Remarks Before the 2012 AICPA Conference on Current SEC and PCAOB Developments
Senior Associate Chief Accountant, Office of the Chief Accountant
U.S. Securities and Exchange Commission
December 3, 2012
As a matter of policy, the Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This speech expresses the author's views and does not necessarily reflect those of the Commission, the Commissioners, or other members of the SEC Staff.
Good morning and thanks once again for the opportunity to share my views at this conference. As Paul Beswick mentioned in his remarks, I am devoting my time today to discussing International Financial Reporting Standards (IFRS) and, more specifically, the SEC Staff’s IFRS Work Plan, including a summary of our findings as presented in the Final Staff Report.
Background on the IFRS Work Plan
Let me begin with a brief review of the history of this project. In February 2010 the Commission issued a Statement in Support of Convergence and Global Accounting Standards. In that Statement, the Commission instructed the SEC Staff to develop and execute a Work Plan to consider specific areas and factors relevant to a Commission determination as to whether, when and how the current financial reporting system for U.S. issuers should be transitioned to a system incorporating IFRS. There were six key areas of the Work Plan:
- Sufficient development and application of IFRS for the U.S. domestic reporting system
- Independent standard setting for the benefit of investors
- Investor understanding and education regarding IFRS
- Impact on the U.S. regulatory environment
- Impact on issuers
- Human capital readiness
During the course of the Staff’s work on the Work Plan, the Staff issued several papers to update the public and to solicit comments. Those papers included the October 2010 Progress Report, the May 2011 Staff Paper regarding “Exploring a Possible Method of Incorporation of IFRS,” the November 2011 Staff Paper regarding “A Comparison of U.S. GAAP and IFRS,” and the November 2011 Staff Paper regarding “An Analysis of IFRS in Practice.” The November 2011 Staff Papers were discussed at this conference last year. The Staff also considered the results of reviews conducted by other organizations, including the IFRS Foundation Trustees’ Strategy Review and the IFRS Foundation Monitoring Board’s Governance Review, both of which resulted in final reports issued in February 2012.
IFRS Work Plan Final Staff Report
Let me move on to the primary focus of my time today, which is the Final Staff Report on the Work Plan, published on July 13, 2012. In my allotted time today, I cannot cover all of the issues in the report, which spans over 125 pages. However, I will give you a sense of the Staff’s overall findings and observations.
One of the key issues addressed in the Final Staff Report is the question of how to incorporate IFRS into the U.S. financial reporting system, if the Commission were to decide to do so. Looking directly to IASB, by designating the standards of the IASB as authoritative, would be challenging and was not supported by the vast majority of participants in the U.S. capital markets. However, the Staff found significant support for exploring other methods of incorporating IFRS. For example, the Staff found that there could be some benefits of using an endorsement mechanism to incorporate IFRS into the U.S. system, including the ability to retain influence on accounting standard setting; a lessening of the burden of conversion for U.S. issuers; and the ability to retain references to U.S. GAAP that are embedded throughout U.S. laws, regulations and private contracts.
I mentioned that there were six key areas of the Work Plan. Let me give you a few takeaways from the Final Staff Report on each section. First, I’ll turn to the section regarding Sufficient Development and Application of IFRS for the U.S. Domestic Reporting System. The Staff found that the IASB has made significant progress in developing a comprehensive set of accounting standards, and that the standards issued by the IASB are generally perceived to be high quality by the global financial reporting community. IFRS continues to have areas that are underdeveloped, such as accounting for extractive activities, insurance contracts, and rate-regulated activities. Another finding in this section relates to the IASB’s interpretive process. The IFRS Interpretations Committee (“IFRS IC”) is the IASB’s interpretive body which has a mandate to review, on a timely basis, widespread accounting issues that have arisen within the context of current IFRSs and to provide authoritative guidance on those issues. The Staff’s outreach found that both domestically and internationally, constituents believe the IFRS IC should do more to address issues on a timely basis. We continue to follow changes to the IFRS IC process that were recently put in place by the IFRS Foundation. On the issue of global application and enforcement of IFRS, the Staff’s review found that, while financial statements prepared using IFRS that were reviewed by the Staff generally appeared to comply with IFRS, global application of IFRS could be improved to narrow diversity. In this area, the Staff believes that the financial reporting community, including the SEC, can be a constructive and helpful influence on the consistent application and enforcement of IFRS.
Next I’ll turn to the second area of the Work Plan: Independent Standard Setting for Benefit of Investors. The Final Staff Report notes the Staff’s view that the overall design and governance of the IFRS Foundation appears to have a reasonable balance of providing oversight of the IASB while also recognizing and supporting the IASB’s independence. However, when thinking about U.S. investors and the U.S. capital markets, the Staff believes it may be necessary to put in place mechanisms specifically to protect the US capital markets - such as by maintaining an active FASB to endorse IFRSs.
And on the issue of national standard setters (such as the FASB), the Final Staff Report notes that the IASB interacts with national standard setters as part of its current process of setting standards, and has a significant challenge in terms of needing to understand the intricacies of a number of distinct domestic reporting and regulatory systems in which IFRS is applied. The Staff’s review found that the IASB could consider greater reliance on national standard setters to assist with individual projects, perform outreach and identify areas where diversity in practice could be narrowed. The IFRS Foundation recently issued an Invitation to Comment on its proposal to establish an Accounting Standards Advisory Forum that would formalize the IASB’s engagement with national standard setters. The IFRS Foundation is requesting comments on its proposal by December 17, 2012, as it aims to set up the new forum early in 2013.
Another issue in this section of the Work Plan is the status of the IASB’s funding. The Staff notes in the Final Staff Report that the IFRS Foundation has made progress in developing a funding mechanism that is broad-based, compelling, open-ended and country-specific. However, the IFRS Foundation has no ability to require or compel funding, and has not been successful in obtaining the funding for the portion of the IASB budget that is allocated to the U.S. The Staff notes that its most significant concern about the funding approach is the continued reliance of the IFRS Foundation on voluntary contributions from the large public accounting firms.
Now I’ll move on to the third area of the Work Plan: Investor Understanding. During its outreach process under the Work Plan, the Staff found that there is a wide spectrum of investor knowledge of IFRS. Many investors are not directly active participants in the accounting standard-setting process, and many tend to rely on issuers, accounting firms, and others to understand changes to accounting standards. As noted in the Final Staff Report, the Staff will continue to consider how to improve investor education and engagement in the process. The Staff also found during its outreach that investors are interested in transition issues associated with incorporating IFRS into the U.S. financial reporting system, should the Commission decide to do so. Specifically, investors are interested in the length of the transition period, the method of transition, and clear disclosures from issuers in the years leading up to any effective date.
The fourth area of the Work Plan addressed the Impact on the Regulatory Environment. The Staff conducted outreach to consider the impact of an incorporation of IFRS on industry regulators, and the Staff found that the impact is largely dependent on the method by which IFRS would be incorporated. I mentioned earlier that references to U.S. GAAP are embedded throughout U.S. laws, regulations and private contracts. Industry regulators expressed the view that incorporating the content of IFRS into U.S. GAAP, rather than looking directly to IFRS, may address or mitigate many concerns expressed by regulators regarding this issue. Several regulators also highlighted that if certain industry-specific standards under U.S. GAAP were to be lost, with no equivalent standard under IFRS, this would impair their regulatory regime and provide less meaningful information to investors. One example cited is the accounting for rate-regulated assets and liabilities.
Incorporation of IFRS into the U.S. system, if it was to occur, is not expected to significantly impact auditors and audit regulation. The Staff observed that the PCAOB has tried to write standards in a manner that is neutral with respect to the accounting framework used to prepare financial statements. Based on PCAOB inspections to date, the PCAOB has not identified auditing issues unique to IFRS; however, as PCAOB inspections of audits of financial statements prepared on the basis of IFRS increase, unique audit issues could be identified in the future.
The fifth area of the Work Plan is the Impact on Issuers. The Final Staff Report discusses the Staff’s consideration of several issues of importance to issuers, including accounting systems, contractual arrangements, corporate governance, and accounting for litigation contingencies, among others. I’ll touch on a few general points here. It’s clear that incorporation of IFRS into the U.S. system would significantly affect preparers of financial statements. There is already significant concern in the system about the existing pace of change with joint projects between the FASB and the IASB expected to be completed in the next year or two. The Staff’s outreach found that the manner in which the incorporation of IFRS would occur, if a decision were made to do so, significantly impacts issuers’ views. More issuers prefer a managed transition over time effected by the FASB incorporating IFRS into U.S. GAAP, although that view was not unanimous.
The sixth and final section of the Work Plan is Human Capital Readiness. This section specifically focused on education and training, and auditor capacity. The Staff found that the level of preparedness for a transition to IFRS varies across companies and audit firms. The Staff also noted that companies and audit firms will have to develop further expertise in-house or acquire additional human capital resources to incorporate IFRS. The demands on human capital will be influenced by the method of transition to IFRS and the length of any transition period.
As Jim Kroeker remarked last year at this conference: So where does that leave us?
Let’s keep in mind a few things: The Work Plan was designed to provide information to the Commission; it did not set out to answer the fundamental question of whether transitioning to IFRS is in the best interests of the U.S. securities markets generally and U.S. investors specifically. An introductory note from the Commission included in the Final Staff Report makes clear that publication of the Final Staff Report does not imply — and should not be construed to imply — that the Commission has made any policy decision as to whether IFRS should be incorporated into the financial reporting system for U.S. issuers, or how any such incorporation, if it were to occur, should be implemented. Additional analysis and consideration is necessary on the threshold policy question before any decision by the Commission on the issue can occur.
I want to mention that we’ve received a handful of comment letters on the Final Staff Report. We will continue to consider comments submitted, subject to any further guidance from the Commission on next steps forward. If you haven’t already, I encourage you to spend some time, perhaps over the holidays, reading our Final Staff Report.
Thank you for your attention today.