Deep Splits Emerge on IFRS for U.S. Filers

Fresh from giving foreign companies the choice of filing financial statements according to U.S. Generally Accepted Accounting Principles or International Financial Reporting Standards, the Securities and Exchange Commission is now trying to figure out how to do the same for domestic businesses.

The question ultimately seems to be when, not if, U.S. companies will be allowed to file financial statements using IFRS, given the accounting system’s soaring usage around the world. Still, the SEC’s concept release exploring how to make such a policy shift drew scores of comments. Many suggested the financial reporting community has a long road ahead before it reaches a consensus and resolves myriad lingering questions.

At first blush, giving U.S. companies the same choice that the SEC has already deemed acceptable for foreign issuers seems like a logical step. As Compliance Week previously reported, the SEC voted on Nov. 15 to accept filings from foreign issuers prepared in accordance with IFRS as published by the Internal Accounting Standards Board, without the reconciliation to U.S. GAAP that had previously been required.

The practical reality of moving U.S issuers to IFRS, however, is fraught with issues—starting with the scant understanding of IFRS that many U.S. companies, auditors, and financial statement preparers and users have.

Even assuming the lack of training in IFRS can be addressed, another major question is whether using IFRS should be optional or mandatory for U.S. companies. Many comment letters—including those from PepsiCo, Cisco Systems, the U.S. Chamber of Commerce, and Fitch Ratings—suggested that the SEC ought to make IFRS mandatory at some point in the future. They contend that a two-system world (of IFRS and GAAP) would cause confusion and make comparing financial statements more difficult. But even among those who favor such an approach, opinions vary on how long of a transition period is necessary and what other issues should be settled before getting on with it.

Hanish

“During that transition time, it will be difficult to compare financial statements between companies or between industries,” wrote Arnold Hanish, chief accounting officer at Eli Lilly & Co. Hanish suggested the SEC set a transition timetable “that requires all U.S issuers to convert to IFRS by a specified date no sooner than 2015, with early adoption encouraged and optional.”

Similarly, James Campbell, corporate controller at Intel, said a dual accounting and financial reporting system for U.S. filers is “an unworkable long-term solution … The SEC should instead adopt a careful and measured transition plan to move all U.S. filers from U.S. GAAP to IFRS by a specific date.”

Bukspan

Others took a more cautious view. Credit ratings agency Standard & Poor’s said IFRS is still in its infancy, and auditors, filers, and regulators all need more time to understand how to apply it on a practical level. “We view an immediate choice for U.S. registrants to report using IFRS as premature, given the current evolutionary state of IFRS development and its limited application experience, the substantially incomplete accompanying disclosure framework, and the lack of readiness of U.S. market participants,” wrote Neri Bukspan, S&P’s managing director and chief accountant.

Convergence and Other Worries

In addition, S&P and others say allowing IFRS for all could hinder work by the U.S. Financial Accounting Standards Board and its international counterpart, the International Accounting Standards Board, to converge their standards. U.S. officials have long said the two accounting systems would be converged by 2009.

Another worry: the funding and governance of IASB. Jeff Mahoney, general counsel at the Council of Institutional Investors, said issues surrounding IASB funding, the European Union’s close ties to IASB, and investor representation on the IASB board all need to be resolved before the SEC should consider allowing U.S. issuers to prepare financial statements in accordance with IFRS.

Read

Similarly, the chief investment officer at the California Public Employee Retirement System, Russell Read, said the pension fund fears that the independence of IASB “may be compromised by its current source of funding,” which includes companies and accounting firms. Despite promises from IASB’s oversight board, International Accounting Standards Committee Foundation, for a more open-ended funding system, “We are not confident at this point that these steps will ensure an independent well-governed IASB that is free of potential influences,” Read wrote.

CalPERS also questioned whether IASB has the enforcement infrastructure to ensure compliance with international standards.

But others, including members of PricewaterhouseCoopers, say efforts to improve IASB funding should allay those concerns. “Given the progress already underway, we do not believe that changes to IASB’s current governance and funding structure should be a prerequisite for the Commission’s decision to allow use of IFRS by domestic issuers,” PwC’s comment letter stated.

The Financial Reporting Committee of the Institute of Management Accountants said companies should be free to choose between IFRS and GAAP, based on their view of which set of standards minimize their cost of capital. The FRC urged the Commission to “move as quickly as possible” to issue a rule permitting U.S. registrants to prepare financial statements using IFRS.

“If the financial statements of foreign private issuers prepared in accordance with IFRS are acceptable for SEC filings, fairness requires that financial statements prepared on the same basis should be acceptable for U.S. registrants,” committee chairman Pascal Desroches noted. Desroches said market forces will drive the necessary education and training required for issuers to make the move to IFRS.

Meanwhile, some commenters overseas raised concerns about the SEC issuing its own views on IFRS. In its concept release, the SEC noted that in circumstances where neither IASB nor its working committees have addressed a particular accounting issue, the SEC itself “may find it necessary as an interim measure to state a view on such an accounting issue.”

“The SEC should be aware that its actions relating to IFRS will have implications outside the U.S. market, and there is the potential for impact on IFRS as a body of literature,” wrote Desmond Wright, senior manager of corporate reporting at the Institute of Chartered Accountants in England and Wales. “In our view, it is particularly important to ensure that the position of [IASB] as the only formal issuer of interpretations of IFRS is not undermined.”

The SEC, which is still reviewing comments on the concept release, announced plans to hold two roundtables next month to gather more input on the issue.