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SEC may propose a new approach to IFRS in the United States

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04 Dec 2014

At a recent conference on the future of financial reporting hosted by the United States Chamber of Commerce, Mr Jim Schnurr, Chief Accountant at the Securities and Exchange Commission (SEC), provided some insights into the possible way forward for International Financial Reporting Standards (IFRSs) in the United States, suggesting that another approach to IFRSs in the United States may be forthcoming in the near future. He also gave some views on the revenue recognition and leases convergence projects.

SEC plans for IFRS

In his opening comments regarding where he was spending his time, Mr Schnurr noted "the first thing" he has been working on is IFRSs. He reflected on comments earlier in 2014 from Mary Jo White, SEC Chair, about moving forward on the consideration of the use of IFRSs by United States companies before moving onto his personal observations around what the possible next steps might be.

In a theme that was often repeated during the course of the discussion, Mr Schnurr noted that "first and foremost... any counsel or recommendations I give would need to be in the best interests of U.S. investors." Having said that, he went on to put forward his belief that the United States is "still committed to one set of global standards", but that this commitment had to be considered in the context of the needs of U.S. investors.

Recalling the move by the SEC in 2007 to allow foreign companies to submit IFRS financial statements without a reconciliation to U.S. GAAP, Mr Schnurr noted "very significant changes in the landscape" since that time, including many standards being more closely aligned in many respects between the IASB and FASB, whilst others are more diverged. However, he went on to say:

There does not appear to be what I call a significant demand... that the U.S. investor is looking for a significant increase in the use of IFRS by U.S. registrants

Mr Schnurr then went out to outline three previous alternatives regarding the use of IFRS in the United States, including:

  • The outright adoption of IFRSs, termed "turning the keys over to the IASB"
  • Providing U.S. registrants with the option to file IFRS financial statements
  • The so-called "condorsement" approach suggested by Paul A. Beswick (SEC Deputy Chief Accountant)

Mr Schnurr noted that each of these alternatives has legal, statutory and practical implications that would need to be considered. He then went on to say that after spending the past eight weeks since commencing the SEC Chief Accountant role looking into alternatives and discussing them with SEC Commissioners, that he hoped "in the not too distant future, we might be able to go public with another possible option that we could get feedback on".

Revenue recognition

The discussion then moved onto the converged revenue standards recently issued by the IASB and FASB, and the number of implementation issues that were arising. Mr Schnurr noted there were many issues arising from U.S. preparers, which he saw broadly fell into three 'buckets':

  1. Issues that may require amendments to the standards. These included some areas where Mr Schnurr believes the IASB and FASB may need 'to have another shot at the clarity we are trying to achieve', specifically singling out upfront versus over time recognition of revenue associated with licences
  2. Issues arising from an 'over technical' reading of the standards. These types of issues arose where people were incorrectly inferring the IASB and FASB were trying to introduce a different model to ordinary revenue transactions (such as splitting the sale and delivery of a good into multiple performance obligations). A process was needed to deal with these types of questions to eliminate diversity
  3. Issues falling between the first two 'buckets'. These are the issues that may require some interpretative guidance.

From the perspective of the number of issues arising specifically in the U.S. context, Mr Schnurr expressed some concern about the volume of issues, and noted the importance of consistency in outcomes for identical transactions, which he saw as an underlying strength of the U.S. markets. He noted he had no issues with entities applying reasoned judgements in developing accounting policies for revenue recognition, but that if diversity in practice arose, that this may indicate that the standard was not "sufficiently articulated".

Returning to early comments about the importance of U.S. investors, Mr Schnurr noted that the FASB and SEC would want to eliminate this sort of diversity, and that it may be that the FASB diverged from the converged standard in this context. Turning to the global perspective later in the session, Mr Schnurr put forward his view that if the revenue recognition project resulted in diversity within industries and across industries on a global basis, that this would be considered 'a failure'.

Leases project

In answering an audience question regarding the leases project, Mr Schnurr responded to concerns regarding the lack of convergence between the FASB and IASB in this area. He noted that in his view, U.S. investors were happy for leases to be on balance sheets, but that they considered straight line expensing from the income statement perspective as preferable. Accordingly, the FASB is responding to these needs in its proposals and the best interests of U.S. investors "trumps convergence" in his mind.

 

A webcast of the session is available on the U.S. Chamber of Commerce website (Mr Schnurr's session begins at approximately 2:07:00).  Mr Schnurr is scheduled to speak at the 2014 AICPA Conference on Current SEC and PCAOB Developments being held on 8-10 December 2014 in Washington D.C..

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