IFRS Foundation report says US SEC’s concerns can be overcome

Three months ago, the US Securities and Exchange Commission (SEC) staff had its say on IFRS. Now the IFRS Foundation is providing its own analysis.

The IFRS Foundation on Tuesday released a detailed, 84-page response to the SEC’s exhaustive, 127-page report on IFRS, which was released in July.

The SEC’s report outlined concerns it had about the funding of the International Accounting Standards Board (IASB), the timeliness of responses to widespread accounting issues by the IFRS Interpretations Committee and other issues.

The IFRS Foundation, in its report, said some of those problems are being addressed in current initiatives. The IFRS Foundation also contested the SEC’s arguments on funding, saying the United States’ contributions are lacking in proportion to the size of its economy and its number of representatives in IFRS Foundation bodies.

What’s unclear is whether the IFRS Foundation report will make a difference in the SEC’s ultimate decision on whether to allow or mandate that US public companies use IFRS for their financial reporting.

Sean Lager, the lead partner in Frazier & Deeter LLC’s International Financial Reporting Standards Group, said there has been little movement on the issue since the SEC released its report in July. That report did not make a recommendation on whether US public companies should be allowed or required to use IFRS for their financial reporting.

Lager said IFRS has taken a back seat to other issues with a US presidential election in its final stages.

“You just get more significant events,” he said. “And this gets overshadowed.”

The report comes a day after American Institute of CPAs (AICPA) President and CEO Barry Melancon, during a speech to the AICPA governing Council, warned that the United States could face consequences for not pushing steadily forward on convergence and adopting IFRS.

Michel Prada, chairman of the IFRS Foundation trustees, said in a statement that the United States is well-placed to achieve a successful transition to IFRS.

“While acknowledging the challenges, the analysis conducted by the IFRS Foundation staff shows that there are no insurmountable obstacles for adoption of IFRSs by the United States,” Prada said.

A spokeswoman for the SEC declined to comment on Tuesday.

SEC noted concerns

The issue of IFRS adoption in the United States remains in the hands of SEC commissioners with no known timetable in an uncertain political landscape.

In its July report, the SEC said the standards of the IASB are considered to be of high quality. But the SEC expressed concerns, some of which centred on the IASB’s funding.

The SEC staff raised concerns about the IFRS Foundation’s reliance on funding from the large public accounting firms, and said fewer than 30 nations contribute to financing of the IFRS Foundation.

In addition, the SEC said, the IFRS Foundation’s trustees have been unsuccessful obtaining the funding for the portion of the foundation’s budget allocated to the United States. The SEC also said US sources are providing “in-kind” funding such as the efforts by the US Financial Accounting Standards Board (FASB) staff on US GAAP-IFRS convergence projects.

The IFRS Foundation, in its report, responded that:

• The SEC analysis overlooked the fact that the biggest contributor to the IFRS Foundation budget is the European Commission, which represents 27 member states. When royalty payments and some voluntary funding arrangements are considered, 69 countries provide financial support for the IFRS Foundation.

• FASB’s work should not be factored into the US contribution because the convergence programme is a joint process with efforts, resources and benefits shared by FASB and the IASB.

• The lack of a publicly sponsored funding arrangement in the United States means that it is not contributing a proportionate amount to the IFRS Foundation’s budget. A proportionate US contribution based on GDP would amount to just over £4 million ($6.4 million) in 2012, while £1.3 million ($2.1 million) is expected to be collected.

• While 20% to 25% of the seats on the IFRS Foundation’s bodies are held by US representatives, US contributions make up less than 10% of the total country contributions to the foundation’s budget.

“Ultimately the lack of public funding in the US can only be resolved by the US authorities themselves, directly or indirectly,” the IFRS Foundation staff wrote.

Funding may be the biggest obstacle for IFRS adoption for US public companies, because the SEC cannot act as a fundraiser for a private organisation, and payment to the IASB could be viewed as a foreign subsidy.

The IFRS Foundation report also said:

• The IFRS Interpretations Committee has implemented changes that will make it more effective; the SEC had expressed concerns about the committee’s failure to address issues on a timely basis.

• The IASB has begun preparatory work to establish an Accounting Standards Forum comprising national standard-setters and other regional bodies to provide feedback. The SEC had recommended that the IASB should extend its involvement with national standard-setters.

• Costs of transition to IFRS for US preparers should be reduced compared with other countries because the convergence programme has reduced differences in standards.

The IFRS Foundation report included an appendix describing a review of academic research on the benefits of IFRS adoption, noting that the SEC staff report did not analyse the benefits of IFRS in the United States.

The IFRS Foundation also said those benefits could not simply be projected onto the United States because it already has high-quality accounting standards that are understood globally. Nonetheless, the report said that, in many ways, the United States is better prepared than other jurisdictions to consider the adoption of IFRS.

“While the size of the US economy relative to other jurisdictions presents significant challenges in transition that are unique to the US,” the report said, “the experience of other countries suggests that many of the challenges can be overcome with the appropriate political will to make a commitment to the mission of a single set of global standards.”

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