International Board Weighs in on SEC
The Worldwide movement toward global accounting standards has received broad coverage in this publication during 2012. As evident from the discussions concerning leases, revenue recognition and financial instruments, the myriad of challenges and controversies surrounding IFRS have led to further delays and uncertainties. Consequently, the lack of a definitive recommendation by the SEC staff in its July report, while disappointing, should not have been a surprise.
After careful consideration of the SEC report, the IFRS Foundation staff published a response at the request of their Trustees that evaluated the report from an international perspective, and sought ways to enhance the Foundation’s work, taking into account academic research and results from other jurisdictions.
The 85 page document analyzes the SEC’s take on:
- the functioning of the IASB as a global standard setter,
- IFRS as global accounting standards,
- transitional challenges of adoption and endorsement of IFRS, and
- other jurisdictional challenges involving regulations, investors, entity size, people readiness, and cost.
1) The functioning of the IASB as a global standard setter
While the SEC staff felt that from a governance standpoint, there is a reasonable balance between oversight and independence of the IASB, the US may still need its own means of protecting US investors and capital markets with regards to the impact of future pronouncements. The IASB staff reiterated several substantive steps that have been taken over eleven years to assure independence.
The SEC staff questioned funding. Since the IFRS Foundation cannot compel financial support, the SEC staff contends that the IASB relies heavily on the large public accounting firms, along with less than 30 of the more than 100 countries that use IFRS. The IASB staff countered that 69 countries financially support the IFRS Foundation, and that the US financial contribution is far less than its size and representation would call for.
The SEC staff reviewed favorably the comprehensiveness of the IASB standard setting process, which the IASB staff appreciated and further noted that its Due Process Oversight Committee provided additional assurance that the process was following the prescribed framework in an independent manner.
2) IFRS as global accounting standards
Both SEC and IASB staff acknowledged the high quality of standards issued as US GAAP and IFRS. The SEC staff emphasized the number of differences that still exist, while the IASB staff noted how much less the differences are than when the convergence process began a decade ago. However, frustrations have grown over this lengthy period, straining relations between the IASB and FASB. They now each appear to be going their separate ways in finding solutions for remaining differences, which could serve to unravel the gains that have been attained.
US GAAP has extensive industry-specific guidance, most significantly for utilities that engage in rate-regulated activities, oil and gas, investment companies and broker-dealers. The IASB opposes industry-specific guidance as adding unnecessary complexity and potential conflicts. Also, the SEC is accused of contradicting its earlier commissioned report that recommended elimination of industry-specific guidance.
The need for more timely IFRS interpretations was agreed to, as had been noted to the IASB in a prior Trustees’ review. The recommendations of that review have been implemented according to IASB staff.
The SEC staff recommended that the IASB expand the work it already does with national standard setters, to have greater involvement in standards development and implementation. Responding to a similar recommendation from the prior Trustees’ review to formalize these relationships, an Accounting Standards Advisory Forum is being formed. The IFRS Foundation recently issued an Invitation to Comment on a proposal for the Forum.
Both staffs recognize the importance of consistent enforceability in order for a global IFRS to be effective. While clear, understandable standards are a start, the authority for enforcement lies with the individual countries. Therefore, cooperation between national regulatory agencies will be critical for success.
3) Transitional challenges of adoption and endorsement of IFRS
The IASB staff affirmed that the method and timing for individual countries to make the transition to IFRS was for each country to decide based on its own circumstances. The SEC staff discussed the pros and cons of a “big bang” method, versus a gradual transition, versus an indirect incorporation approach to IFRS. These alternatives were considered from the standpoint of regulators, preparers and users of financial statements, taking into account the cost, knowledge and awareness, legalities and availability of resources.
Having taken so long to arrive at this juncture, the SEC has the benefit of learning from the experiences of the over 100 countries that have gone through the process of changing over. The IASB staff spells out some of the methods and results. Fast or gradual transitions can work, but the IASB staff feels that a piecemeal or standard-by-standard approach may be more costly and problematic over the long run, since the lack of comparability and the need for reconciliation between standards will continue for an extended period, leading to confusion and misunderstanding.
4) Other jurisdictional challenges involving regulations, investors, entity size, people readiness, and cost.
The SEC staff reported the concern of various industry regulators that have specific financial reporting needs that are not envisioned in IFRS. Acknowledging that this concern is not limited to the US, the IASB staff presented examples from Brazil, the European Union, Australia, and Canada to describe how they have dealt with these regulatory issues. Similarly, differences between tax and financial reporting have been addressed in various countries, and can be in the US as well.
Investor preparation for a change to IFRS is a concern throughout the world. Institutional investors tend to be more familiar with the prospect of IFRS than the small, private investors. Time and education are called for in order to equip the investment community for the ramifications that come with a move to IFRS. The IASB has an Investor Liaison Programme set up to provide resources for investors, as well as various committees and councils to provide ongoing connections to the investor community.
Addressing company size and cost, the IASB staff indicated that the experience with the 120 or so countries that have required IFRS has not found the cost to be prohibitive or problematic, as the SEC staff suggest. Similarly, finding and preparing the human resources needed to accomplish the transition also has not been a significant problem in other countries.
Finally, the IFRS Foundation commissioned an academic study to quantify the benefits that have accrued from adopting IFRS. Generally, that study found that capital markets benefitted in the areas of market efficiency, investment decisions, quality of financial information, foreign investment, capital market integration, and development of the infrastructure to support IFRS.