By Anne Rosivach
The Securities and Exchange Commission (SEC), which is responsible for accounting standards in the U.S. and for the protection of investors, has said it will decide by the end of this year whether to adopt International Financial Reporting Standards (IFRS) for U.S. public companies. The issue "is a major decision for this agency and one not to be taken lightly," SEC Chairman Mary Schapiro said at a July 7 roundtable at the SEC in Washington.
SEC Chief Accountant Jim Kroeker, moderator of the three-panel roundtable, emphasized that the Commission had not yet decided to adopt IFRS for U.S. companies. The SEC intended that the focus of the roundtable discussions, which sought input from investors, small public companies, and regulators, should be the "benefits and challenges of adoption; whether we should adopt IFRS and if so, what would be the best approach," Kroeker said in his introductory remarks.
What does this mean?
The SEC is preparing to make a final decision on adoption of IFRS. Some panelists firmly believe that the U.S. needs to commit to IFRS to remain at the table, to continue to present the investor perspective. Panelists also agreed that the International Accounting Standards Board (IASB), if it is to assume the role of global standard setter, need to make considerable progress in its infrastructure and processes, funding, governance and independence
Participants in the first panel, who represented the investor community, generally agreed that a single set of high quality global standards consistently applied and enforced was in the best interest of U.S. investors and capital markets. Information taken from financial statements based on these standards would be comparable.
Two speakers, Mark LaMonte, Managing Director, Moody's Investor Services, and Gregory Jonas, managing director at Morgan Stanley, stated that the U.S. needed to commit to IFRS to remain at the table, to continue to present the investor perspective. "We need to continue to be thought leaders in setting global accounting standards, to be part of the process," LaMonte said.
"U.S. exposure to IFRS is already considerable, and will only increase," Jonas stated. Of the 5,000 companies, rated by his firm, LaMonte said, "over half are preparing financial statements using IFRS."
Panelists also agreed that the International Accounting Standards Board (IASB), if it were to assume the role of global standard setter, needed to make considerable progress in its infrastructure and processes, funding, governance and independence in order to achieve the goal of high quality standards consistently applied. The Financial Accounting Standards Board (FASB), the U.S. standard setter, could potentially assume one of several roles under options the SEC is considering.
Kevin Spataro, senior vice president of the Allstate Corporation, praised the processes used by FASB. Spataro who has participated in roundtables at both boards, recommended that IASB adopt processes similar to the FASB's, which are transparent, involve continuous user input, and involve field testing. Kroeker commented that the IASB was modeled on the structure and governance of the Financial Accounting Foundation, which oversees FASB, before changes brought about by the passage of the Sarbanes-Oxley Act of 2004.
Panelists raised questions about the lack of application guidance coming from the IASB, and the resulting growing diversity in application of accounting standards and influence of global accounting firms. Tricia O'Malley, former chairman of the Canadian Accounting Standards Board and a former member of the IASB board stated that industry groups had been invaluable in developing application guidance in Canada during its recent adoption of IFRS.
"The IASB is going in the right direction in terms of governance and funding," Gerry White, president of Grace and White told the panel, but there is a need for greater emphasis on the investor viewpoint. In some jurisdictions, the emphasis continues to be on management's views.
Most panelists said that they were reviewing options for transition, but seemed to agree that a date certain was needed and that allowing options to adopt would only lead to greater diversity in standards.
Progress on convergence of U.S. generally accepted accounting standards (GAAP) with IFRS, has slowed recently. The U.S. Financial Accounting Standards Board (FASB) and the London-based International Accounting Standards Board (IASB) have been unable to meet their original project goal to converge 11 standards by June of 2011. Convergence had been viewed as the path to IFRS for U.S. companies.
In May, the SEC published a workplan that "explores a possible method for consideration of incorporating international financial reporting standards into the financial reporting system for U.S. Issuers" that allows for FASB endorsement of international standards released by the IASB as well as convergence activities. U.S. GAAP would continue as the statutory basis for financial reporting.
Jonas was the only speaker to express support for the SEC workplan approach to transition. Jonas, who referred to the workplan approach as the "condorsement approach," stated that he did so for three reasons: U.S. exposure to IFRS will only increase; the condorsement approach recognized that the status quo was not a viable option; and finally, it hedges against IFRS failure by retaining U.S. GAAP as the statutory basis of financial reporting.