In remarks at FEI’s Current Financial Reporting Issues (CFRI) conference earlier today, SEC Chief Accountant Jim Kroeker, appeared to indicate he would personally question whether to offer an ‘option’ for U.S. public companies to report in IFRS, vs. a firm requirement to do so over a transition period, if the SEC were to move in that direction.
this was my take on one point raised by Kroeker; see disclaimer
posted on the right side of this blog, read his verbatim quote below. Note 2:
my use of the phrase 'report in IFRS' may be an overly short-hand reference, since the more recent thinking of the SEC, as discussed in its Staff Paper on 'Condorsement' released in May 2011, focuses on the incorporation of IFRS into the U.S. financial reporting system via ongoing endorsement of IFRS by the FASB, and that concept, combined with comments filed with the SEC today by the Financial Accounting Foundation (which oversees the FASB)
may - the operative term being, may
- indicate a more gradual move to 'incorporating' IFRS into U.S. GAAP, perhaps lessening the potential impact of an on-off 'switch' from U.S. GAAP to IFRS.
Objective of Global Standards ‘Isn’t to Engrain Dual GAAP System”
Kroeker noted that while some smaller companies participating in an SEC roundtable on IFRS earlier this year indicated they would find it advantageous to report in IFRS (e.g. if they already had to report IFRS for purposes of consolidation), others indicated there would be no potential benefit to them, and some asked the SEC to offer an option to report in IFRS, but not strictly require IFRS. He added those companies seemed to favor an option - not so they could take up the option - but so they would never have to report using IFRS.
“The objective isn’t to engrain a dual GAAP system, at least not from my perspective.”
Acknowledging that several have referred to the SEC’s upcoming IFRS decision as ‘the elephant in the room’ – e.g., see Compliance Week Editor-in-Chief Matt Kelly’s column, Condorsement Picks Up Steam, reporting from yesterday’s FASB-IASB Update featuring IASB Vice Chairman Ian Macintosh, and FASB Chairman Leslie Seidman at FEI CFRI) Kroeker not only gave the usual disclaimer today that his remarks were his own, but added for good measure for those in the audience, “I wouldn’t expect an epiphany moment” from his remarks, as to “exactly when” to expect the SEC’s decision, or “exactly what” that decision would be.
Several SEC Staff Reports on IFRS Coming
Kroeker reviewed developments to date with respect to the SEC’s consideration of incorporating IFRS in the U.S. financial reporting system, and announced that the SEC staff plans to issue a number of reports, some in the “very near term,” relating to this subject. The reports are:
1. Comparison of remaining differences between U.S. GAAP and IFRS. – . Kroeker said this report “hopefully will be issued in the very near term.” He noted the focus of this report will be on at the ‘more fundamental level’ rather than a granular level.
2. Review of financial statements prepared using IFRS. According to Kroeker, “you should expect to see [this report] in the short run as well.” In compiling this report, Kroeker explained the SEC staff “selected companies in the Global Fortune 500 that use IFRS as the basis of financial reporting, irrespective of whether they file with the SEC.” SEC staff selected companies in the Global Fortune 500. (Thus, the SEC could not necessarily send a comment letter to a company with follow-on questions relating to its adoption of IFRS, unless it was an SEC filer.) This area of study has provided a couple of ‘take-aways,’ according to Kroeker: (a)”There is still a role to be played - even when people are using IFRS – by national bodies, either national standard-setting bodies, or regulators.” As an example, he noted companies in the study sometimes indicated that they “applied IFRS as supplemented by guidance from” their national regulatory body or standard-setter. (b) “Having uniform standards is only one step in getting consistency in application,” added Kroeker. He noted that even in U.S. GAAP, there are areas where inconsistent treatment results in application. Observing that, while there are some choices available in IFRS, “more troubling to me were issues that indicated a need for improvement on the “auditing and enforcement front.”
3. Comprehensive report on all aspects/all areas the SEC staff was charged to study. Kroeker said this report will address the staff’s study of such issues as: investor understanding, preparedness for IFRS, and regulatory issues. An example of a regulatory issue would be removal of the LIFO inventory method, for which Kroeker said “I’ve heard numbers… north of $50 billion in lost tax revenue” if companies, moving to IFRS, could no longer LIFO. He noted the SEC staff is considering, “Is that an issue we need to put front and center in the current environment, or deal with in transition over time?” Additionally, noted Kroeker, some companies want to continue to use SFAS 71, Rate-Regulated Entities, as there is not similar guidance in IFRS.
Themes in Comment Letters Include ‘Threshold’ – or Process - For FASB Changes To IFRS
Kroeker summarized a number of themes the SEC staff saw in the comment letters filed on the SEC staff paper that floated the idea of a ‘condorsement’ – or an approach to convergence via endorsement of IFRS by the FASB, thereby incorporating IFRS into U.S. GAAP over time (as opposed to, say, flipping a one-time light switch from U.S. GAAP to IFRS.). These themes, he said, included:
1. Broad support for either narrowing differences globally, or achieving a common set of standards. However, Kroeker noted, commenters raised issues regarding a number of potential impediments to achieving this objective, including: (a) enforcement, (b) auditing, (c) quality of application of standards, (d) national interest. “Is there a realistic possibility we’ll get there [to global standards] – [even] if not perfection… how do you get there?”
2. The need to make sure interests of the U.S. are protected. Kroeker said many expressed the importance of this issue including with respect to the role of FASB. A related question, noted Kroeker, would be, whether there should be a ‘threshold,’ and what that threshold should be, for FASB to make any ‘changes’ to IFRS under a condorsement approach. Kroeker said some commenters indicated “Don’t set the bar so high as to mute FASB’s ability to be effective.” But, he questioned, “if there is not some type of threshold, [would we be] effective at narrowing differences?” and should a limit be considered on the frequency of such differences? All of these questions, said Kroeker, lead him to the following observation: “Maybe we should focus more on the process, than the outcome.” For example, rather than focusing on limiting differences to 2% or some % of the time, to focus on the process that would be undertaken to determine whether a difference from IFRS is appropriate to apply in the U.S.
3. The cost of transition is another major theme noted in the comment letters, said Kroeker. The LIFO example noted above is an example of a transition cost that would be incurred in addition to direct costs of a move from U.S. GAAP to IFRS.
The Chief Accountant answered some additional questions for reporters after his panel; there were still no ‘epiphanies,’ and no ‘elephants’ in the room escaped. A formal Q&A session with representatives of FASB and the SEC closed the FEI CFRI conference today; since I was writing up these blog posts during that time, I know I will look for news stories filed by the exceptional reporters who joined us at FEI CFRI from AccountingToday/WebCPA
, CFO Journal
, Compliance Week
, Treasury & Risk
, the Wall Street Journal
, and more. We’ll try to include links to their reporting from CFRI in a followup comment on this post, or in a separate post. We also invite reporters to post links to their stories via a comment to this post, or feel free to email me a link to your story.