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IFRS Staff Challenges SEC on Adoption Obstacles

Tammy Whitehouse | October 24, 2012

Continued heel dragging at the Securities and Exchange Commission over a possible U.S. adoption of International Financial Reporting Standards could undo the work standard setters have done over the past decade to better align U.S. and international accounting rules, according to the staff of the IFRS Foundation.

The foundation staff has dug deep into the details of the SEC final report on IFRS and published a report of its own challenging many of the SEC staff's conclusions. The foundation staff report is not approved by the IFRS Foundation or the International Accounting Standards Board, but it provides an international response to numerous obstacles raised by the SEC staff to a full U.S. adoption or transition to IFRS.

The SEC staff wrapped up its extended study of IFRS and the potential for U.S. adoption with a final report published in July that gives the SEC plenty of reason to be cautious. The report does not make a recommendation to the Commission, nor does the staff offer any time line for if, when, or whether it will ever make such a recommendation.

The IFRS Foundation report says the SEC's indecision creates a risk to the convergence effort that has been under way between the Financial Accounting Standards Board and the IASB under their 10-year-old Memorandum of Understanding. “It is important to consider whether the existing level of alignment between IFRS and U.S. GAAP can be maintained,” the staff wrote. “Both the IASB and the FASB are independently considering their respective post-MoU work programs. There is a risk that, in the absence of a U.S. decision on adoption, a decade of convergence may be followed by a new period of divergence.”

The report provides a number of international perspectives on the various concerns raised by SEC staff, including concerns about governance and funding over the IFRS Foundation and the IASB, the standards themselves, and adoption and transition issues. It also highlights challenges faced by other jurisdictions that have adopted or are preparing to adopt IFRS.

For example, the foundation staff says that the SEC staff's seemingly favorite idea for cutting over to IFRS -- a standard at a time rather than all at once -- has never been achieved successfully in any other country. The staff points out that accountants in the United Kingdom found it impractical, eventually concluding that the market could better adapt to a single change than a protracted change process. The foundation staff acknowledges the U.S. market size as a consideration, but asserts: “The experience of other countries suggests that many of the challenges can be overcome with the appropriate political will.” In fact, the foundation believes the U.S. is further along toward a successful adoption than other countries that have already made the change.

The report also answers SEC concerns about a stable source of funding for the production of international accounting rules. Based on a measure of gross domestic product that the foundation uses as a gauge for support, the staff says the United States contributed only about one-third of the amount that might have been expected. It also points out that the United States holds nearly one-fourth of the seats on the various bodies under the Foundation, but contributes less than 10 percent of of the total country-based contributions to the total budget.

“Ultimately the lack of public funding in the U.S. can only be resolved by the U.S. authorities themselves directly or indirectly,” the staff says. “Indeed, the efforts to raise private funding in the U.S. are not only difficult to realize, because of the criticism expressed in the SEC Staff Report about the dependence of the IFRS Foundation on private sources, but are also contrary to the IFRS Foundation's objectives of eliminating the dependence on private funding.”