By Anne Rosivach
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) late last month announced a delay for completion of the remaining priority convergence projects from June 2011, the target date, until the end of 2011. One project may be postponed until 2012.
The convergence activities of the two boards were expected to produce high quality global accounting standards, International Financial Reporting Standards (IFRS) that would converge U.S. Generally Accepted Accounting Standards (GAAP) and existing international accounting standards.
The slippage in the timeline and a subsequent publication by the IASB of its five-year strategy, anticipating changes in financing and governance, have left many in the U.S. wondering whether the planned U.S. adoption of IFRS will be put on hold indefinitely.
The Securities and Exchange Commission (SEC) is still expected to make a decision about whether to replace U.S. GAAP with IFRS before the end of 2011. The Commission has hinted that its decision may allow different options for large and small companies.
What the SEC is saying
When viewed in the context of comments by officials of the SEC, the actions of the two boards are less surprising. While affirming their continued support of the convergence project and the ongoing work of the FASB and the IASB, SEC commissioners have expressed reservations in recent months about the converged standard-setting process, and they have raised questions about how standards will be set in the future.
SEC Chairman Mary Shapiro, speaking at the American Institute of Certified Public Accountants' (AICPA) annual conference in December 2010, stated that the converged standards – "in addition to being uniform – must be high-quality improvements over current standards." She called for greater investor input and referred to SEC staff progress reports on questions of financing and governance for IFRS Foundation and on the role of the FASB if the Commission were to mandate IFRS for domestic companies. The IASB is the independent standard setting body of the IFRS Foundation.
Shapiro said that she remained "optimistic about achieving a convergence that benefits investors in the U.S. and around the world", but that a significant portion of the work plan remains in progress, and the Commission "looks forward to receiving continued periodic reports from the Staff and to marking progress in the year ahead."
In early 2010, the SEC directed its staff to execute a work plan, the results of which will aid the Commission in its evaluation of the impact that the use of IFRS by U.S. companies would have on the U.S. securities market. SEC staff were asked to asked to address issues including determining whether IFRS is sufficiently developed and consistent in application for use as the single set of accounting standards in the U.S. reporting system. Preliminary progress reports were released in October 2010.
Status of high priority convergence projects
The status of the five highest priority convergence projects on the agenda of FASB and IASB by the end of 2011 is believed to be an important consideration for the SEC in its decision-making, according to KPMG partners who spoke at a May 2 Webcast",IASB's revised target date for completion of projects."
Karl Braun, a seconded partner in KPMG's U.S. IFRS Initiative who moderated the Webcast, suggested that the revised timeline was inevitable. Braun stated that the original target date had advanced the ball for completion of three of the priority convergence projects, but the workload had put a strain on both boards and their staffs. There was increasing concern about whether they could complete high quality projects.
Braun emphasized that ongoing pressure from the G-20 on standard setters to come up high quality standards could not be ignored.
Other highlights from the KMPG Webcast:
Paul Munter, KPMG's National IFRS Professional Practice leader, brought Webcast listeners up to date on the status of the five high priority convergence projects. He said that IFRS 13, fair value measurement, should be issued in a few days with a few amendments to FAS 157, which should bring the boards close to convergence.
Single joint standards can be expected in the second half of 2011 for both leasing and revenue recognition. The revenue recognition standard was a "model for convergence", Munter stated. The standard calls for a single revenue recognition model for all entities across all transactions with limited exceptions. Revenue is recognized when performance obligation is satisfied, i.e. when control of promised good or service is transferred to customer.
"Generally speaking", Munter said, under the final Leasing standard, which should be released in the second half of 2011 "all leases should be recognized on the balance sheet with exception of short term leases." The proposals would bring lease obligations and the related assets onto the balance sheets (statements of financial position) of lessees.
The IASB is working on Insurance contracts right now. FASB will take its final standard as an exposure draft. Insurance contracts are new to the list of priority projects.
It is not likely that the two boards will be able to agree on a converged standard for Financial instruments in the near future. "IASB went ahead on its own on Financial instruments, Munter said. "The boards are out of sync." The result, according to the IASB, is that FASB and the IASB are publishing different exposure drafts for public comment.
IASB will reconsider after FASB publishes its exposure draft. "It is hard to imagine a converged standard on impairment and hedging by the end of the year", Munter stated.
Participants in the KPMG webcast said that potential future progress reports from the SEC staff reports would consider
- Consistency of IFRS application
- Comparison of U.S. GAAP to IFRS
- Methods of incorporation of IFRS
Developments at the IASB
Key developments at the IASB in recent weeks have been the publication of the IFRS Foundation Five Year Strategy Review for public comment, and the foundation's 2010 results and 2011 budget. The foundation's trustees acknowledge that the organization will need to make some changes as it assumes the role of global standard setter. These reports appear to address some of the SEC's concerns about the global standard setting process.
The Five Year Strategy Review describes the future activities and responsibilities of the IASB as it seeks to ensure that standards are clear and, if they are not, to amend them. The Review also includes a plan for the IFRS Interpretations Committee. The Interpretations Committee is charged with identifying emerging areas of divergence before they become entrenched practice, referring issues to the IASB when standards require improvement, and issuing interpretations within a principle-based environment.
The trustees noted the limitations of the IFRS Foundation in the area of enforcement, but said that local jurisdictions had the power to enforce standards.
The SEC has expressed concern about funding and independence. In 2011 the Foundation's budget report noted, The United States is the only country in 2011 where the IFRS Foundation seeks direct contributions by companies. "Direct contributions from companies (8 percent) and international accounting firms (26 percent) is reduced to 34 percent of total revenues."
In their Statement of Financial Position of the IFRS Foundation, the trustees said they will be seeking public sponsorship for the Foundation.
Speakers at the KPMG Webcast suggested that the IFRS Foundation and IASB may be restructured to resemble the relationship of FASB to the FAF Foundation.
Outreach efforts by standards boards and the SEC
There is some evidence that investors and potential users of IFRS may have stopped paying attention. In her AICPA address Chairman Shapiro stated that the SEC wanted greater input from investors and potential IFRS users. The boards received a very limited number of responses to their October 2010 request for comment letters from stakeholders about the time and effort that will be involved in adopting several new standards and when those standards should be effective.
The staffs of both boards recently prepared a brief survey that took only 5-10 minutes, for which the responses were anonymous, requesting feedback from investors on the potential effective dates and transition methods of the following projects – Accounting for Financial Instruments, Leases, Revenue Recognition, and Accounting for Insurance Contracts. The survey was completed on May 6, 2011 and results will be made public.
The SEC will sponsor a roundtable in July that will focus on topics such as investor understanding of IFRS and the impact on smaller public companies, and on the regulatory environment of incorporating IFRS. The July 7 event will feature three panels representing investors, smaller public companies, and regulators.
The KPMG partners said, during their "IASB revised targeted date Webcast", that the single greatest concern their clients had expressed was about the effective date of the adoption of IFRS.
Potential options for small U.S. companies
If the SEC does decide to incorporate IFRS into the U.S. domestic reporting system at some point in 2011, the earliest date U.S. issuers would report under that system would be approximately 2015 or 2016. Implementation dates may still be staggered thereafter. Officials in the SEC and FASB have left the impression in some of their remarks that small companies might be allowed a different timetable.
One hint that the SEC is thinking about the burdens of IFRS adoption on small companies can be found in one of the tasks on the SEC staff work plan. The staff was asked to issue a report on the impact on companies, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations and litigation contingencies.
Another possible clue to the SEC's intentions may be found in remarks to the AICPA on December 6, 2010 by Paul A. Beswick, deputy chief accountant at the SEC. Beswick asked",Should the largest companies be required or allowed to move to IFRS prior to the FASB completing its "condorsement" efforts?" making it sound as if the SEC was already thinking of large companies adopting IFRS as a separate group.
One KPMG Webcast speaker suggested that the separate panel at the SEC roundtable might herald different options for different sized companies. Many large companies already have foreign subsidiaries reporting under IFRS because of local requirements.
Finally, Leslie Seidman, FASB chairman, said in an interview in the Journal of Accountancy in April 2011 commenting on the joint FASB/IASB meeting in March, 'I will also say that we did not specifically discuss whether private companies and other smaller entities might have additional time beyond what I'm even indicating now. We will discuss that at a later date."