As discussed in my prior blog item, the staff in the Securities and Exchange Commission (SEC) did not make a recommendation to the commissioners of the SEC on whether U.S. registrants should be required or permitted to use International Financial Reporting Standards (IFRS). I termed it a “punt.” On October 22, 2012, the IFRS Foundation staff published an 84-page analysis of this SEC staff report. In the press release announcing issuance of the IFRS Foundation staff report, Trustee Chairman Michel Prada observed that there are “no insurmountable obstacles for adoption of IFRS by the United States.”
Accounting principles in the United States are currently established by the Financial Accounting Standards Board (FASB), both for private companies and for public companies subject to SEC oversight. These accounting principles are considered “generally accepted accounting principles,” or “U.S. GAAP.” There has been substantial effort to converge U.S. GAAP with IFRS, which are issued by the International Accounting Standards Board (IASB). The parent organization that provides oversight (ensuring independence, funding, etc.) of the FASB is the Financial Accounting Foundation, whereas such oversight of the IASB is from the IFRS Foundation. Each of these organizations has voting members together with staff that support their respective activities.
Observations in the IFRS Foundation Staff Report
Overall, the findings in this report are complimentary of the SEC staff report, but the IFRS Foundation staff report does provide counterpoints—similar to those in a U.S. presidential debate. For example, one of the points raised by the SEC staff was that of funding of the IASB and the potential for lack of independence and lack of broad-based support. This is countered as follows in the IFRS Foundation staff report:
(a) The analysis of the funding arrangements as set out in the SEC Staff Report overlooks the fact that the European Commission, which is the biggest contributor to our budget, represents 27 member states of the European Union (EU). Furthermore, the analysis does not recognise that royalty payments are received from an additional 19 countries. It also does not take into account that some voluntary funding arrangements by some countries have been withdrawn in anticipation of the introduction of publicly-sponsored schemes that have already been agreed. When considering these factors, 69 countries provide, directly or indirectly, financial support for the work of the IFRS Foundation, instead of the fewer than 30 as identified by the SEC staff. We do, however, agree with the SEC’s suggestion that the IFRS Foundation should continue to expand the number of countries contributing to its budget.
Lack of Industry Guidance
The IFRS Foundation staff report also addresses some of the concerns identified by the SEC staff as to lack of industry guidance in IFRS. It addresses the concerns as follows:
The IASB has always advocated financial reporting requirements that account for transactions and activities across industries, rather than developing industry-specific guidance. Many specialised activities, such as insurance contracts or property investment, are undertaken by a wide range of entities that are not in specialised industries. We believe that such an approach avoids the proliferation of potentially conflicting industry-specific requirements. Furthermore, we note that, in 2008, the SEC published the findings of the Pozen Report, which recommended that industry-guidance should be eliminated from U.S. GAAP to reduce avoidable complexity. The Pozen Report went on to recommend that the SEC should encourage the IASB to limit future industry-specific guidance.
LIFO Inventory Costing Method
The IFRS Foundation staff report observes that several U.S. companies use the last-in, first out (LIFO) tax beneficial inventory costing method, but, to use LIFO on its federal income tax return, a company must also report its earnings to investors the same way. Under IFRS, LIFO is not permitted at all, meaning that companies applying a different costing method could not use LIFO when filing their federal income tax returns. The IFRS Foundation staff believes that this problem is probably better addressed by the U.S. federal taxing authorities, not by sacrificing what the IASB believes is better accounting.
The IFRS Foundation staff report addresses the lack of activity by the IFRS Interpretations Committee (IFRIC), which is the IASB’s equivalent to the FASB’s Emerging Issues Task Force (EITF).
Financial reporting professionals including the SEC staff have been quite comfortable working with the EITF over the years to consider issues that arise outside the scope of existing accounting guidance, but that can be quickly addressed. For example, on September 11, 2001, the United States had a terrorist attack that resulted in loss of life and property damage and disrupted operations of certain companies (e.g., the airline industry was shut down for several days). The EITF was able to provide accounting guidance in less than three weeks, enabling public companies to properly classify any costs associated with the terrorist attack and file their September 30 reports on a timely basis.
The IFRS Foundation staff report agrees that IFRIC should be more timely and active in providing interpretations. The IFRS Foundation staff report notes that the Trustees of the IFRS Foundation in May 2012 published recommendations to improve the efficiency and effectiveness of IFRIC. The IFRS Foundation staff report notes that the “recommendations of the review have now been implemented in full.” Time will tell whether IFRIC will be as responsive as the EITF has been over the years.
The IFRS Foundation staff report also addresses the challenges, costs and benefits of IFRS adoption, how individual countries have adopted IFRS, and regulatory environments. The report concludes that the SEC staff report “provides a valuable contribution to the already extensive body of research and information on IFRS.”
The Reality of the Situation and Next Steps
The ball is back in the court of the SEC in Washington D.C. Whether the five SEC commissioners will, unlike the SEC staff, vote to make a decision on IFRS or maybe ask the staff to actually make a recommendation instead of “punting” is unknown.
However, the desire to make a decision on IFRS will probably not be great until after the U.S. presidential election is over and after some “more important” issues are addressed—such as the federal deficit, resolution of the European debt crisis, implementation issues in the “Jumpstart Our Business Startups Act,” and the continuing regulatory oversight required by the “Dodd-Frank Wall Street Reform and Consumer Protection Act.”
About the Author
Ron Pippin is an experienced CPA based in Wheaton, IL. His 40 plus year career includes being an audit partner in Arthur Andersen, a member of Andersen’s Professional Standards Group (“national office”) in Chicago, the Director of Financial Reporting for a Fortune 50 company and most recently, the editorial director of CCH’s Accounting Research Manager. Currently, Ron does independent writing and analysis together with accounting consultation on a variety of topics.