US Securities and Exchange Commission (SEC)
Description of the SEC
In the United States, the public capital markets are regulated primarily by the US Securities and Exchange Commission (SEC), a national government agency. The law gives the SEC the authority to prescribe the form and content of financial statements filed with the Commission. Historically, the Commission has looked to the private sector to develop financial reporting standards, though the Commission does prescribe financial statement presentation formats and disclosures and, sometimes, accounting recognition and measurement principles as well. The SEC oversees more than 30,000 registrants including 12,000 public companies, 4,600 mutual funds, 11,300 investment advisers, 600 transfer agencies, and 5,500 broker dealers. [2008 Data]
Approximately 1,150 of the 12,000 companies registered with the SEC are non-US companies. A foreign registrant may submit financial statements that conform to US GAAP or (starting 4 March 2008) financial statements that conform to International Financial Reporting Standards as adopted by the IASB (that is, not jurisdictional adaptations of IFRSs), without need to provide a reconciliation to US GAAP. Alternatively, a foreign registrant may submit financial statements prepared using its national GAAP or using a jurisdictional adaptation of IFRSs (such as IFRSs as adopted by the EU), but then a reconciliation of earnings and net assets to US GAAP figures is required.
The SEC and IFRS
Removal of the 'US GAAP reconciliation'
At its public meeting in Washington on 15 November 2007, the SEC voted to allow foreign companies to submit financial statements to the Commission using IFRSs as adopted by the IASB without having to include a reconciliation of the IFRS data to US GAAP. The SEC issued its final rule on Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards without Reconciliation to US GAAP on 21 December 2007.
Considering the use of IFRS by domestic issuer in the United States
On 25 July 2007, the US Securities and Exchange Commission voted unanimously to publish a Concept Release for public comment on whether to allow US issuers, including investment companies, to prepare their financial statements using International Financial Reporting Standards (IFRSs) as published in English by the International Accounting Standards Board.
On 14 November 2008, the US Securities and Exchange Commission published for comment its proposed Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by US Issuers. The proposed 'roadmap' could have lead to the use of International Financial Reporting Standards (IFRSs) by US issuers beginning from 2014.
The work plan for IFRSs
The US Securities and Exchange Commission met on 24 February 2010 to discuss issues relating to the use of IFRSs by public companies in the United States. The Commission approved a 71-page Commission Statement that provides an overview of the Commission's IFRS activities, summarises some of the public feedback on the proposed IFRS roadmap, and outlines an approach going forward.
The Commission Statement directs the SEC staff to carry out a Work Plan prior to an SEC decision on whether to require US issuers to transition to IFRSs. The key areas of concern to be addressed by the SEC staff as part of the work plan include:
- Sufficient development and application of IFRSs globally – comprehensiveness of IFRSs, auditability and enforceability of IFRSs, and comparability across jurisdictions
- Independence of standard-setting – oversight of the IASCF, composition of Trustees and IASB, funding, and the standard-setting process
- Transition issues:
- Investor understanding and education – education of investors
- Impact on regulatory environment – industry regulation, federal and state taxes, and audit regulation
- Impact on issuers – accounting systems, controls and procedures, contractual arrangements, and corporate governance
- Human capital readiness – education and training of various constituency groups
The Commission will also consider progress by the FASB and the IASB in completing their convergence projects under their Memorandum of Understanding.
SEC Staff progress report
On 29 October 2010, the SEC’s staff issued its first public progress report on the staff’s efforts and observations to date under the Work Plan. For each of the six areas of concern identified in the Work Plan, the progress report summarises the objectives of the Work Plan as well as the SEC staff’s efforts in executing the Work Plan and its preliminary observations to date, as applicable.
The progress report addresses the following six areas of concern identified in the Work Plan:
- Sufficient development and application of IFRSs.
- Independent standard setting.
- Investor understanding and education.
- Impact on the regulatory environment.
- Impact on issuers.
- Human capital readiness.
As noted in the progress report, “many of the Staff’s efforts are currently in process and are not expected to be completed until 2011, particularly as they relate to consideration of the sufficient development and application of IFRS for the U.S. domestic reporting system and the independence of standard setting for the benefit of investors.” The SEC staff intended to continue to report periodically on the status of the Work Plan.
In addition to considering the information obtained through execution of the Work Plan, the SEC signalled an intention to assess the progress on the FASB’s and IASB’s current convergence projects before making a final decision in 2011 on the use of IFRSs by U.S. issuers. This decision was subsequently delayed.
SEC Staff Paper Explores Method of Incorporating International Standards Into U.S. Reporting System
On May 26, 2011, the SEC issued a staff paper, “Exploring a Possible Method of Incorporation,” that presented a possible framework for incorporating IFRSs into the U.S. financial reporting system. Comments on the framework outlined in the staff paper and on any other potential approaches to incorporating IFRSs were due by July 31, 2011.
In the staff paper, the SEC staff elaborated an approach that combines elements of convergence and endorsement (dubbed “condorsement” by a member of the SEC staff at the 2010 AICPA National Conference on Current SEC and PCAOB Developments).
Under an endorsement approach, jurisdictions incorporate individual IFRSs into their local financial reporting systems in accordance with specified endorsement processes and usually by using specified endorsement criteria. The European Union and Australia follow such an approach. The staff paper notes that the United States would follow similar processes and that the FASB and SEC would have specific responsibilities. In particular, the FASB would incorporate newly issued IFRSs into U.S. GAAP, and the SEC and the FASB would retain the ability to modify or supplement IFRSs when doing so would be in the public interest or necessary for the protection of investors.
Under the paper, during a transition phase, the framework would follow a convergence approach under which the FASB would bring U.S. GAAP closer to IFRSs by addressing and evaluating differences between the sets of standards and incorporating IFRSs into U.S. GAAP, with a focus on minimising transition costs. While the term “U.S. GAAP” would be retained, the ultimate goal of the framework is that at the end of the transition period, a “U.S. issuer compliant with U.S. GAAP should also be able to represent that it is compliant with IFRS as issued by the IASB.”
SEC Staff Compares IFRSs With U.S. GAAP and Analyses IFRSs in Practice
The staff published two papers on November 16, 2011:
- A Comparison of U.S. GAAP and IFRS — The SEC staff reviewed 29 U.S. GAAP Accounting Standards Codification (ASC) topics and compared them with corresponding guidance in IFRSs, as applicable, focusing on the more significant differences between the two sets of standards.
- Analysis of IFRS in Practice — The SEC staff analysed a selection of annual IFRS consolidated financial statements of both SEC registrants and non-registrants. The staff also identified topics frequently commented on by the SEC’s Division of Corporation Finance in its reviews of the SEC filings of foreign private issuers that prepare their financial statements in accordance with IFRSs.
In comparing U.S. GAAP and IFRSs, the staff focused on identifying differences because similar requirements under the two sets of standards were presumed to be “of sufficiently high quality.” One fundamental difference noted was that IFRSs contain “broad principles to account for transactions across industries, with limited specific guidance and stated exceptions to the general guidance,” whereas U.S. GAAP requirements are often more detailed and specific. Thus, many of the standards’ differences are related to industry or transaction-specific guidance that is contained in U.S. GAAP but not in IFRSs. The staff noted that the existence of specific guidance under U.S. GAAP may contribute to consistency in application within a particular industry but not always across industries, whereas the reliance on broad principles under IFRSs may help promote broader consistency across industries.
In analyzing IFRS in practice, the staff analyzed the most recent annual consolidated financial statements of 183 companies that report under IFRSs. The staff’s analysis focused on compliance with measurement and recognition requirements of IFRSs, transparency and clarity of disclosures, and the comparability of financial statements. The staff found that financial statements of the companies included in the analysis “generally appeared to comply with IFRS requirements.” However, they noted that the disclosures could be more transparent and clear. In particular, some companies did not provide relevant accounting policy disclosures or, when such disclosures were given, they were not sufficiently detailed or clear (e.g., disclosures about the nature of significant company transactions). Some companies also used terms that were “inconsistent with the terminology in the applicable [IFRSs].” The staff noted that in certain cases, “the disclosures (or lack thereof) also raised questions as to whether the company’s accounting complied with [IFRSs].”
SEC final staff report
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 funding – While 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 understanding – Investors 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.
Further analysis by the SEC will be performed before the Commissioners make a decision on incorporating IFRSs in the United States.