SEC Addresses Global Convergence of Accounting Standards

On February 24, 2010, the Securities and Exchange Commission published a statement on the convergence of U.S. generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (IFRS). This is the much-anticipated follow-up to the Commission’s 2008 “Roadmap” towards adoption of IFRS for U.S. issuers. The statement reiterates the SEC’s support for convergence in principle, but does not propose specific measures. Instead it presents an SEC staff “Work Plan” to put the Commission in a position to make a determination in 2011 on whether and how to incorporate IFRS into the financial reporting system for U.S. issuers.

The SEC’s 2008 Roadmap was a plan for the potential replacement of U.S. GAAP with IFRS for U.S. issuers. It contemplated that the SEC would decide in 2011 whether to require U.S. issuers to use IFRS, and it suggested a timetable for a staged transition to IFRS beginning in 2014. The Roadmap also proposed rules under which certain U.S. issuers would be eligible (but would not be required) to use IFRS starting in 2010.

In yesterday’s statement, the SEC noted that commenters on the Roadmap had generally expressed support for a transition from U.S. GAAP to IFRS, but had raised extensive questions and concerns. While multinational firms were generally supportive of a transition to IFRS, many investor groups commented that IFRS is not yet sufficiently developed. Some commenters also raised concerns regarding the ability of the International Accounting Standards Board (IASB) to act as sole independent standard-setter and the future role of the SEC and the Financial Accounting Standards Board (FASB) in setting financial reporting standards. Other commenters raised concerns about the impact of a change in accounting standards on tax and other regulatory regimes that currently are based on U.S. GAAP.

Some of the Commissioners echoed these concerns at the February 24 open meeting where the statement was adopted, but all reiterated their support for a process to explore convergence with IFRS and said that they would reserve judgment until the SEC staff completes its analysis in 2011. Unlike the Roadmap, the new statement is open about whether the process would lead to IFRS replacing U.S. GAAP completely or to some other result, such as mandating IFRS for some but not all issuers, or permitting IFRS as an option.

The principal new development in the SEC’s consideration of convergence is the Work Plan attached to yesterday’s statement. Developed by the SEC’s Office of the Chief Accountant, the Work Plan describes in detail the analysis the Commission and its staff are undertaking with a view to a 2011 decision. It calls for the staff to issue a first report to the Commission in October 2010.

The Work Plan focuses on two broad areas the SEC says will be the most relevant to its 2011 determination about IFRS. No single factor will be outcome-determinative, and the Commission plans to consider each factor individually.

• Sufficient development and application of IFRS for the U.S. domestic reporting system. The Work Plan notes specific concerns about whether IFRS is sufficiently comprehensive, how it affects auditability of financial statements and enforcement of accounting standards, and whether it successfully promotes comparability of financial statements. It also discusses the risk of opportunistic accounting under the less prescriptive, more principles-based approach of IFRS, as well as the problem of jurisdictional variation.
• The independence of standard setting for the benefit of investors. The Work Plan identifies specific issues about oversight, composition and funding of the IASB and about the IASB’s standard-setting process.

The Work Plan also focuses on four transitional considerations:

• Investor understanding and education regarding IFRS.
• Examination of the U.S. regulatory environment that would be affected by a change in accounting standards. In particular, the Commission identified the interaction between accounting standards and the tax regime as an area of inquiry.
• The impact on issuers. Examples cited by the Commission include changes to accounting systems, changes to contractual arrangements, corporate governance considerations, and litigation contingencies.
• Human capital readiness.

The Commission has dropped the proposal it made in the Roadmap for early use of IFRS by certain U.S. issuers starting in 2010. The SEC recognized comments that allowing U.S. issuers to decide between two sets of accounting standards would prove to be overly complex for investors, but indicated it would not foreclose the possibility of allowing early use of IFRS in the future.

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