA) has commended the SEC staff report but "urge[s] the Commissioners to consider the staff report with expediency because the world’s capital markets know no borders". Barry C. Melancon, AICPA president and CEO also stated "We urge the Commissioners to allow U.S. public companies the option to adopt IFRS".

Financial Executives International (FEI) also commended the report but noted "there may be various paths" to achieving a move to global accounting standards.  The response also reiterates earlier views that completion of the IASB-FASB convergence process is paramount and should not be subject to "artificial deadlines".  Accordingly, the FEI argues, "we do not feel the SEC should feel compelled to act... until such time as the Commissioners feel they have conducted sufficient outreach and study to make a well-informed decision that will stand the test of time".

Stephen Haddril, Chief Executive of the UK Financial Reporting Council said: "It is disappointing that transition is not yet clearly recommended.  It is imperative that this is not allowed to affect the continued development of high quality global standards."

Dr Nigel Sleigh-Johnson, Head of the Financial Reporting Faculty of the Institute of Chartered Accountants of England and Wales (ICAEW) noted continued support from the G20 for global accounting standards (further noting the IASB is the "prime contender" to be the global standard setter).  He further stated: "The fact that the US is still hesitant about a radical shift away from its own high quality standards should not be taken as any reflection on the suitability of IFRS reporting for other markets".

The CFA Institute has issued a critique of the report, pointing out a number of areas where the CFA Institute believes more analysis and evaluation is required.  The report notes "it is imperative for the SEC to define the way forward, as failure to act or provide clear direction is, in substance, a decision not to incorporate IFRS".  We provide more analysis of the CFA Institute report in our separate article.

Our summary of the reaction of the IFRS Foundation Trustees and IASB Chairman can be found in our earlier article.