Wednesday, July 6, 2011

New IASB Chairman, Hans Hoogervorst, Optimistic SEC Will Move To Incorporate IFRS Shortly

Hans Hoogervorst, the International Accounting Standards Board's new chairman, said last week he is 'optimistic the SEC will move to fully incorporate IFRS shortly.' Hoogervorst became Chairman of the IASB on July 1, succeeding Sir David Tweedie, whose term ended June 30.

Among Hoogervorst’s former positions (see bio), he served as chairman of the executive board of the Netherlands Authority for the Financial Markets (AFM); chaired the IOSCO technical committee, and co-chaired the Financial Crisis Advisory Group (FCAG) jointly sponsored by FASB and the IASB.

Hoogervorst on IFRS Roadmap; Post-Convergence Agenda
In his welcome message, Hoogervorst notes that the IASB will soon publish a consultation document seeking comment on its post-convergence agenda.

Regarding the SEC’s consideration of permitting or requiring IFRS by public companies in the U.S., Hoogervorst states:

[W]e need to help complete the missing pieces of the IFRS jigsaw, and an important element of that is encouraging the United States to come on board. IFRSs are already permitted for use by non-US companies listed on American markets, and I am optimistic that the US Securities and Exchange Commission (SEC) will move to fully incorporate IFRSs into the US financial reporting regime shortly. The US is the single largest national financial market, with the most developed and mature national accounting standards. It seems reasonable to me that the SEC takes its time to make the appropriate transitional arrangements, however it is clear that US companies would welcome some certainty in the near future. The SEC’s decision will certainly have consequences elsewhere in the world, with several other major economies waiting to see what happens before finalising their own plans to adopt.
Additional priorities are also discussed in the new IASB chairman's welcome message.

Panelists for IFRS Roundtable Announced; Comments on 'Condorsement' Due 7/31
In related news, the SEC recently released the detailed agenda and list of panelists for its previously announced IFRS Roundtable, taking place tomorrow.

As noted in the SEC's press release, the roundtable "will focus on topics such as investor understanding of IFRS, the impact on smaller public companies, and on the benefits and challenges of incorporating IFRS into U.S. public company accounting."

Reminder: the SEC requested comments by July 31 on its SEC staff paper outlining what is informally referred to as a 'condorsement' approach (a term coined by SEC Deputy Chief Accountant Paul Beswick) to using the FASB as the endorsement mechanism for IFRS in the U.S., in a role similar to that of some other national standard-setters in countries that have adopted IFRS.

My Two Cents: The Meaning of "Incorporation" (of IFRS)
In my view (I remind you of the disclaimer posted on the right side of this blog), some of the strongest rhetoric against the potential adoption of IFRS in the U.S. appears to be based on a presumption that the SEC's ultimate decision could be to require public companies to move from their current, U.S. GAAP platform, to a wholly different platform, in the form of IFRS. But let's break this down.

Decision is not pre-ordained; various alternatives still under consideration

The SEC staff emphasized in their staff paper on condorsement that a final decision has not yet been made by the SEC staff vis-a-vis incorporation of IFRS, any upcoming decision is not necessarily a binary decision, and various alternatives are still under consideration.

In the SEC staff's own words (from the SEC staff paper):

The Commission has not yet made a decision as to whether and, if so, how, to incorporate IFRS into the financial reporting system for U.S. issuers. While the Staff’s work on the Work Plan continues, including assessing the quality of the standard setting process, the focus of this Staff Paper is to outline a possible approach for incorporation of IFRS into the U.S. financial reporting system, if the Commission were to decide that incorporation of IFRS is in the best interest of U.S. investors. This Staff Paper does not provide an extensive discussion of a potential timeline of incorporation. That is not to diminish the importance of the timing of incorporation but reflects the fact that the timeline for incorporation is a separate consideration....

...The Staff’s discussion in this Staff Paper is not intended to suggest that the Commission has determined to incorporate IFRS or that the discussed framework is the preferred approach or would be the only possible approach. The framework is presented to illustrate that:
1. The decision faced by the Commission in an effort to achieve a single set of high-quality, globally accepted accounting standards is not necessarily a binary decision (i.e., either to require the use of IFRS by all U.S. issuers immediately or not);
2. Incorporation of IFRS is not inconsistent with the SEC maintaining its ultimate authority over U.S. accounting standard setting; and
3. There are potential ways to accomplish the broad objective of pursuing a single set of high-quality, globally accepted accounting standards while minimizing cost, effort, and other transition obstacles.

'Permit,' 'Require,' or 'Converge'
An oft-cited statistic, loosely translated over the past few years, is that over 100 countries currently "use" IFRS. A useful table specifying which countries in the G-20 have decided to (or, are in the process of deciding whether to) require, permit or converge with IFRS can be found in the IFRS Foundation and IASB's Who We Are and What We Do (updated July, 2011).

As noted in the summary sentence at the top of pg 4 of that publication:

Since 2001, almost 120 countries have required or permitted the use of IFRSs. All remaining major economies have established time lines to converge with or adopt IFRSs in the near future.

The operative word in the above sentence which I would point out, is the word "or," as in, almost 120 countries have required OR permitted the use of IFRS. Refer to the table on pg 4 of the IFRSF/IASB report for country-by-country specifics as relate to the G-20.

The Significance of the Meaning Of 'Incorporate' (re: IFRS)

Moving from the point above, that the use of IFRS in various countries ranges from being a mandatory requirement, to a permitted framework, to a framework upon which national standards have converged, is the next and final point that the SEC's use of the word 'incorporate' - to me, at least - is significant.

Webster's dictionary defines incorporate (parts 1a and 1b of the definition) as:

to unite or work into something already existent so as to form an indistinguishable whole... to blend or combine thoroughly

Thus, to 'incorporate' IFRS could mean, in plain English, for U.S. GAAP to converge with IFRS, period, and that it remain converged with IFRS over the long haul, either through a FASB endorsement mechanism as described in the SEC staff paper, or though maintaining the current design and mandate of the FASB. The downside to keeping a fully standalone mandate for the FASB could be, as expressed by former FASB Chairman Bob Herz in numerous speeches, the challenge of having to 'ride two horses' in maintaining and improving a separate set of U.S. GAAP, along with (what could become an ongoing) convergence mandate.

Additionally, in my view, the word 'incorporate' can be broadly interpreted to include a decision to 'permit' the use of IFRS by U.S. public companies, not only a decision to 'require' the use of IFRS. The jist of the arguments generally made against a decision to simply 'permit' a move to IFRS is that, if companies take advantage of such an 'optional' opportunity (1) they would not want to risk having to change back to U.S. GAAP, with significant costs and complexities attached to changing over an entire accounting and reporting system, impacting SEC reporting and more, and (2) they very likely would not want to incur the cost of having to report, to the SEC, at least, under both IFRS and U.S. GAAP, for much the same reason (incurring the cost of dual reporting systems to fulfill an 'optional' requirement, when one would be sufficient). If companies were offered an opportunity to report in IFRS instead of U.S. GAAP, and had a comfort level the decision would not be reversed on them, I believe there would be some appetite for such a move if IFRS were an 'option.'

However, another flip-side to an IFRS 'option,' would be consideration of investor, preparer, auditor, regulator (regulators in addition to the SEC, who base regulatory actions, taxes, fees, etc. on information provided under U.S. GAAP) and other feedback on the usefulness and understandability of public reporting under an IFRS 'option,' vs. continuing to require U.S. GAAP only, or moving to an IFRS-only requirement.

The main thing I'd like to point out is that 'incorporation' of IFRS in the U.S. public reporting system, as noted in the SEC staff report, can take any number of different forms, ranging from a mandate to optionality (i.e. permission to use IFRS), as well as incorporation through convergence.

In support of this potentially expansive view as to the possible mechanism(s) of incorporation of IFRS in the U.S. financial reporting system, it is interesting to note that the word 'incorporate' has been receiving more prominent placement in SEC releases (certainly in the title of those releases) beginning with the SEC's Feb. 24, 2010 Work Plan for the Consideration of Incorporating IFRS Into the Financial Reporting System for U.S. Issuers (released as an Appendix to the SEC's 2/24/10 Commission Statement in Support of Convergence and Global Accounting Standards). As noted above, the SEC staff paper released in May of this year also has 'incorporation' of IFRS in its title.

Prior to the 2010 IFRS WorkPlan, the SEC did not highlight the term 'incorporation' in its releases. For example, the SEC's Nov. 14, 2008 rule proposal was entitled: Roadmap for the Potential Use of Financial Statements Prepared in Accordance With IFRS, and the SEC's August 7, 2007 Concept Release was entitled, Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with IFRS.

How much significance do you think should be ascribed to the word 'incorporate'? Feel free to post a comment on our blog. If you would like to receive the FEI blog by email, please send an email to and write in Subject line: Sign Up.

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Joel Ungar said...

Good summary. I'm almost at the point now where I don't care (stress almost) what they decide. I just want a decision already. Too much uncertainty.

Edith Orenstein said...

Joel, thanks for your comment. Readers, click on the link to Joel's name in his comment above to see his professional background and links to his blogs. Joel, maybe you should testify at one of these SEC IFRS roundtables, or one of their Financial Reporting Series roundtables! Your perspective is probably aligned with a broad swath of the public company and audit firm community in this country.

Ken Kobylenski said...

Edith & Co: am I reading too much into recent activities on the balance sheet netting proposal? FASB and IASB decided to go in separate directions on this one, thus retaining what is for Financial Services industry the largest GAAP vs IFRS balance sheet difference. This suggests to me FASB's ultimate goal for US GAAP is "almost IFRS" with free choice offered between "almost IFRS" per FASB/SEC or pure IFRS as issued by IASB. Otherwise why did everyone fight so hard to retain this difference, if mandated pure IFRS is only a short time away?

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