With all five seats at the Securities and Exchange Commission finally filled, a roundtable on International Financial Reporting Standards has nudged the SEC a notch closer to allowing IFRS use in the United States.
The Commission assembled the forum last week to hear views on whether IFRS gave a reasonable view of economic reality compared with U.S. Generally Accepted Accounting Principles—specifically in regard to the credit crisis, where credit and cash have evaporated and pricing for assets and liabilities is volatile. SEC Chairman Christopher Cox concluded that at least in the financial services sector, IFRS “worked well during the sub-prime crisis, at least as well and perhaps better than GAAP.”
Cox
Since allowing foreign entities to file financial statements in IFRS without the long-required reconciliation to GAAP, the SEC has been under growing pressure to state its intentions about whether U.S. companies might be allowed or even required to follow IFRS. Cox said during a press briefing before the roundtable that the event would be “germane to … the next steps in laying out a roadmap for the use of International Financial Reporting Standards in the United States.”
Large companies with global operations seem eager to shed GAAP in favor of a single global accounting standard. Investor advocates, however, say GAAP is a tried-and-true accounting system that shouldn’t be dumped so quickly for the young upstart IFRS, which is quickly gaining ground in countries around the world.
Cox acknowledged that question looms large over the SEC. “The question we’re now asking ourselves is: How does this fit in over the longer term, and will U.S. companies ultimately be using IFRS instead of U.S. GAAP?”
The Commission clearly is wobbly on whether it should simply allow companies the choice of using IFRS, or mandate IFRS outright. Only a few days on the job, new commissioner Luis Aguilar asked Paul Boyle, chief executive of Britain’s Financial Reporting Council, which approach he would recommend.
Boyle
Boyle said when the European Union mandated a move to IFRS in 2005, it was looking to integrate some 25 different national GAAP systems. “It was chaotic,” he said, and there was plenty to be gained by the “big bang approach” of requiring everyone to make a full conversion to IFRS.
In the United States, however, with its single, strong pre-existing accounting system, “going for the big-bang approach would be frankly heroic,” Boyle said. “The big disadvantage of the big-bang approach is you get a massive amount of work to be done in a very short space of time.”
SPEAK UP
To find out where to send comments on IFRS, please see the information below:
On August 4, 2008, from 1:00 p.m. to 5:00 p.m., the Securities and Exchange Commission will hold a roundtable to discuss International Financial Reporting Standards (“IFRS”) and to update the Commission on IFRS developments, including the experience with use of IFRS during the recent period of market turmoil.
The roundtable will be organized as two panels. The panels will include investors, issuers, auditors, and
other parties with experience in IFRS reporting. Additionally, representatives from the
Financial Accounting Standards Board and the International Accounting Standards Board will be present as observers.
The roundtable will be held in the auditorium of SEC headquarters at 100 F Street, NE, Washington, DC. The roundtable will be open to the public with seating on a
first-come, first-served basis. The roundtable discussions also will be available via Webcast on the SEC’s Website at www.sec.gov. The roundtable agenda and other materials related to the roundtable, including a list of participants and moderators, will be accessible at www.sec.gov/spotlight/ifrsroadmap.htm. The Commission welcomes feedback regarding any of the topics to be addressed at the roundtable.
DATES: Comments should be received on or before August 11, 2008.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission’s Internet submission form:www.sec.gov/rules/other.shtml.
or
Send an e-mail to rule-comments@sec.gov.
Please include File Number 4-564 on the subject line.
Paper Comments
Send paper comments in triplicate to Florence Harmon, Acting Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549–
1090.
All submissions should refer to File No. 4-564. This file number should be included on the subject line if e-mail is used. To help us process and review your comments more
efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site, www.sec.gov/rules/other.shtml.
Comments also will be available for public inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE, Washington, DC 20549, on official business days between the hours of 10:00 am and 3:00 pm. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.
Source
Roundtable Comment Instructions (2008).
Cox said after the roundtable it appears that IFRS did a better job than GAAP of keeping special-purpose entities on corporate balance sheets. SPEs have come under fierce fire in this country as a way to hide complex securitizations of risky loans, making the full measure of risk unclear to investors.
Cox also concluded that both sets of standards need to improve their use of fair value in measuring assets and liabilities, the presentation of financial information, and disclosures so investors can make adequate comparisons. “The world’s and possibly America’s move to IFRS offers an opportunity to take a fresh look at financial reporting to improve the existing shortcomings of both GAAP and IFRS,” he said.
Charlotte Jones, head of accounting policy at Deutsche Bank, said the bank’s conversion from GAAP to IFRS resulted in considerable new work to determine how accounting rules would be applied, but also has resulted in better accounting. She acknowledged fair-value measurement has been difficult under both sets of accounting rules, more because of today’s vexing market issues than the rules themselves.
“The challenge is still there when there’s no two-way market and liquidity dries up,” she said, referring to the difficulty in using market prices to establish fair value when market activity has disappeared. “It’s not an IFRS vs. U.S. GAAP issue.”
Boyle took a swipe at GAAP requirements around fair-value measurement, especially an anomaly that lets a company experiencing a deterioration in creditworthiness book a gain on the income statement as a result. That occurs when a company marks its own debt to market value, as required in GAAP, reflecting a decline in the liability because the company is less likely to pay back the loan. That decline crops up in the income statement as a gain.
“That seems quite a difficult proposition to stack up,” Boyle said. “It doesn’t pass the common sense test.” He encouraged the Financial Accounting Standards Board to consider tweaking the rules to guard against such reporting.
Roger Harrington, vice president of group accounts at British oil giant BP, said the company’s move away from GAAP toward IFRS has allowed the company to communicate “quite effectively” with investors. He did say, however, that volatility in oil and gas prices has exposed some of the accounting challenges of IFRS.
Specifically, accounting for inventory under IFRS produces something of a mismatch in pricing of materials compared with the cost of selling finished goods. IFRS does not allow last-in-first-out (LIFO) pricing for inventory, but that method would best match the pricing of materials with the price fetched when the materials are sold as finished goods to customers, Harrington contended.
“The impact can be significant,” he said. When BP announced its second-quarter profits of $9.5 billion, about $2.6 billion can be attributed to volatility effects, he said.
Gannon
D.J. Gannon, head of Deloitte’s IFRS Center of Excellence in the United States, tells Compliance Week the roundtable probably greased the wheels for adopting IFRS in the United States. “It validated IFRS as being good enough,” he said. “The SEC has been interested in not just are the standards good enough quality, given the words on the page, but do people apply them in a way that make sense? The answer was yes.”
Jeff Mahoney, general counsel for the Council of Institutional Investors, implored the SEC to think hard before flipping a switch to IFRS. He ticked off a list of uncertainties that need to be addressed before the SEC should deem IFRS ready for use in the United States, including how application and enforcement of international standards would work and whether international rulemakers are adequately independent of the preparer and auditing communities.
Cox didn’t promise any speedy movement on the SEC’s part and recited his own long list of issues on the SEC’s agenda that need attention now that all five seats are occupied: mutual fund fees, naked short selling, the 25 recommendations of the Committee on Improvements to Financial Reporting, and a dozen or so other rules already in the pipeline. IFRS is just one of the many.
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