The decision of the US Securities and Exchange Commission to kick the IFRS can down the road is unwelcome. And even more delays could lie ahead
The world of financial reporting has been waiting for many months for the US Securities and Exchange Commission to publish its study on the adoption of International Financial Reporting Standards. Much overdue, the report surfaced this month, saying little that was not already known, and making no recommendations about adoption.
The regulation of financial reporting in the US is complicated, given that it is a federation of states, which retain the right to issue their own company laws. The only federal regulation of financial reporting is in the hands of the SEC, which mandates rules for listed companies. However, rather than issue accounting standards itself, it leaves detailed standard-setting to a private sector body, the Financial Accounting Standards Board.
The FASB works under the umbrella of the Financial Accounting Foundation, which also supports the Governmental Accounting Standards Board. This body sets standards for the public sector (they occupy the same building in commuter Connecticut).
Since the European Union switched to using IFRS for listed private sector companies in 2005, their use has spread rapidly, taking in Brazil, China, South Korea, Canada and many other countries. Starting in 2002 the international standard-setter, the International Accounting Standards Board, has been working closely with the SEC and the FASB to converge IFRS with US standards.
The aim has been to get the US to use IFRS and give confirmation to their status as the global standard for reporting by stock-exchange listed companies. It was even possible the SEC could simply abandon the FASB and use the IASB in its place.
The SEC was enthusiastic about having a single global standard and published a plan in 2008 that would have seen some US companies using IFRS by now. That, however, proved to be a high water mark. The arrival of President Obama’s administration caused a shift in attitude, and prevarication on the issue has since been the order of the day.
The new administration dropped the 2008 plan, and in 2010 suggested that what was needed was an in-depth study of the issue. This would take a year or so and a decision on adoption would be made in 2011. 2011 came and went, with no study published, and, of course, no decision. The SEC staff said they needed more time to complete, and pointed to slower than expected progress on convergence by the IASB and FASB, as well as planned changes in the IASB’s governance structure.
Nonetheless, senior SEC staff did trail some of the major issues they were addressing. They suggested that the US would, if it did anything, be more likely to retain US rules and then amend them progressively to conform with IFRS. They would retain the US standard-setter as part of an endorsement mechanism, similar to that used in other areas such as China and the EU. In November 2011 they published an analysis of the 2009 reports of 183 international companies which use IFRS. They found the financial statements not always compliant with IFRS and not comparable.
Recently they made clear that when their final report was published, it would contain no recommendation. An SEC Commissioner also said that they would need to know what arrangements the IASB planned to put in place to liaise with national standard-setters in the next phase of standard-setting (the IASB is currently near the end of its convergence programme with the US).
This month the SEC study has been published – late afternoon on Friday 13, just after IFRS Foundation trustees had concluded a week-long meeting in Washington. While it contains no recommendation to the SEC, its findings are close to what had already been hinted at.
They are:
- It would be too costly for US companies to switch to IFRS and abandon US standards
- A gradual endorsement system, perhaps using the FASB, would be a better way to approach closer alignment - Consistency of application of IFRS needs to be improved
- The IASB needs to develop a mechanism for involving national standard-setters and regulators in improving implementation and developing IFRS
- The IFRS Interpretations Committee needs to expand its activities and do more to ease implementation issues - The governance of the body is appropriate but its funding is too heavily dependent on a small number of countries and the international audit firms
The SEC has given no hint as to the likely time frame for a decision. However, the SEC chairman is normally replaced when there is a new US president. One should not therefore expect any radical decisions from the SEC before the US presidential elections in November. If President Obama is given a second term, then a gradual take-up of IFRS is likely to be put in place during 2013. If Mitt Romney wins, the whole issue could be up in the air again.
Peter Walton is professor, department of accounting and management control at ESSEC Business School, and ESSEC KPMG chair of financial reporting
