On May 26, 2011, the Securities and Exchange Commission ("SEC") issued a Staff Paper discussing the method of incorporating International Financial Reporting Standards ("IFRS") into the U.S. financial reporting system.
The Staff Paper explains one possible approach for incorporation. This approach was first outlined in December 2010 by SEC Deputy Chief Accountant Paul Beswick and termed "condorsement," because it would involve the combination of "convergence" and "endorsement". According to this framework, Generally Accepted Accounting Principles in the United States ("GAAP") would be retained, but the Financial Accounting Standards Board ("FASB") would incorporate IFRS into GAAP over a defined period of time, focusing on minimizing transition costs, particularly for small issuers. Similar to other jurisdictions, the endorsement protocol would provide the SEC and the FASB the ability to modify or supplement IFRS when in the public interest and necessary for the protection of investors.
The Staff Paper also explains the approaches applied by other jurisdictions. There are mainly two categories of approaches. The first category comprises jurisdictions in which IFRS as issued by the IASB are fully used without approval by any local body. Based on the Staff's research so far, very few jurisdictions follow this approach. Under the second category, IFRS are used after some form of national or multinational incorporation process, leading to the full use of IFRS as issued by the International Accounting Standards Board ("IASB") or some local variation thereof. This category can be further divided into two categories.
The Staff Paper identified the People's Republic of China as one example of a country that adopts such approach. Jurisdictions that use such approach do not adopt IFRS as issued by the IASB or incorporate IFRS into their accounting standards directly. Instead, they maintain their local standards and make efforts to converge those bodies of standards with IFRS over time.
According to the Staff's research, the majority of countries, for instance, countries within the European Union and Australia followed this approach. Under this approach a stated criteria was used for implementation. The stated criteria was specifically designed to protect shareholders. However, under this methodology the degree of deviation from IFRS as issued by the IASB varied due to language translations and interpretation by the standards board.
Under the "Condorsement" approach as stated in the Staff Paper, would be a combination of convergence and endorsement. Under this framework the US would retain a standard setter and facilitate the transition process by incorporating IFRSs into GAAP over some defined period of time (e.g., five to seven years). At the end of this period, the objective would be that a U.S. issuer is compliant with GAAP should also be able to represent that it is compliant with IFRS as issued by the IASB.
In addition, the Staff Paper discusses the roles that FASB, SEC and U.S. Reporting Companies would play if this approach is adopted.
Role of the FASB in the United States
Under the framework, due to the FASB's participation in the IASB's standard setting process, the FASB would be in a position to readily endorse (i.e., incorporate directly into GAAP) the vast majority of the IASB's modifications to IFRS. However, the FASB would retain the authority to modify or add to the requirements of the IFRSs incorporated into GAAP, similar to other jurisdictions, and such U.S.-specific modifications would be subject to an established incorporation protocol. Also, U.S.-specific circumstances for which the FASB would consider modifying IFRS should be similar to the circumstances in which the SEC exercises its authority to amend or add to the standards issued by the FASB and, therefore, modifications should be rare and generally avoidable.
Role of the Securities and Exchange Commission
The incorporation of IFRS into the U.S. financial reporting system would generally allow the SEC to maintain its oversight over the FASB as the designated standard setter and would require the SEC to be actively engaged in the standard-setting process with the IASB. On an ongoing basis, the SEC would monitor international standard-setting developments to understand any changes to IFRS and the impact they may have to the SEC's existing rules, regulations, interpretations, and forms. The incorporation of IFRS and any modifications to IFRS could necessitate additions to or deletions and modifications of existing SEC guidance.
Role of U.S. Reporting Companies and Financial Statement Users
U.S. reporting companies would need to have the ability to influence the IASB's standard-setting process and have their interests appropriately considered by the IASB. This process would be similar to the current process that occurs with FASB. The FASB would provide feedback to the IASB and reflect perspectives that are in the general interest of all companies. The FASB would facilitate communications between the IASB and reporting companies and would be considered as the primary provider of the educational information for U.S. reporting companies and financial statement users with respect to the views of the IASB and conclusions reached in the standard-setting process.
Convergence under the framework would involve the full, but potentially staged or phased, replacement of existing GAAP through the incorporation of IFRS into GAAP pursuant to a transition plan. The Staff envisions that transition to IFRS by following the framework could be a multi-step process and would be accomplished over a period of several (e.g., five to seven) years. To develop the transition plan, the FASB would evaluate each IFRS individually in order to determine how and when to incorporate the standards into GAAP during the transition period. The FASB would study whether each incorporation should be staged, phased, or occur all at once.
The final portion of the Staff Paper discussed the benefits and risks that would arise if this approach is adopted. The significant benefits under this approach would allow for a more flexible transition strategy that could be better tailored and more responsive to the needs of U.S. constituents than other potential mechanisms for incorporation. It would provide greater investor protection with FASB endorsement than direct incorporation of IFRS and would retain GAAP as the statutory basis of financial reporting, thereby mitigating the complexities associated with changing all GAAP references.
The significant risks identified are the general risks associated with first-use of any process whereby such a strategy may cause confusion for U.S. reporting companies during the transition period. GAAP would be an evolving set of standards that was neither U.S. GAAP as applied currently, nor IFRS as issued by the IASB. Extensive efforts would be needed during the transition to understand the full impact on application of affected U.S. laws, contractual documents, regulatory requirements and guidelines, and other similar documents. The Staff Paper was open to comment through July 31, 2011.
Subsequent to the Staff Paper discussed above, the SEC convened a day-long roundtable on IFRS on July 7, 2011. The panel consisted of investors, issuers and regulators. The panel members discussed their opinions about the effects that the move to IFRS would have on them, both advantageous and disadvantageous, most panelists support the move to a single set of high-quality, global financial reporting standards.