On May 26, 2011, the U.S. Securities and Exchange Commission (SEC) staff released Work Plan for the Consideration of Incorporating International Financial Reporting Standards in to the Financial Reporting System for U.S. Issuers — Exploring a Possible Method of Incorporation (the Study) revealing a possible approach for incorporation of International Financial Reporting Standards (IFRS) into the U.S. financial reporting system, if the SEC were to decide that its incorporation is in the best interest of United States (U.S.) investors.

When considering the SEC-outlined approach, it is important for CPA firms to first assess the objectives behind it and then look forward to the end position to see if this approach meets those objectives.

By issuing this Study, it may be perceived that the SEC is still very interested in IFRS, even though the step to commit to an IFRS future has not been taken. That said, the Study approach certainly has been written in support of the incorporation of IFRS into U.S. Generally Accepted Accounting Principles (GAAP) and the objective is clear that after a period of convergence, GAAP-compliant financial statements would also be IFRS-compliant financial statements.

But if the objective is to have financial statements fully compliant with IFRS, is the SEC’s outlined approach really the most pain-free way of getting there?

Incorporating IFRS

The SEC-outlined approach is a ‘Condorsement’ approach, which is in essence an Endorsement Approach that shares characteristics of the incorporation approaches with other jurisdictions that have incorporated or are incorporating IFRS into their financial-reporting frameworks. However, during the transitional period, the framework would employ aspects of the convergence approach to address existing differences between IFRS and U.S. GAAP.

While this is only one possible approach, the Study suggests that the envisioned convergence period would be five years to seven years, after which time U.S. GAAP’s financial statements would also have IFRS-compliant financial statements.

Benefits and Disadvantages

By using convergence as the transition method to adopting IFRS, U.S. preparers would not have a first-time adoption of IFRS, because it would be phased in gradually. This would undoubtedly help organizations that have limited resources. However, finance teams often consider a piecemeal as difficult to manage because of the numerous smaller changes that usually take place over a longer period of time.

Convergence also means changing U.S. GAAP to meet IFRS requirements. This presumably means that all U.S. companies will end up applying IFRS in their financial statements.

In Europe, the Endorsement Approach was taken, which meant that listed groups were required to make the transition to IFRS at a particular point in time. IFRS is mandated at the European Union (E.U.) level only for those organizations that have listed instruments. Some countries have permitted IFRS use for private companies. Note that many countries within Europe do not require private companies to adopt IFRS, and therefore are still working with local GAAP and IFRS for public groups. Such a model would not be possible, should a convergence approach be taken.

Also, if the goal is to incorporate IFRS into the U.S. financial reporting system then a critical part of making this decision must be because the internationality of IFRS has been recognized as an advantage for U.S. investors. While the SEC’s goal in their Study is to make U.S. GAAP IFRS compliant, there is the danger that convergence on a standard-by-standard basis will mean that there is more opportunity to deviate from IFRS.

Note that if there are any deviations from IFRS to make it specific to the U.S. market, then the internationality of the accounting framework will be damaged. In such a case, U.S. companies will need to consider why IFRS is being adopted at all, if it is adopted with changes.

Contrasting the SEC proposals with current practice in Europe, the endorsement approach has manifested itself with the EU ratifying the use of new IFRS accounting standards and interpretations that all countries within Europe apply for the preparation of financial statements of groups with listed instruments. Individual European countries are not permitted to modify E.U.-adopted IFRS.

Even though the European approach is fairly time-consuming one that may, on occasion, prevent a company from early adopting of a new standard, it nevertheless, appears to work well in practice.

Conclusion

With the SEC’s release of its Study, they have clearly revealed a “third” possible approach for the incorporation of IFRS into the U.S. financial reporting system. However, it would appear a little odd spending so much time on the possible approach for incorporating IFRS into U.S. GAAP when the decision has not yet been made whether IFRS should be the way forward for U.S. companies.

From a European perspective, it seems to have many different views emanating from the U.S. It is apparent that one solution will not suit everyone, however, the absence of a decision on adopting, converting or altogether abandoning IFRS is causing confusion.

Companies need confidence in their financial-reporting regime and time to adopt to new requirements. Whatever decision is finally taken, regulators should make it sooner rather than later. Delays surrounding the application of IFRS are not helpful for business.

Steven Brice is a technical partner in the financial reporting advisory group for Mazars UK. For U.S. IFRS, you can contact Remi Forgeas, CPA, who is an audit and assurance partner for Mazars in the U.S.

* The views expressed in this article are the author’s own and do not necessarily reflect the views of the AICPA or AICPA CPA Insider™.