SEC accounting staff have proposed a new framework for the gradual implementation of IFRS into the US financial reporting system that blends 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. This approach would avoid the costs of a “big-bang” in which U.S. issuers would have to incorporate the entire body of IFRS all at once. It would also limit the occasions in which U.S. issuers would be required to make two accounting changes in relatively quick succession, potentially causing confusion for investors and possibly causing U.S. issuers to incur incremental costs in making major systems changes and retraining personnel twice instead of once. The framework envisions a new role for FASB under which FASB would participate in the process for developing IFRS, rather than serving as the principal body responsible for developing new accounting standards or modifying existing standards under U.S. GAAP.
The staff noted that the SEC has yet to make a decision as to whether and, if so, how, to incorporate IFRS into the financial reporting system for U.S. issuers. The proposed condorsement approach is one possible framework to effect incorporation. Importantly, the SEC Chief Accountant emphasized that any incorporation approach would not, and could not, affect the SEC’s responsibility under the federal securities laws to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation, nor would it dilute the Commission’s ultimate authority to prescribe accounting principles and standards to be followed by U.S. issuers that provide financial information to the SEC and investors.
The framework proposed by the Office of Chief Accountant is predicated on several principles. First, U.S. GAAP would be retained, but FASB would incorporate IFRS into U.S. GAAP over a defined period of time, with a focus on minimizing transition costs, particularly for smaller issuers. Also, FASB would incorporate newly issued or amended IFRSs into U.S. GAAP pursuant to an established endorsement protocol, requiring a change to how FASB currently operates.
The endorsement protocol would provide the SEC and FASB with the ability to modify or supplement IFRS when in the public interest and necessary for the protection of investors. The framework would share many key features of other major jurisdictions’ processes for incorporating IFRSs into their respective national financial reporting frameworks. However, whereas many countries chose to align existing accounting standards with IFRS through a first-time adoption of IFRS and thereafter keep pace with new or amended IFRSs through endorsement procedures, the framework would include a transitional period during which existing differences between IFRS and U.S. GAAP would be eliminated through ongoing FASB standard-setting efforts.
Countries using an IFRS national incorporation process generally can be divided into those that converge local standards with IFRS without a firm commitment to incorporate fully IFRS as issued by the IASB and those that undertake some form of local endorsement. Under the convergence approach, jurisdictions do not adopt IFRS as issued by the IASB or incorporate IFRSs into their accounting standards directly. Instead, these jurisdictions maintain their local standards but make efforts to converge those bodies of standards with IFRS over time. One example of a country using convergence is China, which is moving its standards closer to IFRS without incorporating IFRS fully into its national financial reporting framework.
Although the joint projects between FASB and the IASB are often denominated “convergence,” noted the SEC staff, those projects are different from the convergence approach described here. The FASB-IASB process involves movement by both standard setters toward a new, mutually-acceptable high-quality standard, while the convergence approach involves movement by a country toward existing IFRS.
Under the endorsement approach, jurisdictions incorporate individual IFRSs into their local body of standards. Many of these jurisdictions use stated criteria for endorsement, which are designed to protect stakeholders in these jurisdictions. The degree of deviation from IFRS as issued by the IASB can vary under this approach. A significant number of EU jurisdictions follow the endorsement approach.
The proposed framework would retain a U.S. standard setter and facilitate the transition process by incorporating IFRSs into U.S. GAAP over some defined period of time, such as five to seven years. At the end of this period, a U.S. issuer compliant with U.S. GAAP should also be able to represent that it is compliant with IFRS as issued by the IASB. Incorporation of IFRS through the framework would result in having a single set of high-quality, globally accepted accounting standards, while minimizing both the cost and effort needed to incorporate IFRS into the financial reporting system for U.S. issuers. It also would align the US with other jurisdictions by retaining the national standard setter’s authority to establish accounting standards.
New Role for FASB
The SEC staff believes that it will be important for the US to continue to have an active role in the international accounting arena to assist in the development and promotion of high-quality, globally accepted accounting standards; to be proactive in identifying new and emerging financial reporting issues; and to ensure that U.S. interests are suitably addressed in the development of those standards
The SEC staff believes that FASB would be the existing body best equipped to fulfill this role. For the endorsement aspect of the framework, FASB would continue to participate in the development and improvement of accounting standards. However, the manner of participation as contemplated in the framework would differ considerably from FASB’s current standard-setting role. Most significantly, FASB would participate in the process for developing IFRS, rather than serving as the principal body responsible for developing new accounting standards or modifying existing standards under U.S. GAAP. FASB would play an instrumental role in global standard setting by providing input and support to the IASB in developing and promoting high-quality, globally accepted standards; by advancing the consideration of U.S. perspectives in those standards; and by incorporating those standards, by way of an endorsement process, into U.S. GAAP. Additionally, FASB would become an educational resource for U.S. constituents to facilitate the understanding and proper application of IFRS and promote ongoing improvement in the quality of financial reporting in the United States.
FASB would continue to promulgate U.S. GAAP primarily through its endorsement of standards promulgated by the IASB. Under the framework, the staff feels that, due to FASB’s participation in the IASB’s standard setting process, FASB should be in a position to readily endorse into U.S. GAAP the vast majority of the IASB’s modifications to IFRS.
However, FASB would retain the authority to modify or add to the requirements of the IFRSs incorporated into U.S. GAAP, similar to other jurisdictions, and such U.S.-specific modifications would be subject to an incorporation protocol under which FASB would determine if the IASB’s modification to IFRS, either by means of issuance of a new standard or amendment of an existing standard, met a pre-established threshold incorporating the public interest and investor protection.
If the IASB’s modification reaches that threshold, FASB would incorporate fully the IASB’s adopted standard into U.S. GAAP. But if FASB concludes to the contrary, in incorporating the standard, it would need to determine whether it should modify the requirements of the standard, retain relevant U.S. GAAP, or find an alternative solution. Before making any modifications, FASB could discuss the situation with other national standard setters to understand their perspectives on the issue and the approaches they have taken for endorsement of that standard in their respective jurisdictions.
Specifically, FASB could add disclosure requirements to those specified by IFRS in order to address U.S. circumstances in a manner consistent with IFRS or prescribe which of two or more alternative accounting treatments permitted by IFRS on a particular issue should be adopted by U.S. issuers in order to achieve greater
consistency in U.S. practice.
SEC’s Role
Under the proposed framework, the SEC would be actively engaged in the FASB standard-setting process and also with the broader activities of the IASB and its governance bodies. If IFRS is incorporated into the U.S. financial reporting system, the SEC would maintain its oversight over FASB. Obviously, the Commission would have a less direct oversight relationship with the IASB. While the SEC and SEC staff would provide their perspectives to the IASB, regulators in different jurisdictions may have different or conflicting perspectives, thus having the potential to reduce the SEC’s impact on the IASB’s standard setting.
Under the framework, the SEC staff would build upon the relationships currently held with the IASB and its staff to enhance the processes employed in the oversight of international standards development. Further, the SEC Chief Accountant Office would expand its relationships with other securities regulators with respect to interpretations of accounting matters in order to inform the staff on the application of IFRS across different jurisdictions.