Carve-Ins, Not Carve-Outs, Can Help IFRS Adoption, Investor Panel Tells SEC

A panel of investors, speaking at an SEC roundtable on International Financial Reporting Standards earlier today, told SEC Chairman Mary L. Schapiro, Commissioner Elisse Walter, and SEC staff present that 'carve-ins' (or requiring additional or alternative information to that required by IFRS) - vs. 'carve-outs' (in which a country opts out of all or a portion of a particular IFRS standard) can be helpful if the SEC were to move to adopt IFRS.

Carve-Ins, Not Carve-Outs
Mark LaMonte, managing director, Moody's Investor Service, told the group, "Carve-outs are not particularly helpful; carve-ins can be. FASB needs to understand where U.S. views [differ] … maybe you have carve-ins [such as] incremental disclosures, or alternative presentations, we still make sure we adopt the standards in a way that allows those global comparisons to take place."

David Larsen, Managing Director, Duff & Phelps noted he supported what has informally been described as a 'condorsement' approach to adopting IFRS in the U.S., as outlined in a May 27 SEC staff paper on the incorporation of IFRS into the U.S. financial reporting system. Under the 'condorsement' approach, the FASB would have a continuing role in participating in the development of IFRS, and in serving as the 'endorsement' mechanism in the U.S., to approve standards for adoption in the U.S., or develop modifications for U.S. adoption, as needed.

Y2K Prep May Be A Useful Model
Larsen added, "The condorsement approach has a great deal of merit; a strong and vibrant FASB has had a strong, positive impact on the development of IFRS."

Drawing a comparison between IFRS adoption and the runup to Y2K, Larsen said, "Similar to y2K, a lot of work was done, a lot of money was spent on consultants to get there; that being said, it seemed to go smoothly, and there were’t too many hiccups."

Private Company Considerations
Alluding to ongoing deliberations by the Financial Accounting Foundation, parent of the FASB, on private company accounting (including consideration of a recommendation released earlier this year by a Blue Ribbon Panel sponsored by the FAF, the AICPA and NASBA, that a separate board be formed under the FAF, to focus on private company standard-setting), Larsen stated, , "We need to be careful not to dilute FASB with a separate private company board."

In contrast, a comment letter filed by Mark Heeson of the National Venture Capital Association included in the SEC's comment file on IFRS warns,

As we noted in our 2007 comment letter on the SEC’s Concept Release on Allowing US Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards, both venture capital firms and venture funds generally operate as private companies in a partnership form. Additionally, venture funds invest almost exclusively in private companies. As we note in our 2007 comment letter, NVCA is concerned that the SEC’s evaluation of IFRS has included too little consideration of the way decisions regarding accounting standards for public companies ripple through and affect accounting and auditing for venture capital funds and the private companies in which they invest.

Among the points raised in NVCA's most recent letter, are:

1. Efforts to converge IFRS and US reporting standards have added to the FASB’s excessive focus on issues of publicly traded companies and retail investment vehicles,
   



2. The SEC has a responsibility to minimize the negative consequences of any move to IFRS on private companies in the US and is uniquely positioned to do so, and
   



3. [NVCA] remain[s] concerned that the move to IFRS will further solidify the oligopoly position of the Big Four Accounting firms.

NOTE: Canada adopted its own 'home-grown' model of private company GAAP ("Accounting Standards for Private Enterprises or ASPE), as Canadian public companies move to adopt IFRS this year. See, e.g. Canadian GAAP at a Crossroads (updated 4/11) by Deloitte.

Political Pressure A Reason To Join In, Rather Than Opt Out of IFRS Process
Tricia O'Malley, a former IASB board member, and former Chairman of the Canadian Accounting Standards Board (note: Canadian public companies are in the process of adopting IFRS this year), appeared to indicate that concerns about the politicization of accounting standards and the IASB's standard-seting process were a reason for the U.S. to join into and provide a thoughtful counterweight to that process, rather than opting out and letting the political pressures that current face the IASB continue to mount.

Specifically, O'Malley said, "[I]t became quite clear to us early on, a lot of people signed onto use of IFRS as their reporting language without understanding the fundamental philosophy of a conceptual framework, and that financial reporting is for investors.

She added, "I think there are a lot of jurisdictions using IFRS where it is pretty clear the standard setting process has been under political control … [geared toward] policy making, as opposed to … investors." That, said O'Malley, is "one of the reasons [some of] the rest of the world would like to see the U.S. and Japan join ... It would actually help the funding issue, and as Greg [Greg Jonas of Morgan Stanley] mentioned earlier, ensure continuous U.S. participation in the process which I think is absolutely essential, so investor focus remains front and center; that is the critical piece of the IASB continuing to be successful."

Investors Will Be Ready, Panelists Say

Asked by SEC Chief Accountant Jim Kroeker to comment on investors' IFRS readiness, the panelists (notably, mainly institutional investors and analysts) generally indicated that investors will be ready, or at least will be able to gear up to be ready, but that the effort to fully gear up, particularly among investors or analysts that are not focused on multinationals, but more domestically focused, may not take place in earnest until a date certain is announced, as to a pending move, and the nature of that move, to IFRS.

Gerry White, of Grace and White, Inc. observed, "Knowledge of IFRS is very variable, and particularly among people who follow U.S. companies only, is broad but not at all deep; having said that, giving people another two years is not going to make much of a difference, most analysts focus on accounting changes when they happen."

Regarding a potential transition to IFRS, White noted, "The [SEC] staff paper talks about prospective change, our surveys show that among investors, that is a clear second choice, it is much more helpful for investors to have retrospective adoption."

Mary Morris of CalPERS agreed, saying, "Investors will be ready to jump in full force, as Gerry says, when the decision is made," although she also highlighted some matters requiring attention.

Greg Jonas of Morgan Stanley noted, "U.S. investors are heavily exposed to IFRS today, and more as time goes on; we can only protect U.S. investors by bolstering IFRS, making it strong and vibrant, bringing it into the U.S. in a thoughtful way." He added, "Personally, I am a condorsement fan."

Neri Bukspan of Standard and Poor's said, "Investors are going to be ready, we ought to be ready if we cover companies globally." He added that both FASB's Investor Advisory Committee and the IASB's Investor Advisory Committee emphasized the importance of the conceptual framework, which was also referenced by FASB Chairman Leslie Seidman, in attendance as an observer at the roundtable.

Bukspan also noted the importance of a comprehensive disclosure framework, (a project which is currently being deliberated by the FASB, with a Discussion Document due out for public comment in the 4th quarter of this year), adding, "I believe the Commission could promote the dialogue, [including] thinking about what the right kind of disclosure [would be], and considering cost/benefit of prospective vs. retrospective adoption."

Industry Communication With Investors Essential
Panelists emphasized that it is essential that companies individually, and in some cases supported by educational efforts by industry associations, make sure that investors in their companies are prepared for any major change in reporting such as an adoption of IFRS, specific to how such adoption is likely to impact that industry and/or company.

O'Malley observed, with insight from Canadas's ongoing transition: "I would emphasize the incredible importance of industry groups [in educating investors about the transition]; I would give absolute top marks to our own GAAS guys... helping people with questions about transitioning from Canadian GAAP to IFRS, spent a lot of time with groups, including major analysts." She added, "Other industries like the banking industry have done major presentations, explained the kind of choices individual companies are going to be making, has really just started getting into high gear as transition approached, they know the analysts are still trying to understand whats going on in the last year of Canadian reporting."

Further, O'Malley noted, "Some of the companies have actually had ‘boot camps’ for some of the analysts that follow them; one of the CFO's said, ‘This is part of my job, if something happens to my stock price because I didn’t explain something propertly to my analysts, I’m going to wear it.”

Jonas had a similar view, adding, "On the education front, investors will be ready for any thoughtful transition approach, and the primary education vehicle will be what companies say to investors as they prepare for transition, not only in [the year of] transition, but the years prior to transition, so they can prepare for it."

In related news, see Michael Rapaport's July 6 Wall Street Journal article, U.S. Firms Clash Over Accounting Rules.

Process, Process, Process
Kevin Spataro of The Allstate Corporation, (a frequent and well-spoken, in my view (please refer to the disclaimer on the right side of this blog), participant in past SEC and FASB panels on fair value reporting), noted that it's all about "Process, process, process," pointing out that the IASB needs processes that are "similar to those that have made the FASB so successful."

Today's SEC IFRS roundtable also included a panel of small public companies, and a panel of regulators from other regulatory agencies. For more info, refer to the archived webcast, list of panelists and agenda. See also our post yesterday: New IASB Chairman, Hans Hoogervorst, Optimistic SEC Will Move To Incorporate IFRS Shortly.

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