For at least 20 years, the debate has raged over whether US public companies should report financial information in accordance with International Financial Reporting Standards (“IFRS”). Opinions have vacillated among various stakeholders in the financial community, and support for the proposal has waxed and waned over the years. Now, a stunning announcement by the new SEC Chief Accountant, James Schnurr, may signal an end to the current uncertainty.
The Push for Convergence
IFRS, issued by the International Accounting Standards Board (“IASB”), an independent board comprised of 14 full-time experts from around the globe, are intended to establish a single set of high quality, globally accepted international financial reporting standards. Currently, their use is mandated in over 100 countries, including the European Union and more than two-thirds of the G20. Many more countries, including Japan, permit the use of IFRS. However, in the US, while foreign private issuers have been allowed to file reports with the SEC using IFRS (without reconciling to US GAAP) since 2007, SEC regulations permit US registrants to use only US GAAP in preparation of financial statements submitted to the SEC.
In the late 1990s and early 2000s, forces pushing for international convergence (making global accounting standards as similar as possible) gathered steam in the US. Starting in 2002, the Financial Accounting Standards Board (“FASB”) began working with the IASB on some major projects with a goal of adopting similar standards, including a number of short-term and long-term projects that have been generally converged. The longer-term projects — covering revenue recognition, financial instruments, and leases — were very challenging and delivered mixed results. The FASB’s new revenue recognition standard (issued in May 2014) was a major success in conforming US and IFRS guidance. On the other hand, lease requirements, one of the last of the major convergence projects, are diverging in key respects. And, the pendulum has swung to more ambivalence in adopting a single set of global standards.
Why is convergence and/or adoption of IFRS for US registrants important? The basic goal of any set of accounting standards is to provide investors with high quality decision-useful financial information to allow for informed investment decisions that facilitate capital formation. To achieve this goal, the financial statements of one company must be comparable to other similar companies; that is, companies must account for similar transactions in the same way. The current extent of globalization highlights the issue. Consider, for example, that according to the Federal Reserve Bank of New York, US investors’ foreign investments have been increasing and totaled more than $7 trillion in IFRS jurisdictions in 2013. Those foreign company financial statements are prepared, for the most part, using IFRS; the financial statements of US-based registrants continue to use US GAAP. Significant differences result not just from differences in situations but from differences in accounting standards, differences that are difficult for an investor to discern based on information publicly available.
Opposition and the Need for Resolution
Those resisting adoption of IFRS for US-based public companies point to the need for maintaining the high quality of US accounting standards. The FASB expresses its mission as establishing and improving US financial accounting standards for the benefit of present and potential investors, lenders, donors, creditors, and other users of financial statements. Of course, the pros and cons and costs and benefits of US adoption of IFRS are much more complex than the major issues of comparability versus high quality accounting standards. Interpretation, application, and enforcement in various jurisdictions around the world, the potential cost to US companies of adopting or incorporating IFRS, investor education, and governance must all be included. However, while the issues remain complex, the importance of finding a resolution is growing.
The Clouds May Be Parting
Before December 2014, the IFRS adoption landscape was clouded. With the virtual completion of the FASB’s convergence projects, its role had reverted to membership on an advisory council. And, the SEC’s position was equivocal. For over a decade, the SEC and its staff have been issuing concept releases, policy statements, and work plans, with no definite position taken on the best path forward. In July 2012, the staff produced a lengthy paper, “Work Plan for the Consideration of Incorporating International Financial Reporting Standards in the Financial Reporting System for U.S. Issuers,” which took pains to caution that the Commission had made no policy decision as to whether US issuers should adopt IFRS or how such an adoption would be implemented. Rather this “Final Staff Report” set forth a detailed analysis of the issues.
Then came James Schnurr’s compelling December 8, 2014 speech at the 2014 National Conference on Current SEC and PCAOB Developments. He announced that the SEC staff is studying a new alternative to resolve the IASB adoption debate. The alternative would allow US public companies the option of presenting IFRS-prepared financial statements as supplemental information, without the current implications of having this information designated non-GAAP measures, which requires reconciliation to US GAAP. Mr. Schnurr explained that SEC Chair Mary Jo White has committed to making IFRS a priority. Also, when he recently became Chief Accountant, Chair White asked him to study the issue and recommend a path forward. Schnurr acknowledged the tension between having high quality, decision-useful information for informed investing that facilitate capital formation and striving for high levels of comparability between financial information provided for domestic and international issuers. He recognized that “any continued uncertainty around IFRS results in uneasiness for investors across the globe.” Thus, Schnurr declared that bringing a recommendation to the Commission in the near future with the hope of resolving, or at least lessening the uncertainty, would be his priority.
Clearly, thorny issues must be resolved to move forward with a supplementary information approach. Will public companies take up the mantle? Will it be cost-effective information? What are the legal implications? How will investors be educated? Will it be audited? Still, having written my first article on Tower of Babel accounting standards over 20 years ago, I find it refreshing to learn of new proposed solutions and a commitment to prioritizing a resolution. Hopefully, we won’t need to wait another decade to see some progress in resolving this ongoing conundrum. Stay tuned!
This alert provides practitioners with an overview of just some of the parameters to consider. If you have questions, please contact Sally Hoffman, Senior Advisor, Berdon LLP Litigation, Valuation & Dispute Resolution Services at 212.331.7524 | firstname.lastname@example.org