With SEC report looming, uncertainty over IFRS expected to linger

Although the release of a long-awaited US Securities and Exchange Commission (SEC) staff report discussing IFRS adoption is imminent, uncertainty over the issue appears certain to linger.

Commission spokesman John Nester said early this week that the report on IFRS adoption for US public companies is expected “soon,” but it will provide an analysis of issues rather than a recommendation to the SEC commissioners on whether to allow or mandate the use of IFRS for US public companies.

A separate project will lead to an SEC staff recommendation on IFRS, Nester said, but there is no timetable for that guidance. Ultimate authority on whether to require or allow US public companies to use IFRS rests with the five SEC commissioners. But the timing of their decision remains unclear.

Sean Lager, CPA, the lead partner in Frazier & Deeter LLC’s International Financial Reporting Standards Group, said he does not expect an SEC decision on IFRS before the end of this year.

International accounting expert Eva Jermakowicz, CPA, Ph.D., chair of the Accounting and Business Law Department at Tennessee State University, predicts that the SEC eventually will require US public companies to use IFRS to file their financial statements.

“The US has to mandate IFRS because the US would become isolated internationally [without it],” Jermakowicz said. “… The US could not remain out of a global system forever.”

Because of its potential effect on the world of financial reporting, the staff analysis and recommendation on IFRS have been eagerly awaited by accounting professionals, business leaders, and regulators worldwide. Many groups, including the AICPA, have said a single set of global accounting standards would benefit investors and public companies by increasing the transparency and comparability of firms around the world.

And many have said US participation is essential to creating consistent global standards. Former International Accounting Standards Board (IASB) Chairman Sir David Tweedie, CA, said in April that a delay in the SEC’s decision could cause the international standards effort to unravel.

He expressed concern over how the rest of the world would react if the SEC took another year to decide on the role of IFRS. Tweedie speculated that a US delay would cause European and Asian countries to seek regional variations in IFRS.

“And then it’s going to take another ten years to put it all back together again,” Tweedie said during a panel discussion sponsored by the AICPA and the Institute of Chartered Accountants of Scotland. “So that’s the danger, I think. It’s a very interesting decision, and the SEC’s got a tough call to make.”

Global standards have been the focus of an organised effort since at least 1973, when the International Accounting Standards Committee (IASC) was formed with the AICPA as a charter member. As the global economy developed, the effort to converge worldwide standards accelerated in 2001, when a restructuring of the IASC led to the creation of the IASB. The IASB was formed under a parent board, the IASB Foundation, chaired by former US Federal Reserve Chairman Paul Volcker. Companies in all the countries in the EU as well as many other nations use IFRS.

US GAAP generally gives more specific, detailed guidance than IFRS, which is more principles-based, a dichotomy that has given rise to some concerns in the United States.

The worldwide enforcement of IFRS also worries many in the United States. An SEC study published in September analysing financial statements of 183 public companies prepared in accordance with IFRS found the statements lacking in transparency and clarity to the point that questions were raised about whether some companies’ accounting complied with IFRS. The SEC staff also noticed diversity in application that made it challenging to compare companies.

But there are some who believe that having the SEC involved as a watchdog over US public companies’ use of IFRS would increase worldwide compliance with the standards because the SEC could prompt regulators in other countries to act, too, when application inconsistencies arise.

“US public involvement in the application of IFRS … would provide a positive impact on the consistent application of IFRS globally,” SEC Deputy Chief Accountant Paul Beswick said in a speech in December at the AICPA’s National Conference on Current SEC and PCAOB Developments.

Costs likely to be addressed

The final SEC staff report, like some of the earlier staff analyses, is likely to describe the potential cost for companies to switch their financial reporting basis from US GAAP to IFRS. Implementation and application of IFRS in other countries, as well as the funding mechanism and governance of the IASB, also may be discussed in the report.

Beswick said some commenters on a May 2011 SEC staff paper were concerned that the cost of incorporating IFRS would be significant, with no commensurate benefit to individual companies or US markets.

IFRS expert Barry Epstein, CPA/CFF, Ph.D., said the SEC has other concerns as well. He said the SEC has a statutory responsibility to ensure that US investors have access to accurate information that could be difficult to maintain without some kind of control over accounting standards. That control would be relinquished to some degree if the IASB controls standard-setting.

There’s also a chance that the United States could lose its influence over international standard-setting if it continues to delay a decision. One IASB member from the United States, John Smith, saw his term expire in June. Another, Paul Pacter, will finish his IASB duties in December.

Tweedie speculated in April that Smith and Pacter could be replaced by board members from other countries if the United States does not commit to IFRS.

“The rest of the world is going to say, ‘Well, are they in or are they out? Do we replace them, or do we just hold back and say, well, perhaps it should be people who use the standards [who are represented on the board]?’ ”

Epstein predicted that the SEC eventually will mandate or allow the use of IFRS. He said the internationalisation of business makes consistent, worldwide accounting standards a necessity.

“I think the world is going in that direction, and nothing can stop that,” he said. “And I think the SEC is going to have to recognise that they have to move with it.”

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.