Wednesday, November 16, 2011

FASB Oversight Body Fears Loss of Sovereignty under Condorsement Approach to IFRS Incorporation

The SEC staff’s condorsement approach to IFRS incorporation diminishes the SEC’s ability to continue to ensure investor protection in the U.S. capital markets as standard setting for U.S. GAAP moves to an international body, said the Financial Accounting Foundation, which oversees FASB. In a commentletter to the SEC, the Foundation said that, under condorsement, the SEC would move from being the sole regulator with direct influence over U.S. standard setting to one of several international regulators with indirect and shared influence over international standard setting.

The framework suggested by the SEC staff envisions the gradual implementation of IFRS into the US financial reporting system, blending the existing convergence and endorsement approaches into what the staff calls ``condorsement.’’ The transition to IFRS under the framework would occur on a staggered basis over a number of years and be coordinated with the ongoing standard-setting activities of the IASB.

According to the Foundation, condorsement would transfer significant authority to an international governance structure early on. Adoption and incorporation of IFRS around the globe is still evolving, noted the Foundation, and there remains limited agreement around the world as to the purposes of financial reporting standards and limited global consistency in the application, auditing, and enforcement of IFRS financial reporting. In the view of the FAF, transferring primary authority for U.S. standards to an international body at this stage may expose the U.S. capital markets to risks that can be mitigated through a more incremental approach to the transitioning of U.S. standard-setting authority.

The FAF also raised the specter that reducing the role and influence of the U.S. standard setter could affect the quality of US financial reporting standards in U.S. capital markets, which have uniquely benefitted from a financial reporting regime with a strong regulator focused on investor protection, a long history of independently developed and investor-focused accounting standards, and a vigilant audit compliance regime. IFRS development will continue to endure pressures to meet the needs of various markets that are not yet as robustly developed as the U.S., posited the Foundation, and the reduced role of the U.S. standard setter, as set forth in the SEC Staff Paper, may weaken the positive leverage that U.S. GAAP has provided to improving accounting standards.

The FAF recommended an approach that, while acknowledging the worthy goal of one set of global accounting standards, advances the more practical goal for the foreseeable future of highly comparable, but not necessarily identical, financial reporting standards based on a common set of international standards. This approach is a model for incorporating into U.S. GAAP independently developed and investor-focused international standards that improve financial reporting in the U.S. or that maintain the quality of financial reporting under U.S. GAAP, noted the Foundation, but also advance global comparability of standards. Under this approach, the U.S. would retain sovereign authority over financial reporting and standard setting for U.S. capital markets, with influential roles for the SEC and FASB that recognize the benefit of the global harmonization of financial reporting standards based on the common platform of IFRS.

Also under the approach espoused by the Foundation, FASB and the IASB would continue to work together to complete the projects under joint development on their memorandum of understanding. FASB would refrain from separately engaging in standard setting on new technical projects added to the IASB’s agenda, noted the Foundation, and the U.S. would look to the IASB to set those new standards with active involvement by the FASB. In addition, the FASB would develop a process to address substantial differences that remain between U.S. GAAP and IFRS.

More granularly, active U.S. involvement would be a multifaceted program involving FASB Members with nonvoting observer rights on the IASB and the right to participate in the IASB’s deliberations. The program also envisions regularly scheduled meetings between the FASB and the IASB to discuss, review, and provide input on the IASB’s technical projects, including due process, investor and other stakeholder outreach, and deliberations. Under the FAF approach, FASB would seek broad agreement on the appropriate criteria for its good faith evaluation of international standards and the IASB’s standard-setting process in determining whether to incorporate an international standard into U.S. GAAP. In the Foundation’s view, a new major international standard should be incorporated into U.S. GAAP if that standard improves the quality of financial reporting already in place in the U.S.

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