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Tilting Toward IFRS Experiments in the U.S.

Robert Herz | April 21, 2015

Last December, at the AICPA’s annual conference to discuss current developments with the Securities and Exchange Commission and the Public Company Accounting Oversight Board, SEC Chief Accountant James Schnurr floated the idea of allowing U.S. public companies to provide voluntarily supplementary financial information based on International Financial Reporting Standards.

From Schnurr’s comments, it seemed that he envisions that companies electing to provide such information on a supplementary basis would have free reign to determine what and how much IFRS information to provide. It could range, for example, from a full set of supplementary financial statements prepared under IFRS to summary or partial financial statements under IFRS to piecemeal disclosures of what the company would have reported under IFRS for selected income statement or balance sheet items.

Schnurr floated the idea as a possible way to continue to advance the use of IFRS in the U.S. capital markets and the SEC’s long-standing support of the ultimate goal of a single set of high-quality global accounting standards. He made clear, however, that under his proposal U.S. registrants choosing to provide supplementary IFRS information would be required to continue to provide full, audited U.S. GAAP financial statements—reinforcing and preserving the primacy of U.S. Generally Accepted Accounting Principles reporting by U.S. public companies.

Thus, the Schnurr proposal is quite different from an option under which U.S. registrants could choose to use IFRS as their primary reporting language instead of U.S. GAAP. Under Schnurr’s option the IFRS information would be provided in addition to and not instead of the U.S. GAAP financial statements and related financial information.

Not surprisingly, reactions to the Schnurr proposal have been mixed. At the same AICPA conference in December, SEC Commissioner Dan Gallagher welcomed and applauded the idea as a market-based way of determining whether demand for IFRS reporting by U.S. companies truly exists. Similarly, the Financial Accounting Foundation and Financial Accounting Standards Board quickly issued a statement in support of the Schnurr proposal, with FAF/FASB spokesman Robert Stewart stating: “We agree with Chief Accountant James Schnurr that U.S. investors are best served by an independent standard setter that is first focused on the interests of those that participate in the U.S. capital markets. We also believe it makes sense to explore whether there are ways to remove barriers that might exist for companies that voluntarily choose to offer investors a second set of financial statements prepared in accordance with IFRS. We believe that voluntarily providing IFRS information on a supplemental basis, subject to audit, SEC review, and other regulatory scrutiny, could be an important tool in fostering further convergence of Generally Accepted Accounting Principles and IFRS.”

What’s interesting is that Stewart’s statement seems to suggest that the supplemental IFRS information be in the form of a second set of audited financial statements; that seems more specific and goes beyond the more flexible approach that Schnurr outlined. Part of the thinking behind Schnurr’s proposal may be that with U.S. GAAP and IFRS diverging in important areas (for example, in regard to accounting for impairments of loans and debt securities), there may be increasing demand by financial statement users and others, including regulators, for companies to provide supplementary information in those areas so that they can better compare companies using the two sets of standards. In turn, that might lead some parties to call for further convergence between U.S. GAAP and IFRS.

On the other hand, there were also some less enthusiastic reactions to the Schnurr proposal. For example, some U.S. companies and industry groups have indicated that the added costs of providing supplementary IFRS information will deter them from doing so voluntarily. In that regard, at the AICPA SEC conference in December, IASB Vice Chairman Ian MacIntosh diplomatically questioned whether implementing the Schnurr option would substantively move forward the reporting of IFRS information by U.S. companies, and whether it would be a true test of market demand for U.S. companies to provide financial information under IFRS. “If it’s very few companies” that use the option, he said, “then it may not be a relevant test for the market.”

While I am an internationalist at heart, and would like to see the U.S. continue to move in a systematic way toward international standards, my clear sense is that currently there is not much demand among U.S. stakeholders for more IFRS reporting by U.S. companies.

Clearly (and I believe understandably) there have been different reactions to, and perspectives on, the Schnurr proposal. Supporters seem to view it as an interesting and potentially substantive way to maintain comparability of reporting across U.S. public companies, and to enable U.S. registrants to provide supplemental IFRS financial information that can help global investors’ ability to compare them with non-U.S. companies that report under IFRS.

Under current SEC rules, IFRS information provided by a U.S. registrant would be treated as “non-GAAP” and would need to be reconciled to the related U.S. GAAP measures. The Schnurr approach would presumably remove that requirement, lowering the cost and effort to provide the supplemental IFRS financial information.

These additional costs would likely vary based on a number of factors, including, for example, the extent of the differences between its U.S. GAAP accounting policies and practices, and those required or permitted by IFRS; or based on the extent to which the company already uses IFRS across its non-U.S operations. So while U.S. companies might incur some additional costs to develop the supplemental IFRS information, they would presumably be willing to bear it if investors want the information or if they otherwise view the exercise as in their best interests. That might give us an indication of the extent and strength of market demand for the IFRS information.

On the other hand, skeptics of the proposal—many of whom I suspect would prefer that the SEC provide an outright option for U.S. public companies to switch from U.S. GAAP to IFRS in preparing their primary financial statements—seem to see the Schnurr proposal differently. In their view, the additional costs of providing the supplemental information are likely to deter most U.S. public companies from bothering, even those that might choose to switch from U.S. GAAP to IFRS if they had the option to do so.

Under this view, an option to provide supplemental IFRS information is regarded as akin to a trade tariff that imposes additional costs on U.S. companies that may want to report under IFRS. The skeptics may also be concerned that investors and users of financial information will be reluctant to rely on the supplemental IFRS information if it is unaudited, incomplete, or piecemeal. They also question why the SEC allows foreign private issuers (now numbering some 500 companies with listed shares in the trillions of dollars) to file in the United States using IFRS, but won’t let U.S. registrants do likewise.

For these reasons they do not view the Schnurr proposal as providing a valid or even-handed test of the potential market demand for the provision of IFRS financial information by U.S. public companies. As such, they do not believe it will foster much progress in further advancing the use of IFRS in the U.S. capital markets or promote further convergence between U.S. GAAP and IFRS.

The Schnurr proposal has already elicited numerous questions, potential issues, and differences in perspectives. Clearly, the issues relating to common high-quality global financial reporting, and whether and how the U.S. reporting system continues to move toward that goal, continue to prove challenging to the SEC. It’s an issue that has been on the table for almost 20 years with many twists and turns and various paths having been pursued or suggested.

That Schnurr has proposed a new idea should be welcomed. His idea and other potential alternatives should be explored, carefully evaluated, and debated. And while I am an internationalist at heart, and would like to see the U.S. continue to move in a systematic way toward international standards, my clear sense is that currently there is not much demand among U.S. stakeholders for more IFRS reporting by U.S. companies—whether that be in the form of supplemental information or by allowing U.S. registrants to prepare their financial statements under IFRS.

For good or bad, most in the U.S. reporting system currently seem OK with what has essentially become a two-GAAP world: U.S. public companies and a shrinking number of foreign private issuers reporting under U.S. GAAP, and listed companies from many other parts of the world and a growing number of foreign private issuers reporting under IFRS. Yet, with the growing use of IFRS around the world, the SEC continues to receive encouragement and exhortations from various parties to develop a substantive plan for further advancing the use of IFRS in the U.S. reporting system.

So the $64,000 question at this point is whether and when we might see a formal proposal from the SEC on this important subject.