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Tuesday, April 12, 2016

Has the International Accounting Convergence Project Fizzled Out?


Once upon a time, financial reporting professionals expected the Securities and Exchange Commission (SEC) to publish a rule that would allow — or force — U.S. companies to use International Financial Reporting Standards (IFRS). Had the anticipated move come about, U.S. Generally Accepted Accounting Principles (GAAP) would have been abandoned.

The switch, however, never happened, despite several definitive statements in recent years that the agency was prepared to move ahead on IFRS. Here’s more on the SEC’s plans to issue a watered-down proposal later this year.

Fighting Global Peer Pressure
Most of the countries in the world, including member states of the European Union, have adopted IFRS. And they’ve been increasingly pressuring U.S. accounting regulators to use global accounting standards. Full-scale adoption of IFRS in the U.S. looked nearly certain almost a decade ago, when the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) were committed to completing convergence of their standards.

In 2007, the SEC allowed foreign companies to report under IFRS without reconciliation to U.S. GAAP. A year later, the SEC floated the idea of adopting IFRS as the primary financial reporting regime for U.S. companies. Then the financial crisis hit. The FASB and IASB continued to work on their convergence projects. But it was clear that U.S. interest in IFRS had waned.

In 2012, the SEC released a much-awaited report on IFRS in the United States. The report described the challenges of adopting IFRS, rather than making recommendations on whether international accounting standards should be used for domestic companies.

In October 2014, SEC Chief Accountant James Schnurr assumed his post with the express goal of moving forward on IFRS. Now he acknowledges that the IASB’s guidance has, at best, a limited future in the United States.

Backtracking on Convergence
At a recent conference, Schnurr announced that the SEC’s forthcoming proposal on IFRS for domestic companies will make clear that the United States won’t be adopting international accounting standards, at least not for the foreseeable future.

Instead, the SEC plans to issue an IFRS proposal that it has been working on for more than a year. It will have two aspects. The first part will serve as a preamble, reiterating the SEC’s commitment to, one day, creating a single set of standards. Although the SEC wants the FASB and IASB to work toward further convergence down the road, for now it won’t allow domestic issuers to file financial statements under IFRS.

Second, the SEC would propose a rule to allow U.S. public companies to voluntarily provide IFRS information as a supplement to their U.S. GAAP financial statements.

“Right now, if U.S. domestic issuers were to include IFRS-based information, that IFRS-based information is considered a non-GAAP measure subject to the rules that we currently have around non-GAAP measures,” Schnurr told conference attendees. “This would … essentially eliminate the requirement to reconcile IFRS-based measures back to U.S. GAAP.”

His statement refers to some exemptions from Regulation G, which requires companies that use non-GAAP financial information in their regulatory filings to reconcile the differences between IFRS and U.S. GAAP. The supplemental IFRS information will be treated as non-GAAP information. Schnurr had previously said the Reg G waiver would keep costs down for companies that want to provide IFRS information. If the SEC were to allow domestic companies to voluntarily provide supplemental IFRS information, the information could be limited to selected financial data instead of a full set of IFRS financial statements.

Schnurr envisions that the proposal will apply equally to foreign private issuers. In other words, they’d be able to voluntarily provide financial information under U.S. GAAP as an exhibit to the financial statements prepared under IFRS and filed with the SEC.

Waiting for Official Guidance
The publication date of this proposal still is uncertain. Schnurr hopes that it will come out by the end of the year, but the timing also depends on the priorities SEC Chair Mary Jo White sets for the agency. White plans to devote significant time in 2016 to completion of congressionally mandated rules, market structure issues and a project to overhaul the SEC’s disclosure requirements.

Costs and Benefits of IFRS Disclosures
The Securities and Exchange Commission’s proposal to allow U.S. companies to supplementally disclose information using International Financial Reporting Standards (IFRS) will require support from at least three of its five commissioners to move forward. If the rule is finalized by the SEC, public companies would still have to file annual and quarterly reports with audited financial statements under U.S. GAAP. They would also have to be willing to incur an additional cost to provide the IFRS supplemental information.

Realistically, many analysts are unsure how many U.S. companies — even multinationals with extensive overseas operations that use IFRS to satisfy foreign reporting requirements — will be willing to spend the time and money to provide these disclosures. Doing so could increase audit fees and time needed to prepare financial statements.

But the SEC sees its proposal as a small step toward the long-term goal of international convergence. SEC Chief Accountant James Schnurr and Chair Mary Jo White both back the proposal. They hope that it will give accountants and standard-setters overseas more confidence in U.S. involvement with the International Accounting Standards Board.

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