Is the U.S. Moving Towards a U.S.-Flavored IFRS?
Repercussions of such an IFRS divulged.August 4, 2011
by Remi Forgeas, CPA
On May 26, 2011, the U.S. Securities and Exchange Commission (SEC) issued a staff paper offering a new plan to the adoption of International Financial Reporting Standards (IFRS) in the United States (U.S.). This paper titled “Work Plan for the Consideration of Incorporating International Financial Reporting System for the U.S. Issuers — Exploring a Possible Method of Incorporation” (The Paper) is part of the SEC-implemented Work Plan to assess the opportunity to incorporate IFRS in the U.S. accounting framework.
This plan addresses several of the key issues raised in previous discussions on the SEC’s possible IFRS adoption. More precisely, it addresses preparers’ issues and acknowledges the possibility of seeing a “U.S.-flavored IFRS” being developed.
Overview of the SEC Staff Paper
The Paper presents an overview of various approaches that other countries followed and provides a strategy for adopting IFRS in the U.S. It indicates clearly that this plan is just an option among others and is certainly not the privileged one.
In a nutshell, the SEC’s plan is to keep the U.S. Generally Accepted Accounting Principles (U.S. GAAP) framework and endorse IFRS standards into the U.S. GAAP standards. Topics would be broken down into three categories:
The transition would last “some defined period,” noted the SEC, such as between five years and seven years. To simplify the transition, most of the changes would be prospective. Since the regulatory framework would remain unchanged, the SEC and the Financial Accounting Standards Board would maintain their roles in the adoption and the oversight of accounting standards.
Pros and Cons
The SEC reiterating its willingness to move forward on its roadmap to IFRS is a good sign, especially since the U.S. is one of few countries in which private companies have the option to use IFRS to prepare their financial statements.
It is a fact that other countries (such as the European Union, among others) have a similar endorsement model, the risk of significant deviation is still under control in part because of the SEC’s pressure to forbid such national-flavored IFRS. If, over time, the U.S. endorsement process produces a U.S.-flavored IFRS, the idea of one accounting standards would quickly fade away and IFRS would become nothing more than a mere platform for national accounting standards.
Benefits and Detriments
What Would Happen Should There Be a Loss in Clarity for Users and Mid- and
Several aspects of the proposal will lead to this complexity:
Risk of Developing of U.S.-flavored IFRS
The main downside is the risk that the SEC staff already identified for a development over time of US-flavored IFRS.
In the short term and as suggested in The Paper, the SEC and the FASB would pay attention to limit the development of U.S.-flavored IFRS, but no one can predict what route would be followed in 10 years or 20 years.
Also, IFRS adoption will be via an endorsement process, current standards under GAAP with no equivalent under IFRS, such as industry specific standards would still be in force, maintaining de facto a divergence between the two standards.
Another aspect that the SEC staff has not addressed fully is the future role of the Emerging Issues Task Force (EITF) in this “condorsement” environment. Under the current GAAP environment, the EITF has a critical role in developing implementation guidance by answering specific questions received on how to apply standards. Without a change in the EITF’s role, it would be another source for generating U.S.-flavored IFRS.
Mitigating Measures May Help to Reduce These Risks
We recognize the mandate of the SEC to protect the interests of the investors and, as a result, the importance for the SEC and the FASB to maintain the oversight and the ultimate control on accounting standards applied in the U.S. These U.S.-focused concerns may conflict at time with the projects led or IASB-issued standards, which must primarily address multinational issues.
These two potentially conflicting mandates could be harmonized by modifying the project discussed in the Staff Paper in the following manner:
We strongly believe that IFRS should be adopted in the U.S., but the recent transition plan presents significant risk that could with the U.S. FRS instead of IFRS. Unfortunately, this would lead to countries developing the same national flavored deviations and in a near future we would be back to square one: domestic standards.
Remi Forgeas, CPA, is an audit and assurance partner for WeiserMazars LLP US and provides his views on international convergence of GAAP and whether progress is really being made in light of recent developments. For U.K. IFRS, you can contact, Steven Brice who is a technical partner in the financial reporting advisory group for WeiserMazars LLP UK and provides his views on international convergence of GAAP and whether progress is really being made in light of recent developments.* The views expressed in this article are the author’s own and do not necessarily reflect the views of the AICPA or AICPA Corporate Finance Insider.