Remarks before the 2014 AICPA National Conference on Current SEC and PCAOB Developments
Julie A. Erhardt
Deputy Chief Accountant, Office of the Chief Accountant
Dec. 8, 2014
The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues on the staff of the Commission.
Good morning. I am grateful to be in Washington, D.C. today and thus to have the opportunity to speak at this conference. The context for my remarks is a combination of my experiences in carrying out my international responsibilities at the SEC and the comments made earlier this morning by our Chief Accountant, Jim Schnurr, regarding International Financial Reporting Standards, or “IFRS”. Jim said this morning that he is open to continued dialogue regarding whether there should be further incorporation of IFRS into the reporting system for U.S. issuers at this time. I will thus provide some background information and mention other factors that you may wish to consider ahead of continuing this dialogue. Of course my remarks will be my own, and thus not necessarily those of the Commission, the Commissioners, or other members of the SEC staff.
Three Parties: Investors, Issuers, and Securities Regulators
I have organized my comments around three parties who would be affected by potential IFRS alternatives, either the example Jim noted of facilitating potential voluntary disclosure of IFRS-based information or other alternatives. These three parties are U.S. investors, U.S. issuers, and the SEC staff itself. U.S. investors and U.S. issuers, and for that matter the SEC staff, are situated differently than they were in 2004 when the SEC staff first took up the policy matter of whether to recommend to the Commission that it accept IFRS financial statements from foreign private issuers without a reconciliation to U.S. GAAP. I will try to bring this point to life for you with some examples. In doing so I will attempt to show that the policy considerations associated with the potential incorporation of IFRS into the reporting system for U.S. issuers are first, complicated, and second, very different from the previous IFRS considerations for reporting by foreign private issuers.
Let me begin with investors, starting with institutional investors. I have heard anecdotally that institutional investors have progressed over the past ten years to the point where they can and do adjust a company’s IFRS-reported results to produce their proprietary cash flow forecasts. Of course, I understand that they continue to do likewise with financial results reported in U.S. GAAP. So if ten years ago many institutional investors were not knowledgeable about understanding IFRS-based results, I do not think this is the case today at least for investors located outside the U.S. Today’s questions then are perhaps about other matters, such as whether there are important distinctions in how well institutional investors are able to adjust reporting in IFRS versus in U.S. GAAP.
Let me now move to retail investors; specifically I am thinking of those who do read financial statements. My intuition is that over the course of the last ten years the more financially sophisticated retail investors have come across IFRS. So if ten years ago these retail investors had not heard of IFRS, my belief is that now they have heard of it and even on occasion may have seen IFRS-based financial results, and perhaps even tried to compare them to U.S. GAAP-based results. Nonetheless, my intuition is that retail investors are not as comfortable with IFRS as they are with U.S. GAAP. If so, then this would affect whether they could make effective comparisons between the two.
Let me move to issuers, beginning first with the U.S. issuers that have extensive overseas operations. As more and more countries accept IFRS for statutory filings and/or base their national standards on IFRS, I think the incentives and opportunities for accountants outside the U.S. to be proficient in IFRS are increasing while the incentives and opportunities for them to be proficient in U.S. GAAP are decreasing. This may today incentivize multinational U.S. issuers to incorporate IFRS provisions into the overseas portion of their systems of books and records, yet at the same time they need to ensure that they can accumulate the information needed for their U.S. GAAP reporting needs.
Now I will move to U.S. issuers that are the U.S. subsidiaries of companies headquartered overseas. As compared to ten years ago, these U.S. subsidiaries may be incentivized or asked to ensure that the system of books and records for the U.S. operations is also able to accumulate information for the parent company’s IFRS financial reporting needs. Of course, within such a system, management of the U.S. subsidiary would also need to establish processes to develop the U.S. GAAP information for the subsidiary’s own U.S. reporting.
Let me now comment on the more domestically focused U.S. issuers, namely those that neither have extensive overseas operations nor are the U.S. subsidiary of an overseas parent company. I sense that over the past ten years these issuers have become more aware of IFRS, and the management of some of them has commented to the SEC staff about it. Therefore, for some IFRS is no longer solely “something I should check into if I have time.” However, this evolution does not imply that there is either a need or a desire for management of these more domestically focused issuers to prepare IFRS-based financial information.
Lastly, I will make a comment about the SEC staff itself, in particular an aspect of the SEC staff’s work from almost ten years ago on the acceptance of IFRS financial statements from foreign private issuers without reconciliation to U.S. GAAP. My central recollection of that work, besides the outcome of course, is encapsulated in a statement from an older SEC release; one the SEC issued in the early 1980s as part of revising its overall system of disclosure for its foreign private issuers. This 1981 release said, and I quote, “…the investing public in the United States needs the same type of basic information disclosed for an investment decision regardless of whether the issuer is foreign or domestic…” however “… the interests of the public are [also] served by an opportunity to invest in a variety of securities, including foreign securities….”
In practical terms I believe the comments in this quote mean that foreign private issuers may be subject to different disclosure requirements from those of U.S. issuers because effectively in exchange for this differential disclosure U.S. investors are able to achieve international diversity in their investment portfolios by buying and selling securities of foreign companies within the protections of the U.S. capital markets system. As a point of fact I do not think this differential disclosure line of thinking would apply in considering whether to provide an IFRS reporting option to U.S. issuers, although of course other lines of thinking would come into play in considering this.
There are of course other aspects of IFRS that are similar to or differ from ten years ago, but you can discern information about many of these matters from the IFRS Foundation’s materials. Of course one central aspect of any policy matter remains the same; namely the responsibility of the SEC to protect investors, among the other aspects of its mission. With this timeless point let me close my remarks by saying that whether or not you have closely followed IFRS developments for the past ten years I hope you now feel more prepared to engage in meaningful and thoughtful dialogue on both the example Jim mentioned this morning of facilitating potential voluntary supplemental disclosure of IFRS-based information by U.S. issuers, as well as other alternatives. Thank you very much for your attention.
 Integrated Disclosure System for Foreign Private Issuers, Release Nos. 33-6360, 34-18274, 39-677 (Nov. 20, 1981) [46 FR 58511]