Will IFRS Be Mandated Under New SEC Chair White?

The new SEC Chairman, Mary Jo White, joins the SEC with decades of experience as a federal prosecutor and securities lawyer. She was nominated to be SEC Chair by President Barack Obama on Feb. 7, 2013, and confirmed by the U.S. Senate on April 8.

When she was the Attorney for the Southern District of New York, Chairman White specialized in prosecuting complex securities and financial institution frauds and international terrorism cases. With her guidance, the office earned convictions against the terrorists responsible for the 1993 bombing of the World Trade Center and the bombings of American embassies in Africa. Chairman White is the only woman to hold the top position in the 200-year-plus history of the Southern District of New York.

Upon nomination, Chairman White commented that “It is an honor to lead the talented and dedicated SEC staff on behalf of America’s investors and markets. Our markets are the envy of the world precisely because of the SEC’s work effectively regulating the markets, requiring comprehensive disclosure, and vigorously enforcing the securities laws.”

These comments give us strong clues that the emphasis of this Chairman will be on vigorous enforcement of current securities laws and financial disclosures that are designed to inform and protect investors. It seems unlikely that IFRS will be mandated soon given Chairman White’s focus on investor protection and securities laws enforcement. However, it will be interesting to see how she responds to the international political pressure favoring IFRS adoption.

While the SEC focuses on disclosure and enforcement, US GAAP and IFRS accounting standards continue to converge. So, like it or not, US companies are currently being impacted by IFRS. Among the most significant changes coming our way are the final standard for Revenue Recognition and the re-Exposure Draft for Leases. Both of these standards will significantly impact companies, so the planning and implementation of these standards should be started well in advance of adoption dates.

What should companies consider as these new standards are published and IFRS adoption is considered? First, tone at the top and corporate governance should be addressed so that proper attention is paid to implementation. In addition, it is important to utilize a disciplined project management approach to implementing complex new standards whether they be US GAAP standards or IFRS standards. Early on considering new accounting standards impacts on long term projects like corporate acquisitions, IT infrastructure implementations, long-term tax planning, long term corporate initiatives and the like are very important to consider. Other important considerations in any major new implementation include:

• Financial results
• Staff resources
• Investor relations
• Internal control environment
• Compensation plans
• Contract compliance
• Training and Communication

Lastly, large multi-national companies may want to consider adopting IFRS as a cost cutting and efficiency effort. Some companies, including Ford Motor Company, are in fact adopting IFRS to save time and money. In a recent webcast, Susan Callahan, Ford’s Global Accounting Policy and Special Studies Manager, stated that Ford is still a consolidated US GAAP SEC Registrant, but found it for more cost effective to convert from one global standard (IFRS) to US GAAP in the corporate office, than to convert form US GAAP to IFRS in 60 different international jurisdictions for complying with local reporting requirements.

What will your company do with IFRS and the new complex Revenue Recognition and Leasing Standards?

Will IFRS Come to the United States…After the Election We May Find Out

The future of IFRS in the United States is still uncertain after the release in July of a long-anticipated SEC analysis of IFRS.

The SEC staff said the global financial reporting community considers the standards produced by the International Accounting Standards Board (IASB) to be of high quality despite areas that need further development. But the report questioned the funding of the IASB and the timeliness of responses to widespread accounting issues by the IFRS Interpretations Committee. It also said adoption would be costly for U.S. public companies.

Many view global comparability and consistency in accounting standards worthy of pursuing. The SEC report said the IASB has made significant progress in developing a comprehensive set of standards. If there is ever to be a single global standard, it is far more likely the United States will need to move to IFRS rather than 120 countries converting to US GAAP.

Some believe that the SEC’s continued indecision on IFRS leaves the U.S. isolated and limits U.S. companies’ access to international capital. Many are disappointed that no clear action plan on IFRS is described in the SEC’s report. Businesses are seeking a decision in one direction or another so that they can make plans for the future.

It’s clear that a decision on IFRS will not be made before the presidential election. But if a new president appoints a new chairman of the SEC, that could change.

Funding is a major obstacle to IFRS in the United States

The biggest obstacle to IFRS adoption for U.S. public companies may be the funding of the IASB. Voluntary funding was critical for the IASB as it got off the ground in the early 2000s; the SEC report said that until 2008, the IFRS Foundation financed the IASB largely through voluntary contributions from a wide variety of participants across the world’s capital markets. The concern with that model is that it leaves the IASB open to the perception that organizations that provide funding could try to influence accounting standards. However, I can remember when the FASB was funded by voluntary contributions as well.

The SEC staff also described the following concerns in its report:

Maintenance of IFRS. The SEC concluded that the IFRS Interpretations Committee should do more to address accounting issues that arise within the context of current IFRSs and provide timely, authoritative guidance.

Application and enforcement of IFRS. A review of financial statements found that while they generally complied with IFRS, global application could be improved to narrow diversity in practice (i.e. national “flavors” of IFRS). The SEC staff wrote that the financial reporting community, including the SEC, can have a positive effect on the consistent application and enforcement of IFRS.

Use of national standard setters. Greater reliance by the IASB on national standard setters—in order to understand the intricacies of distinct domestic reporting and regulatory systems—is needed, the SEC reported.

Governance of the IFRS Foundation. The SEC believes that mechanisms to consider and protect U.S. capital markets, such as maintaining an active FASB to endorse IFRSs, may be necessary

FASB and Endorsement

A significant portion of the report discussed the barriers to outright adoption of IFRS, contrasting full adoption with an endorsement process that would involve FASB.

Although the SEC could mandate that publicly traded U.S. companies use IFRS as issued by the IASB, the report said that would affect other regulators and may require additional federal and state legislation.

Those requirements could be diminished if FASB assumes an endorsement role. But if FASB is involved, its duties would need to be established from among a wide variety of alternatives. These range from the small role of writing each IFRS into U.S. GAAP as-is and without delay, to the significant duty of considering IFRSs during FASB’s own standard-setting process.

A scenario the SEC staff identified between the two extremes would allow FASB to endorse new or newly modified IFRS standards for incorporation into U.S. GAAP. The “vast majority” could be endorsed without change, but FASB would have the authority to add or modify the IFRS standards subject to a protocol that considers the public interest and protection of investors. In the rare case that IFRS standards had gaps, FASB would be allowed to fill them.

Under the endorsement process, FASB could act as a strong U.S. voice in the interests of U.S. investors, according to the report. To prevent too much divergence from the IASB standards in the United States, the SEC staff suggested the IASB “take U.S. perspectives into greater consideration during the standard-drafting process—resulting in standards that meet the needs of U.S. constituents without the need for modification during an endorsement process.”

Tax Implications

Federal and state tax effects of adopting IFRS are covered briefly in the report. If current federal and state tax law is not amended to reflect IFRS, the report said, companies would be required to track a significantly increased number of book-tax differences. Some companies would also end up paying more tax because IFRS does not permit the use of the LIFO method for inventories, and the Internal Revenue Code requires that a company use the same method of inventory accounting for financial and tax reporting purposes.
A change to IFRS might also require companies to request permission from the IRS to change a method of accounting and might affect computation of U.S. earnings and profits for federal tax purposes. Transfer-pricing policies may also be affected.

The report identified two areas of state taxation that could be affected by IFRS adoption: (1) apportionment of income, if IFRS adoption changed underlying apportionment factors; and (2) taxes based on a company’s net worth or equity, if IFRS adoption affected either of those.

While the tax implications of IFRS remain to be addressed, the US tax code does allow companies to absorb major changes in tax accounting over a period of several years.

Preparedness for an IFRS Transition

The level of preparedness for a transition to IFRS varies widely, the report said. Many large public accounting firms with an international presence have experts already on staff or have IFRS training programs in place.
Many companies, however, would need training or would need to hire IFRS experts as consultants or full-time employees, both costly propositions. The report said most companies’ employees “currently have little or no knowledge of IFRS requirements or developments and are only focused on U.S. GAAP.”

Issuers generally supported a single set of high-quality, globally accepted accounting standards, the report said. Many issuers expressed concerns about how much change the financial reporting system could absorb. More issuers preferred a managed transition through which FASB would incorporate IFRS into U.S. GAAP. Small issuers, particularly those who do not have global operations, expressed more concern about the transition than bigger issuers who compete globally.

The SEC staff was very clear in stating that a transition to IFRS could be difficult for some companies. While some standards would be easy to convert, others would require issuers to overhaul accounting systems, controls, and procedures.

Where do we go from here?

The U.S. decision on IFRS could remain in flux for the next year. But if a new SEC Chairman is appointed by a new president we could finally see a decision of IFRS.
As the wait for an SEC decision on IFRS continues, CPAs can turn their international standards focus to the convergence projects on leases, revenue recognition, and financial instruments. These standards alone will have a significant effect on company financial statements.

FASB and the IASB are working on three key convergence projects. The leases standard will require lots of attention because it will put assets and liabilities stemming from leases on the balance sheet and mean changes for lessees and lessors. The wide-reaching revenue recognition project, among other things, eliminates certain industry-specific guidance and requires businesses to disclose more information about revenue. The boards had been scheduled to issue standards in those two projects plus one on financial instruments by the middle of 2013, but the financial instruments project did not get saw problems in July.

FASB sought to address some constituent concerns in the project, and FASB Chairman Leslie Seidman said the staff would work expeditiously. But the IASB’s Hoogervorst said it was “deeply embarrassing” that the boards have not come up with an acceptable solution in the project after three years. He expressed concern that the project could unravel.

But the future of IFRS in the United States is still uncertain. Will a transition be made using the SEC’s new “condorsement” approach, or perhaps with only endorsement of certain IFRS standards? Could optional adoption or straight-out adoption be in our future? Or will IFRS be rejected? There is still not a clear answer to these questions. Will the future become clear after the presidential election? Only time will tell.

FASB and IASB Agree on Lease Accounting

The FASB and IASB agreed last week to a lease accounting model in which all leases with a term of one year or more would be recorded on the balance sheet. The decision will increase both sides of company balance sheet by recording a lease liability that represents the current value of the lease’s non-contingent payments and a corresponding right-of-use asset.

This is a significant change from current practice where leases that are classified as operating are maintained off-balance sheet. The decision has the potential to significantly affect debt covenant ratios and introduce timing differences to the recognition of certain leasing expenses.

FASB and the IASB’s agreement comes almost two years after they issued an initial exposure draft that proposed capitalizing all leases. Complex calculations and estimates that the original exposure draft required are expected to be eliminated in a new joint exposure draft the boards scheduled to issue by the end of the year.

The boards previously agreed that leases should be recorded on the balance sheet, but have continued to discuss the classification and pattern of expenses in the income statement. In the recent decision the boards decided upon an approach in which some lease contracts would be accounted for using an approach similar to that proposed in the 2010 Leases exposure draft and some leases would be accounted for using an approach that results in a straight-line lease expense.

“The boards have reached agreement on a proposed approach to put leases over one year on the balance sheet. We will publish our proposals for public comment, with a view to completing this important convergence project during 2013”. stated Hans Hoogervorst, Chairman of the IASB. Leslie Siedman, Chairman of the FASB, comments that “The boards carefully considered the diverse views of stakeholders about whether the income statement profile of all leases should be the same. On balance, we decided that leases that convey a relatively small percentage of the life or value of the leased asset should be recognised evenly over the lease term”.

Companies should analyze the potential impact of the new proposal to determine what impact it will have have on debt covenants agreements and other liquidity and capitalization requirements. Doing so will allow time to plan for and resolve any issues identified thereby minimizing the potentially negative impact of a new lease accounting model.

Is IFRS Coming to America?

Late last year SEC Chief Accountant, James Kroeker, told us that a decision on IFRS is still a few months away. His comments indicated the he couldn’t give a precise schedule given the number of things on the SEC’s agenda. Kroeker made the remarks at the AICPA National Conference on Current SEC and PCAOB Developments in Washington when he said that the SEC will make a decision on IFRS “carefully and thoughtfully, being guided by an ideal that  produces the maximum benefit for the investing public and the capital markets”.

Kroeker indicated that significant progress had made on several FASB and IASB Memorandum of Understanding convergence projects including other comprehensive income and financial reporting fair value guidance. He also stated that he was optimistic about the prospect of achieving converged revenue recognition and leasing standards.

Conversely, Kroeker said that a converged solution on the financial instruments project did not appear encouraging and that the timeframe for and impairment model is uncertain. The Chief Accountant emphasized that the FASB and IASB need to work hard to “maximize the prospects of converged, high-quality solutions”.

In early January SEC Chairman, Mary Schapiro, echoed Kroeker’s remarks when she said that a decision on IFRS will be decided “in the next few months”. She added that there are some challenges that have to be addressed before the SEC will be comfortable making the ultimate decision about whether to “incorporate IFRS into the US reporting regime”. The major hurdles she spoke of include the independence of the International Accounting Standards Board and “the quality and enforceability of standards”.

International Pressures

In late January IASB Hans Hoogervorst stepped up public pressure on the SEC when he said that the US would ultimately accept IFRS. “Quite simply, they need us and we need them”, he added
Hoogervorst acknowledged that IFRS poses many practical challenges for the SEC. The US uses a mature, sophisticated and time-tested set of accounting standards, so he admits that this “is not an easy decision to make”. As with and major shift, like moving from US GAAP to IFRS, transition issues need to be carefully addressed.

The challenges in moving to IFRS are real, but Hoogervorst says the SEC and IFRS are optimistic that IFRS can become a legitimately global accounting standard. “The US is committed to supporting global accounting standards,” Hoogervorst said. “It is SEC policy, it is US government policy and it is the policy of the G20, in which the US is a key player.”

Is “Condorsement” the only viable option?

Meanwhile Fitch Rating predicts that the SEC will use the “condorsement” approach to IFRS adoption in the US Fitch warned that the condorsement approach would lead to a prolonged, cautious and incremental adoption of IFRS.

The condorsement approach to IFRS was proposed by the SEC in 2010 as a possible IFRS adoption method. Condorsement consists of IFRS standards either being endorsed by the FASB and adopted into US GAAP or converged where the FASB is not comfortable with endorsement without additional convergence.
Fitch argues that condorsement is the “only viable option” for the US to introduce IFRS.

Despite promising to decide by the end of 2011 if it would permit IFRS to be used across the US, the Securities and Exchange Commission is still yet to make a decision on IFRS use. Fitch warns that investors and other IFRS stakeholders may have to wait a while for the SEC’s decision, especially since a final decision may be predicated on completion of major Memorandum of Understanding projects, particularly financial instruments, impairment, revenue recognition and leases.

The Condorsement approach “not only preserves some measure of control of the accounting standards that will be incorporated into US GAAP, but it should also preserve FASB’s active participation in global standard setting”, Fitch stated. Fitch expects the US to move forward with its plan to incorporate IFRS into US GAAP, but expects a “prolonged, cautious and incremental” approach to IFRS.

The Impact of IFRS on America is Real

It doesn’t matter what the timing or the approach to acceptance of IFRS in America is, companies are being affected by IFRS now. Like it or not, the significant changes to US GAAP over the last few years have been heavily influenced by international standards. Its time that companies being to be more proactive about anticipating what impact IFRS “condorsement” (or other less likely adoption approaches) will have on systems, long-term projects, corporate governance, decision-making criteria and the like.

What will you do if the SEC “condorses” IFRS?

The SEC Delays its Decision on IFRS

The SEC may delay its decision on IFRS for several months according to Jim Kroeker, the SEC’s Chief Accountant. At a recent AICPA Conference Kroeker remarked that the SEC staff would need “a few additional months” to complete the final report on the IFRS Work Plan for U.S. markets. The SEC had previously stated that the goal was to make a decision on IFRS adoption in 2011. In his statement, Kroeker said, “Given the number of things on our agenda, I cannot give you a precise schedule. I can tell you that we will do so carefully and thoughtfully, being guided by an ideal that produces the maximum benefit for the investing public and the capital markets.”

There are enormous pressures on both sides of the U.S. IFRS decision. Pushing for adoption are the G20 group of nations, the IASB and a significant number of U.S. stakeholders including large multinational companies (who are already dealing with IFRS in many jurisdictions), Big 4 public accounting firms, and those seeking to be competitive in global capital markets. Others want to stay with U.S. GAAP. This group includes smaller companies, companies with U.S. operations only, and financial statement preparers who are already dealing with other significant changes.

Moving Toward IFRS

The SEC has been studying the implications of a move to IFRS for some time. In December 2007 the SEC removed the requirement for Foreign Private Issuers to reconcile to U.S. GAAP. The result is that a large number of Foreign Private Issuers are now filing Forms 20-F and 40-F in IFRS. The decision to eliminate the requirement to reconcile IFRS to U.S. GAAP is what caused many market participants to ask: “If IFRS is good enough for Foreign Private Issuers, why isn’t IFRS good enough for U.S. companies”?

In November 2008 the SEC issued a Roadmap for the possibility of using IFRS for other types of SEC filings as well. The Roadmap to IFRS was conditioned upon a study of the implications of IFRS adoption and its impact on investors and other market participants. A decision about IFRS would then be considered, but only after seven milestones had been addressed. It was the Roadmap to IFRS that set 2011 as the year for the SEC to decide the fate of IFRS.

In February 2010, based on comments from constituents on what the SEC should take into account in its evaluation of IFRS, the SEC issued a statement in support of convergence of global accounting standards. In its statement the SEC outlined the factors it considered to be of particular importance as it continued to evaluate IFRS, and presented a comprehensive work plan that laid out what had to be done to support an IFRS decision.

The Condorsement Approach

In May 2011, the SEC’s Office of the Chief Accountant issued a paper in which it described one possible IFRS adoption approach it dubbed “Condorsement”. The Condorsement idea resulted from combining the most common IFRS adoption approaches used in other jurisdictions, namely Convergence and Endorsement. These two approaches emerged as the most common among jurisdictions that have adopted IFRS. These common choices for adopting IFRS consist of:

• Convergence – Under this approach jurisdictions do not directly adopt IFRS as their accounting standards. Rather, they maintain local standards while making efforts to converge such standards with IFRS.
• Endorsement – Under this approach jurisdictions directly incorporate individual IFRS into their local standards based primarily on (1) stated criteria designed to protect investors and other stakeholders, or (2) modifications or additions to individual IFRS to comply with local regulations or to address the perceived need for country-specific or industry-specific guidance.

Although the SEC has not yet made a decision regarding whether and, if so, the manner in which IFRS adoption should be accomplished, the Office of the Chief Accountant said that in addition to the Condorsement approach, it is also considering several other approaches including full adoption of IFRS on a specified date, full adoption over a staged transition period, and an option allowing U.S. issuers to apply IFRS.

Generally, the Condorsement approach would retain the FASB as the U.S. standard setter, retain the SEC’s oversight role over the FASB, and incorporate IFRS into U.S. GAAP over a defined period of time (say five to seven years), with the ultimate goal being that a U.S. issuer compliant with U.S. GAAP would also be able to assert that it is in compliance with IFRS. Condorsement would not dilute the SEC’s role in setting accounting standards or establishing rules for public companies.

In a Condorsement based adoption approach, existing convergence projects would be stratified and addressed by category as follows:

• Category 1 projects would be those U.S. GAAP and IFRS convergence projects scheduled for completion;
• Category 2 projects wild include those that the IASB has included on its current agenda for IFRS; and
• Category 3 projects would include those standards that are not on the IASB’s agenda for future standard setting.

Category 1 projects would be incorporated into U.S. GAAP and IFRS thereby practically eliminating the major differences. The U.S. GAAP related to Category 2 projects would remain in effect until a new IFRS standard was issued on that topic. The new IFRS standard would then be considered for inclusion in U.S. GAAP and would become the basis for determining if U.S. GAAP on that topic should be retained, the newly issued IFRS should be adopted, or if other action should be taken with respect to that standard. Following the development of an IFRS transition plan, Category 3 projects would be addressed in a manner similar to Category 2 projects with the idea being to allow prospective adoption of Category 3 projects whenever possible.

In November 2011 the SEC released two reports on IFRS adoption. The first report compares U.S. GAAP and IFRS and a second report that analyzes IFRS in practice.

More Time Needed to Complete IFRS Work Plan

In his December 5 speech announcing the delay in releasing the Commission’s final report on the IFRS Work Plan for U.S. markets, Kroeker emphasized the importance of taking this opportunity to establish a “strong and lasting” framework for IFRS incorporation into U.S. GAAP. Kroeker believes the framework should:

• “Demonstrate a high level of support for U.S. commitment to continued development and use of global consistent high quality accounting standards;
• Provide both in fact and in substantive operation clear U.S. authority over standards applicable in the U.S. capital markets;
• Provide for and facilitate a strong U.S. voice in the process of establishing global accounting standards;
• Be responsive to the economic and other impacts of change;
• Consider whether to retain “U.S. GAAP” as the basis for U.S. financial reporting, thereby mitigating the costs and complexity of introducing a new set of standards under regulatory regimes, contractual documents, and U.S. laws under which compliance with U.S. GAAP is often specifically contemplated.”

The State of Convergence

On a related note, both FASB chairman Leslie Seidman and IASB chairman Hans Hoogervorst said in recent speeches that as the current U.S. GAAP and IFRS convergence projects wind down, the Memorandum of Understanding (“MoU”) approach to converging U.S. GAAP and IFRS is not a the best way to resolve differences. As efforts to converge differences between U.S. GAAP and IFRS are made, differences between the two standards continue to persist. Both emphasized that a new, more workable approach to bringing the two standards together is needed.

At the recent AICPA National Conference on Current SEC and PCAOB Developments Seidman said that the FASB would like to finish its convergence work on remaining priority projects like revenue recognition, leasing, financial instruments and insurance. She said “However, we do not believe indefinite convergence is a viable option, politically or practically. As any observer can see, this process is challenging technically and administratively.” Hoogervorst echoed her comments at the same conference when he said “Our convergence history with FASB has been extremely useful in getting us to a point where IFRS and U.S. GAAP are much improved and closer together. So, it’s tempting to just maintain the status quo. But for the long-term, the status quo is an unstable way of decision making that inevitably leads to diverged solutions or sub-optimal outcomes.”

A Path Forward

It seems clear now that a path toward a single high quality global accounting standard is emerging. It appears that convergence may be nearing an end and endorsement may begin to play a more important role in global standard setting. The details may not yet be finalized, but U.S. companies are already being impacted by global accounting standards. As converged standards begin to be implemented, companies need to take a broad view of their approach to implementing and following new accounting standards. A formal strategy for dealing with global standards should be developed that addresses:

• Leadership and communication of the global standard adoption process;
• Considers what peer companies are doing;
• Addresses accounting processes to identify any gaps in information gathering that may need resolution;
• Prepares for changes in technology that may be required; and
• Develops worker’s skills for addressing changing accounting standards.

Since new standards are likely to be much more principles based, a management decision support framework should also be developed to formalize how accounting decisions will be made. An SEC decision on IFRS appears to be around the corner. why not begin to develop a readiness framework for adopting global accounting standards by becoming a champion for preparedness in your organization?

The IFRS Foundation Publishes an Interim 2011 IFRS Taxonomy

On August 22 the IFRS Foundation published an interim release of the 2011 IFRS Taxonomy to address Presentation of Items of Other Comprehensive Income (IAS 1 amendments) and Employee Benefits (IAS 19).

The 2011 IFRS Taxonomy is based on IFRS as issued at January 1, 2011. The interim release of the IFRS Taxonomy contains additional taxonomy concepts that reflect new IFRS standards and improvements to existing IFRS standards published by the IASB. The interim taxonomy release gives companies the opportunity to report XBRL financial concepts using the latest IFRS standards without creating custom taxonomy elements.

The interim release of the 2011 IFRS Taxonomy follows the taxonomy architecture in The IFRS Taxonomy 2011 Guide and The Global Filing Manual.

Which is Better – Principles or Rules?

When it comes to accounting standards, there is debate about whether principles or rules are better. Some argue that the rules based US GAAP approach is better while others argue that the principles based IFRS is better. But which approach, principles or rules, do you think is best?

While US GAAP is often considered rules based, it is better to think about individual standards within US GAAP as being more or less rules-based. There are advantages and disadvantages to a rules based approach. Advantages include clarity in application, reduction of risk (but only when the applicable rule is followed), and comparability for companies in the same industry for the same rule. Disadvantages include a regimented approach where a transaction must be accounted for in accordance with the rule even if the applied accounting is misleading, non-comparability between different industries when the transactions are similar, and increased risk when the applicable rule is not followed (its hard to defend a position when the rule is broken).

Similarly, IFRS is often thought of as principles based, but is better considered more or less principles based. Clearly defined principles provide many advantages as a basis of accounting, including allowing preparers the ability to consider the best way to account for and report a transaction, increased comparability among companies with similar transactions no matter the industry and the ability to defend positions based on the principles followed. Disadvantages include an increased ability to manipulate transactional accounting, increased variations in accounting approaches for similar transactions, and fewer bright lines to consider in determining how to account for a transaction.

In today’s global marketplace IFRS has a distinct advantage over US GAAP. The fact is that IFRS is either permitted or required in over 120 jurisdictions while US GAAP is required in one. The SEC will decide later this year when, whether and how IFRS should be adopted in the United States. If IFRS is permitted or required in the United States, companies will need to develop a judgment framework that documents how accounting decisions will be made in a principles based accounting environment. Because there could be variations in accounting by different companies for similar transactions, companies should disclose the basis for the accounting followed as well as the factors considered and reasons for accounting decisions made.

If you could choose to follow accounting standards that are principles based or rules based, which would you choose?

Lack of IFRS Taxonomy…an IFRS Adoption Hinderence?

The SEC’s Roadmap to IFRS adoption consisted of milestones that if met could pave the way to IFRS adoption. One of the Milestones, facilitating the use of interactive data (XBRL) for IFRS, is a current topic in 2011 since all filers, including certain foreign private issuers using IFRS, need to begin filing in the XBRL format. If US filers could adopt IFRS, they would need to be able to file XBRL exhibits to their IFRS SEC filings. That cannot be done until an IFRS Taxonomy is approved by the SEC.

Effective with periods ending after June 15, 2011, Foreign Private Issuers using IFRS as issued by the IASB are being required by the SEC to file their annual reports on forms 20-F or 40-F with an XBRL exhibit. In the first year, detail tagging of the front facing financial statements and block tagging of footnotes would be need to be completed. In the second year in addition to detail tagging of the front facing financial statements, the footnotes would be detail tagged at four different levels as outlined below.

• Level 1 – Each complete footnote tagged as a single block of text.
• Level 2 – Each significant accounting policy within the significant accounting policies footnote tagged as a single block of text.
• Level 3 – Each table within each footnote tagged as a separate block of text.
• Level 4 – Within each footnote, each amount (i.e. monetary value, percentage, and number) is required to be separately tagged. Narrative disclosures are not required.

One big open item on the 2011 XBRL agenda is the IFRS Taxonomy. Yes, the SEC’s XBRL rule requires certain foreign private issuers to file the XBRL exhibit to their SEC filings beginning with periods ended after June 15, 2011. But to do so, these filers would be required to use a taxonomy that is approved by the SEC (approved taxonomies are listed on the SEC’s website). The problem is that there is not an approved IFRS taxonomy listed on the SEC’s website.

Without an approved IFRS Taxonomy, foreign private issuers will not be able to prepare XBRL financial statements and the ability of US companies to move to IFRS would be hindered. Fortunately, there is a 2011 IFRS taxonomy that has been exposed for comment until March 18, 2011. Hopefully the SEC will consider approving the new 2011 IFRS Taxonomy or will issue additional guidance clarifying expectations for foreign private issuers. To encourage US adoption of IFRS it is essential the the IASB develop a robust IFRS Taxonomy that can meet the demands of the advanced reporting requirements US companies.

Is the IFRS Taxonomy robust enough for US use and what’s next for XBRL and IFRS? We will have to wait until the SEC clarifies its intentions later this year.

Choose adoption not condorsement!

There have been a few articles and blog posts favoring a blend of IFRS convergence and endorsement (dubbed “condorsement” by some). Is this really a good idea? We started down the road to IFRS in order to achieve a “high quality global accounting standard”. Would ‘condorsement” lead the largest capital market in the world to a high quality global accounting standard?

One of the criticisms of IFRS acceptance around the world has been the emergence of national IFRS “flavors”. A condorsement approach would undoubtedly lead to a US flavored accounting standard. The resulting somewhat similar global accounting standard would never allow multinational companies to achieve the economies of scale that could be achieved by with a truly global accounting standard. Similarly, simplifying comparisons of global investment options would be hindered. If we are serious about improving global financial reporting transparency then we should adopt a high quality global accounting standard.

In addition to achieving high quality and global acceptance our further goal is to improve financial reporting transparency. The best way to obtain transparency in financial reporting is through a principles based approach. US GAAP is primarily rules based. Pursuant to US GAAP, different industries report similar transactions differently because of the rules they must follow. Under a principles based approach, financial reporting professionals determine the best representation of a transaction based on well established principles. Some say we can’t adopt a principles based approach because we live in a litigious society. I say people who follow rules have no defense when they inadvertently break that rule, but people who follow principles can easily defend themselves based on the principles followed.

Like it or not, IFRS is the de facto (i) principles based (ii) globally accepted and (iii) high quality accounting standard. Over 100 countries have adopted IFRS. Nine of the ten largest capital markets have adopted IFRS. Want to guess which country is the IFRS adoption hold out? As for the countries that have adopted national flavors of IFRS, how can we expect them to move to full IFRS adoption if we don’t do adopt IFRS as issued by the IASB?

Choose adoption not condorsement!

IASC Seeks XBRL Participants

The International Accounting Standards Committee Foundation (IASCF) through its standard-setting body, the International Accounting Standards Board (IASB), is seeking FPI participants for a pilot XBRL program. The IASCF sees itself as the independent, private and not-for-profit body responsible for developing a single set of high quality global financial reporting standards for use throughout the world. XBRL Pilot participants are being sought because the SEC’s rule on XBRL requires that Foreign Private Issuers (FPI’s) begin filing an XBRL formatted exhibit to form 20F for financial periods ending after June 15, 2011.

On 17 December 2008, the SEC published rules that require all FPIs to submit their financial reportsin Interactive Data format, SEC speak for XBRL. According to the rule, FPIs “using IFRS as issued by the IASB will be required to tag their financial information using the most recent list of tags for international financial reporting, as released by the IASCF and specified in the EDGAR Filer Manual”.

FPIs, which will be mandated to file with XBRL in IFRS from 15 June 2011, are invited to participate in a pilot initiative being coordinated by the IASC Foundation. The pilot will focus on FPI use of the 2010 IFRS Taxonomy to tag SEC filings in XBRL.

The purpose of the pilot is for FPIs to produce real XBRL filings that include block-tagged notes. The pilot is intended to test the validity of the IFRS Taxonomy to “determine and demonstrate that the IFRS Taxonomy is practical for filers and for users of filed XBRL content”. FPIs from all industries are welcome to participate.

The pilot initiative will start when the final IFRS 2010 Taxonomy is released (about the end of April 2010). Companies interested in joining this initiative are invited to express their interest by writing to Olivier Servais, Director of XBRL Activities

• Mail: IASC Foundation: 30 Cannon Street, London EC4M 6XH
• Email: oservais@ia sb.org

The IASCF will accept applications until 15 May 2010.

For more information on XBRL see http://xbrl.org/; http://xbrl.us/Pages/default.aspx and http://xbrlusa.wordpress.com/

US GAAP & IFRS Convergence Progress Report Issued

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) published an accounting standard convergence progress report on April 14 2010. The report summarizes the two boards work to improve and achieve convergence of US GAAP and IFRS. In November 2009 the two boards demonstrated their shared commitment to convergence by establishing a comprehensive work plan to complete their joint projects by a June 2011 target. The 2011 target is significant because it corresponds with the year in which the SEC is expected to make a date certain decision about IFRS conversion.

To accomplish their objective of substantially converging US GAAP and IFRS by 2011, the boards have accelerated and intensified their efforts. Instead of meeting every four months, they have agreed to meet every month. In addition, they have expressed their willingness to schedule special meetings to address key convergence issues.

In addition to the stepped up convergence efforts, the boards are developing extensive outreach programs to involve a broad group of convergence stakeholders in standard setting due-process. Their outreach will include educational sessions on their websites and in Oceania, North America and Europe. They have already scheduled session in Tokyo, and Norwalk Connecticut.

As of 31 March 2010, the FASB and IASB had achieved substantially all of the milestone targets they set for the first quarter of 2010. The progress made by the boards is explained more fully in their report.

• For five of the major Memorandum of Understanding projects they are on track to publish, by mid-2010, exposure drafts that would improve and achieve substantial convergence of US GAAP and IFRS in those areas.
• On two major projects, financial instruments and insurance contracts, the boards have reached different conclusions on some important technical issues. Addressing convergence differences in those areas could affect the convergence timetables described in their report.
• The boards also agreed in late March to explore an alternative approach to lessor accounting. That decision could also affect convergence timetables

The boards have agreed to maintain a high degree of transparency about convergence progress by reporting progress against planned convergence milestones. They will report progress quarterly with the next report being published in July 2010.

SEC Views on IFRS – Part 1

The SEC held a public meeting on February 24, 2010 to express its support for a single set of high quality global accounting standards. Over the coming weeks I will be posting summaries of some of the views published by the SEC in its Release numbers 33-9109 and 34-61578

In its expression of support the SEC stated that a single set of high-quality globally accepted accounting standards is consistent with the its mission of protecting investors, maintaining fair, orderly and consistent markets, and facilitating capital formation. The commission reiterated its support for continued convergence between US GAAP and IFRS and acknowledged that IFRS is best positioned to become the single global accounting standard.

The commission last addressed the topic of convergence when it released a proposed Roadmap to IFRS in November 2008. The proposed Roadmap set forth seven milestones toward eventual adoption of IFRS. However, the commission stopped short of proposing a date certain for adoption and instead stated that it would make a decision about adopting IFRS by 2011. The seven milestones set forth in the proposed Roadmap to IFRS are as follows (see IFRS Roadmap Milestones):

IFRS Roadmap Milestones

• Improving Specific Accounting Standards
• Improving the Structure and Funding of the IASB
• Facilitating the use of interactive data (XBRL) under IFRS
• Updating the Education and Licensing of U.S. Accountants
• Evaluating the early adoption experiences of a limited group of companies
• Timing of future rulemaking
• Sequencing of companies required to use IFRS

The Roadmap generated comments from a diverse group of investors, issuers, accounting firms, regulators, educators, and others as to what factors the SEC should consider as it evaluates IFRS. The SEC has carefully reviewed the thoughts of those who commented on the Proposed Roadmap to IFRS. In my next post I will summarize the SEC’s conclusions regarding the factors it considers particularly important as it continues to evaluate IFRS through 2011.

Preparing for a global accounting standard

Now is the time to prepare for a gradual migration toward a single global accounting standard, especially for multinational companies. As more countries move toward IFRS (like Canada, Japan, Australia and others), companies should determine what the migration to IFRS means for them. In addition, US based companies should stay actively informed about the standards being converged by the FASB and the IASB. Companies should also consider conducting an IFRS impact assessment to determine how a transition to IFRS might impact them. By doing so, companies can plan for a smooth transition to a single global accounting standard.

Financial Crisis Advisory Group on Global Accounting Standards

The Financial Crisis Advisory Group recently issued a letter to the G-20 Group of Nations expressing its support for “a single set of high quality, globally converged financial reporting standards that provide consistent, unbiased, transparent and relevant information across geographical boundaries”. The letter summed up the Financial Crisis Advisory Group’s review of the progress of the International Accounting Standards Board IASB) and the US Financial Accounting Standards Board (FASB) in addressing the recommendations contained in their July 28, 2009 report.

In their July 2009 report the Financial Crisis Advisory Group set forth four main principles and a series of recommendations to improve the functioning and effectiveness of global standard-setting. The primary areas addressed in its July 2009 report include:

• Effective financial reporting
• Limitations of financial reporting
• Convergence of accounting standards
• Standard-setters’ independence and accountability

Harvey Goldschmid, Co-Chairman of the group commented on the report by saying “I urge policymakers around the world to study the report and to take note of its conclusions, especially the importance of broadly accepted accounting standards that are the result of a thorough due process. The report highlights the importance but also the limits of financial reporting. Accounting was not a root cause of the financial crisis, but it has an important role to play in its resolution.”