The
SEC Office of the Chief Accountant has issued a final report on the
incorporation of international financial reporting standards (IFRS) into the US
However,
the staff noted areas in IFRS that are still underdeveloped, such as accounting
for extractive industries, insurance, and rate-regulated industries. By
comparison, U.S. GAAP also contains areas for which guidance is in need of
continued development, such as push-down accounting. But the perception among U.S.
The SEC
emphasized that publication of the staff report does not imply that the
Commission has made any policy decision as to whether IFRS should be
incorporated into the financial reporting system for U.S. issuers, or how any such
incorporation, if it were to occur, should be implemented. There remains the
fundamental question of whether transitioning to IFRS is in the best interests
of U.S.
securities markets and investors. Additional analysis of this threshold policy
question is necessary before any decision by the SEC concerning the incorporation
of IFRS into the US
financial reporting system can occur.
Impact
on PCAOB
As
part of its study, the staff analyzed the effects of incorporation of IFRS on
PCAOB audit standard setting and auditor requirements by considering the extent of, logistics
for, and estimated time necessary to undertake any changes to the auditing
standards. Currently, there are over 350 foreign private issuers that file
financial statements using IFRS that are audited by accounting firms using
PCAOB standards as the basis for issuing an audit opinion. Audit firms told the
SEC staff that they are able to perform audits and issue audit opinions on
financial statements prepared in accordance with IFRS using PCAOB auditing
standards. Thus, any incorporation of IFRS should not affect the firms’ ability
to continue to issue audit opinions in the future.
The
SEC staff met with PCAOB staff to discuss
whether incorporation of IFRS would necessitate changes to PCAOB
auditing standards. Under any of the alternatives likely to be considered with
respect to an incorporation of IFRS, the PCAOB staff did not think initially
that there would be a need to make significant modifications to existing PCAOB
auditing standards solely to facilitate any particular incorporation method.
However,
there may be a need for the PCAOB to update certain of its interim standards
with language that is neutral with respect to the accounting framework applied
by issuers and referred to by auditors. For example, AU Section 337, Inquiry of a Client’s Lawyer Concerning
Litigation, Claims and Assessments, was written specifically in
contemplation of ASC Topic 450, Contingencies.
Therefore, AU 337 may need to be updated if there are differences in the
relevant IFRS standard.
In
general, however, as the PCAOB has updated its interim auditing standards, it
has written the standards in a manner that is neutral with respect to the
accounting framework and, in the SEC staff’s judgment, the effort required to
update the interim standards related to any particular incorporation method
would not be significant
The
PCAOB staff also indicated that, while they have a limited sample of
inspections of audits of financial statements prepared in accordance with IFRS,
based on the inspections to date the Board has not identified auditing issues
that are unique to IFRS. As the PCAOB’s inspections of audits of financial
statements prepared in accordance with IFRS increase, however, issues unique to
IFRS may be identified.
IASB
Funding and Governance
The
SEC staff has significant concerns about the continued reliance on the large
public accounting firms to provide funds to the IASB. While acknowledging that
the IFRS Foundation, the IASB’s overseer, has made progress in developing a
funding mechanism that is broad-based and country-specific, the staff noted
that the IFRS Foundation is a private not-for-profit organization that
ultimately has no ability to require or compel funding. Further, while IFRS is
used on some basis in more than 100 countries around the world, current funding
is provided to the IFRS Foundation by businesses, not-for-profits, and
governments in fewer than 30 countries. Currently, the IFRS Foundation Trustees
have been unsuccessful in obtaining the funding for the portion of the IASB
budget allocated to the United
States
The
SEC staff found that the governance structure of the IFRS Foundation strikes a
reasonable balance of providing oversight of the IASB while simultaneously
recognizing and supporting the IASB’s independence. As is typical with a global
organization, however, the IASB does not have a mandate to consider the
establishment of standards with the focus of any single capital market. The staff
believes that it may be necessary to put in place mechanisms specifically to
consider and to protect the U.S.
The
SEC staff also found that the global application of IFRS could be improved to
narrow diversity. Since IFRS is being incorporated into an increasing number of
countries that will have perspectives about the application of IFRS, reasoned
the staff, a greater emphasis will be placed on the staff to work more
cooperatively with regulators in other jurisdictions if IFRS is incorporated
into the financial reporting system for U.S. issuers. An increased level of
cooperation is important to allow regulators to share views on application and
enforcement and, thus, foster global consistency.
The staff urged the IASB to consider
relying more on national standard setters. National standard setters could
assist with individual projects for which they have expertise, perform outreach
f+or individual projects to the national standard setter’s home country
investors, identify areas in which there is a need to narrow diversity in
practice or issue interpretive guidance, and assist with post-implementation
reviews.
IFRS
Interpretations
Noting
that an important role of any standard setter is the adequate maintenance of
its standards, the staff said that the IFRS Interpretations Committee, which is
the interpretative body of the IASB, should do more to address issues on a
timely basis. The feedback received included comments that the IASB infrastructure
for an interpretive mechanism, while potentially robust, is currently neither
adequately staffed nor sufficiently productive. The IASB’s interpretive
function needs to be much more active than it has been, concluded the staff. The
IFRS Foundation has begun to address this concern, noted the staff, but changes
were only recently implemented, and it is unknown at this point whether they
will be effective
FASB’s
Role
Although
U.S. GAAP is perceived by many to be more rules-based, and IFRS to be more
principles-based, the SEC staff found both sets of standards to be a
combination of both approaches. Indeed, FASB has recently trended toward
issuing objectives-based standards that require greater judgment to be
exercised in application. The staff observed that the difference between
principles- and rules-based standards is not always clear
If
IFRS is incorporated into the U.S. financial reporting system, investors
generally support the FASB retaining some role in the standard-setting process
through some form of endorsement framework. Most investors who commented
posited that FASB should have a significant and active role in the
standard-setting process on the grounds that it would be able more narrowly to
act in the interest of U.S. constituents or to ensure a U.S. voice in standard
setting. In this role, FASB could be responsible for endorsing the standards
that the IASB has promulgated, but would also retain its authority to create
new standards and interpret existing standards when necessary to protect U.S.
investors.
Other
investors commented that FASB’s role
should be limited to providing support, resources, and expertise to the IASB
and to participating in the development and improvement of international
standards. In this role, FASB would endorse IASB standards for incorporation
into U.S. GAAP. However, FASB’s authority to reject or modify international
standards, or add new U.S. standards, would be limited. For example, FASB’s
ability to deviate from the IASB’s text could be limited to requiring
supplemental disclosures when such disclosures would provide users with
meaningful information. These investors believe that this more restricted role
for FASB would result in the most comparable accounting standards.
Impact
on Regulators
The
extent to which the Commission’s incorporation of IFRS would impact the
regulatory environment is largely dependent on the method by which IFRS would
be incorporated. Regulators other than the SEC have consistently noted the
number and significance of U.S. GAAP references in federal and state laws, in
regulatory requirements and guidance, and in contracts. These regulators
believe that incorporating IFRS into the U.S. financial reporting system
through U.S. GAAP may address or mitigate a number of significant issues that
could otherwise be problematic for their regulatory regimes. In addition, some
regulators have expressed a concern about their ability to present directly
their views on any given standard-setting project, which could be impacted
depending upon the method in which such standards were incorporated. These
concerns could be mitigated to some extent if FASB were positioned with a
substantive role in any incorporation and endorsement process.
Federal Tax Impacts
Incorporation of IFRS into the financial
reporting system for U.S. issuers also could affect the federal tax code and
regulations. Since the Internal Revenue Code has developed over an extended
period of time with existing U.S. GAAP as the predominant set of accounting
standards, interactions exist between certain provision of U.S. GAAP and income
tax requirements. For example, the Code has conformity provisions related to
the method of accounting for inventory for tax reporting purposes and the
method used for reporting to shareholders or for credit purposes.
The SEC staff coordinated with IRS and Treasury staff to
understand the potential effects of incorporating IFRS on federal tax
regulations. The tax-related areas that may be most significantly affected from
any IFRS incorporation include a company’s ability to use the LIFO inventory
method for tax purposes; changes in U.S.
tax accounting methods, to the extent changes in accounting policies made in
the transition to IFRS are considered changes in accounting methods under the
U.S. tax code; changes in the computations of U.S. earnings and profits for
U.S. tax purposes; and the impact on organizations’ existing transfer pricing
policies and documentation.
IFRS does not allow for the use of last-in,
first-out, or LIFO, method of accounting for inventory. As a result, a company
that reports in accordance with IFRS would be required to use a method of
accounting for inventory that is acceptable under IFRS, for example the
first-in, first-out, or FIFO, method. U.S. issuers changing to FIFO for financial reporting purposes may experience a
change in taxable income based on the difference between inventory valued on a
LIFO basis and on a FIFO basis.
More broadly, under the US Tax Code, companies
may experience a significant increase in the number of financial accounting and
tax accounting differences they would be required to track upon incorporation
of IFRS. Further, because of the high cost that otherwise would be incurred in
maintaining two sets of records under this book-tax dichotomy, the Code and
related regulations may need to be modified. Alternatively, if federal tax regulators
aligned the Code with reporting for SEC purposes, companies may experience
significant changes to the amount of tax that they are required to pay.
Consistent with the responses
of other regulators, the manner of any incorporation and transition to IFRS
would have important implications. Commenters stated that incorporation of IFRS
through U.S.
GAAP would reduce the level of effort that tax regulators would be required to
expend and would reduce the complexity of the transition.