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 lead to the use of International Financial Reporting Standards (IFRSs) by US issuers beginning in 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 Issues 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 summarizes 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:

1. Sufficient development and application of IFRSs.
2. Independent standard setting.
3. Investor understanding and education.
4. Impact on the regulatory environment.
5. Impact on issuers.
6. 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 intends 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 will 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 has since been delayed until later in 2012.

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 presents 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 elaborates on 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.

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 minimizing transition costs.1 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 Analyzes 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 analyzed a selection of annual IFRS consolidated financial statements of both SEC registrants and nonregistrants. 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].”

Next Steps

The final SEC staff report should be publicly released in the second quarter of 2012 followed by the SEC staff recommendation to the Commission in the third quarter of 2012.