On May 26, 2011, the U.S. Securities and Exchange Commission (SEC) issued a staff paper offering a new plan to the adoption of International Financial Reporting Standards (IFRS) in the United States (U.S.). This paper titled “Work Plan for the Consideration of Incorporating International Financial Reporting System for the U.S. Issuers — Exploring a Possible Method of Incorporation” (The Paper) is part of the SEC-implemented Work Plan to assess the opportunity to incorporate IFRS in the U.S. accounting framework.

This plan addresses several of the key issues raised in previous discussions on the SEC’s possible IFRS adoption. More precisely, it addresses preparers’ issues and acknowledges the possibility of seeing a “U.S.-flavored IFRS” being developed.

Overview of the SEC Staff Paper

The Paper presents an overview of various approaches that other countries followed and provides a strategy for adopting IFRS in the U.S. It indicates clearly that this plan is just an option among others and is certainly not the privileged one.

In a nutshell, the SEC’s plan is to keep the U.S. Generally Accepted Accounting Principles (U.S. GAAP) framework and endorse IFRS standards into the U.S. GAAP standards. Topics would be broken down into three categories:

1. Those covered by the Memorandum of Understanding (i.e. under convergence process);
2. Those that MoU does not cover, but are present in both standards; and
3. Those that don’t exist under IFRS (such as, industry specific standards).

The transition would last “some defined period,” noted the SEC, such as between five years and seven years. To simplify the transition, most of the changes would be prospective. Since the regulatory framework would remain unchanged, the SEC and the Financial Accounting Standards Board would maintain their roles in the adoption and the oversight of accounting standards.

Pros and Cons

The SEC reiterating its willingness to move forward on its roadmap to IFRS is a good sign, especially since the U.S. is one of few countries in which private companies have the option to use IFRS to prepare their financial statements.

It is a fact that other countries (such as the European Union, among others) have a similar endorsement model, the risk of significant deviation is still under control in part because of the SEC’s pressure to forbid such national-flavored IFRS. If, over time, the U.S. endorsement process produces a U.S.-flavored IFRS, the idea of one accounting standards would quickly fade away and IFRS would become nothing more than a mere platform for national accounting standards.

Benefits and Detriments

• Cost Savings. The main positive aspect of this plan is the potential cost reduction for the transition as compared to a big-bang approach in which U.S. issuers would have to incorporate the entire body of IFRS all at once. The impact of these changes is similar to adopting and implementing new standards altogether. Additional factors in favor of this seamless approach are that these new standards will not require a retrospective application in many cases.
• Clarity for Preparers. Another interesting aspect is the clarity it provides and the clear path it sets to preparers compared with the current situation in which companies and other interested parties, such as CPAs or educators are left in the dark about how to prepare and under what timeframe.
• SEC Controls Maintained. Finally this approach allows the SEC and U.S. standard setters to protect the U.S. and users of the U.S. companies’ financial statements against the risk of seeing the International Accounting Standards Board’s (IASB) inability to maintain its independence or issue high-quality standards. The Paper would substantially maintain control over accounting standards applied by public issuers.

What Would Happen Should There Be a Loss in Clarity for Users and Mid- and
Long-Term Issues?

Several aspects of the proposal will lead to this complexity:

• Prospective application of newly adopted standards only. On the face of their balance sheet, companies can potentially present items that have different basis of accounting;
• Unstable accounting platform until the end of the endorsement process;
• During the transition period, accounting standards will be updated and modified at a rapid pace, which will make it difficult to compare performance over time effectively because every year will see new standards that would require transition and implementation.

Risk of Developing of U.S.-flavored IFRS

The main downside is the risk that the SEC staff already identified for a development over time of US-flavored IFRS.

In the short term and as suggested in The Paper, the SEC and the FASB would pay attention to limit the development of U.S.-flavored IFRS, but no one can predict what route would be followed in 10 years or 20 years.

Also, IFRS adoption will be via an endorsement process, current standards under GAAP with no equivalent under IFRS, such as industry specific standards would still be in force, maintaining de facto a divergence between the two standards.

Another aspect that the SEC staff has not addressed fully is the future role of the Emerging Issues Task Force (EITF) in this “condorsement” environment. Under the current GAAP environment, the EITF has a critical role in developing implementation guidance by answering specific questions received on how to apply standards. Without a change in the EITF’s role, it would be another source for generating U.S.-flavored IFRS.

Mitigating Measures May Help to Reduce These Risks

We recognize the mandate of the SEC to protect the interests of the investors and, as a result, the importance for the SEC and the FASB to maintain the oversight and the ultimate control on accounting standards applied in the U.S. These U.S.-focused concerns may conflict at time with the projects led or IASB-issued standards, which must primarily address multinational issues.

These two potentially conflicting mandates could be harmonized by modifying the project discussed in the Staff Paper in the following manner:

• Reduce the length of the transition period with an adoption date. Under this approach, the FASB would list all IFRS standards to be adopted and would implement them at a preset date.
  
  Also during the period between the end of the Convergence project and the adoption date, FASB would not adopt new standards and would not implement additional implementation guidance.
  
• Accept a First-Time Application methodology instead of the proposed prospective approach for new standards. Despite the adoption of IFRS 1 – First-time Adoption of International Financial Reporting Standard would not be necessary if the plan as discussed in the Staff Paper is adopted. A first-time adoption methodology should be developed instead, that would improve the comparability of performance going forward by creating a comparable starting point being companies.
• Develop a new role for the EITF. We believe that the role of the EITF should be similar to the European standard-setters’ role, which provides comments and suggestions to the International Financial Reporting Interpretation Committee. As such, the EITF becomes an IFRS Interpretation Committee advisor, instead of working directly with the FASB.

Conclusion

We strongly believe that IFRS should be adopted in the U.S., but the recent transition plan presents significant risk that could with the U.S. FRS instead of IFRS. Unfortunately, this would lead to countries developing the same national flavored deviations and in a near future we would be back to square one: domestic standards.