Remarks before the 2015 Baruch College Financial Reporting Conference
James Schnurr, Chief Accountant
May 7, 2015
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 upon the staff of the Commission.
Good morning and thank you for the introduction. I am happy to be with you today and it is my pleasure to share the stage with Jim Kroeker, who certainly has a unique perspective having served as the SEC Chief Accountant prior to becoming the Vice Chairman of the FASB. As I have previously stated, when I arrived at the Commission last October, Chair White asked me to make a recommendation to her as to what action, if any, the Commission should take regarding the further incorporation of IFRS into the U.S. capital markets. In December, I gave a speech that mentioned a potential alternative of allowing domestic issuers to provide IFRS-based information as a supplement to U.S. GAAP financial statements without requiring reconciliation. I thought it would be helpful to spend a few minutes this morning providing you with a brief update on some of the recent activities of OCA, as well as some of the current thinking with respect to convergence and IFRS.
Before continuing, let me pause here and remind you that the views expressed today are my own and not necessarily those of the Commission, the individual Commissioners, or other colleagues on the Commission staff.
Subsequent to my comments at the AICPA conference in December, the staff has heard reactions from a number of different constituents: preparers, investors, auditors, regulators and standard-setters. In many cases, this was the first time these constituents had discussed their views on IFRS with the staff since the completion of the work plan in 2012. I can tell you that I found the exercise helpful, particularly since I was not at the Commission during the staff’s previous work on this issue. From my vantage point, I found the discussions helpful, and I can confirm that many of the observations I noted in December about U.S. constituents’ views on IFRS appear to continue to exist today. Some of the key questions raised are as follows:
- Is the Commission still committed to the objective of a single set of high–quality, globally accepted accounting standards?
- If the Commission moves forward with proposed rulemaking to allow domestic issuers to include IFRS-based information without reconciliation, would that rulemaking be the Commission’s final word on IFRS with respect to domestic issuers?
- Why would a company spend the time and money to provide IFRS-based information on a voluntary basis?
- What are the benefits of providing this information?
Some of the key themes we heard from our discussions were as follows:
- There is virtually no support to have the SEC mandate IFRS for all registrants.
- There is little support for the SEC to provide an option allowing domestic companies to prepare their financial statements under IFRS.
- There is continued support for the objective of a single set of high–quality, globally accepted accounting standards.
My goal is to deliver on my commitment to Chair White in the near term. The staff is currently developing a recommendation, and I am hopeful that we will be able to provide some clarity to investors.
Similarities between IFRS and U.S. GAAP
Of course, when the topic of IFRS for domestic issuers is raised, the discussion seems to quickly transition to convergence, or lack thereof, often with an adversarial “U.S. GAAP versus IFRS” tone. Conversations on the topic typically highlight the differences and shortfalls in the efforts towards convergence in an attempt to suggest the two sets of standards will never be able to achieve uniformity. For example, we often read news articles that focus on the opposing positions of the FASB and IASB in projects, such as leasing and credit impairment, but rarely do we see headlines that highlight where the standards have converged. While I certainly appreciate the importance of highlighting the differences, especially with respect to any conversation about convergence, I think it is important to also acknowledge the significant contributions the boards have made with respect to the objective of a single set of high-quality, globally accepted accounting standards.
Let me highlight some of the key areas of the accounting standards that are converged or substantially converged.
With some minor exceptions, business combinations and consolidations are converged. In addition, the boards achieved a significant milestone with the issuance of the new revenue recognition standard, converging extensive, industry specific guidance under U.S. GAAP with less prescriptive guidance in IFRS.
The leasing and credit impairment joint projects are in late stages, and, while the differences are often highlighted, the boards were able to achieve convergence in many significant respects. With leasing, the key objective was to bring most leases on the balance sheet. The standards under development would meet this objective. The boards are also aligned on how to determine what constitutes a lease. With credit impairment, while the IASB is limiting the measurement of expected losses on loans with no indication of credit impairment to the next 12 months, the lifetime expected credit loss model will be used to measure all expected losses under the FASB proposal as well as for all loans impacted by credit impairment under IFRS 9. Under both models, the definition of expected credit losses is an estimate of all contractual cash flows not expected to be collected from a recognized financial asset or group of financial assets. And while differences remain, it appears the differences in the leasing and credit impairment standards are a result of different standard setting processes that address the needs of their respective constituents.
Generally, convergence efforts have brought standards closer together in the last decade. I think back to the issuance of FAS 123R, the guidance for share-based payments. One of the objectives of the guidance for share-based payments was not only to bring domestic consistency to how we account for share-based payment awards, but also to converge with the IASB, which issued IFRS 2 around the same time.
I recognize there are some people who believe the spirit of cooperation has run its course and that we are starting to observe the boards move in different directions. However, some of the standard setting agenda items the FASB is currently addressing contradict the idea that cooperation has ended. While the FASB has certainly started adding more “FASB only” projects to its standard setting agenda, I would suggest the FASB still very much considers IFRS in setting its agenda and during its deliberations. For example, in the area of income taxes, the FASB proposed to eliminate the prohibition on recognizing current and deferred taxes for an intra-entity transfer of assets. Under the proposal, an entity would be required to recognize current and deferred income taxes when the transfer occurs. The proposed update would further align recognition of income taxes with IFRS.
Not only is it important to strive for consistency in the accounting standards, but it is equally important to have consistent implementation and application of our converged standards. I am pleased by the recent efforts of the Revenue TRG, and I believe the TRG – along with both boards – will continue to play a key role toward consistent implementation and application of converged standards. Although there were initially a limited number of issues submitted to the TRG, it is fair to say both the quantity and quality of issues being raised has increased, and I am pleased to observe that a number of constituents – preparers, auditors, and AICPA working groups – have contributed to ensuring that issues have been elevated with the appropriate prioritization. Finally, I have been encouraged by the boards’ willingness to consider the issues raised, and where necessary, further deliberate and amend the standard to provide greater clarity for all stakeholders.
I believe the creation of the TRG to assist with the revenue standard is beneficial to the boards, preparers, auditors, investors and regulators. I likewise believe the creation of a transition resource group for credit impairment could also be useful. As you know, the IASB has already issued its standard on credit impairment and has developed a transition resource group to discuss issues that have been raised. While the FASB is continuing to refine their proposed credit impairment model, I understand that the FASB is in the process of forming a transition resource group to address the issues expected to arise as a result of this principle-based standard. As this standard will have the largest impact on banks and other financial institutions holding significant financial assets, I believe that it is very important for preparers, auditors, regulators and the standard setters to work together to address the implementation issues. Given that estimating lifetime losses will require the exercise of significant judgment and will likely result in significant measurement uncertainty, I expect that there will be important audit issues that need to be addressed, and it will be important for the PCAOB to participate as a key observer of the TRG for this standard in order to ensure preparers, auditors and regulators are all aware of how best to address these audit issues.
Let me briefly recap and then turn our collective attention to the future.
- While differences still exist, significant progress has been made by the FASB and IASB and much of IFRS and U.S. GAAP are converged.
- It is critical that the two boards continue to work together toward the objective of a single set of high–quality, globally accepted accounting standards.
- When differences in the standards arise, the boards should monitor the implementation of those standards with the objective of learning from the implementation and re-engaging with each other with the goal of converging to the standard with the highest quality financial reporting outcome.
- With the revenue standard, we have learned that in order to achieve convergence, cooperation is needed even after the standard setting process is complete and to that end, the TRG has been helpful.
While I am optimistic about the future and the prospect of continued collaboration between the FASB and IASB, I am also realistic. The FASB and IASB officially agreed to collaborate in 2002 under the Norwalk Agreement, which set out a common objective of developing a single set of high-quality accounting standards that can be used cross-border for financial reporting. The objective was not only meant to eliminate differences between IFRS and U.S. GAAP whenever possible, but to also achieve convergence in accounting standards that stood the test of time.
Even though some of the joint projects will result in accounting standards with differences, I believe the FASB and IASB have moved forward along the road towards achieving the objective of a single set of high-quality, global accounting standards. By working so closely over the past decade, both the FASB and the IASB understand each other’s constituent base much better. Through that understanding, the boards were able to successfully eliminate differences in many areas of the convergence projects. In doing so, the boards have remained faithful to their respective standard setting processes, while seeking to achieve the common objective set out in the Norwalk Agreement. When the accounting standards diverge, it is generally because the boards followed their respective standard setting processes, listened to their constituents and made decisions that were best for the constituents that they support.
However, the convergence projects are entering the final lap of the race, and constituents are going to be anxious to see how those standards are implemented. Further, stakeholders are interested to see how the boards will interact in the future and how much coordination and cooperation will exist.
It is fair to say the FASB and IASB collaborative relationship is at a critical juncture. How often and what kind of interaction is going to occur after the leasing standard is finalized and issued? What happens to the Norwalk Agreement? Ultimately, how the boards decide to interact in the future is important. I believe that, for the foreseeable future, continued collaboration is the only realistic path to further the objective of a single set of high-quality, global accounting standards. In making my recommendation to Chair White about IFRS, and as the Commission considers how best to resolve or lessen the uncertainty existing today, we will collectively need to consider the best approach forward for the boards to continue their collaboration to support the objective of a single set of high-quality globally accepted accounting standards.
 Financial Accounting Standards Board
 International Financial Reporting Standards
 Generally Accepted Accounting Principles
 Office of the Chief Accountant
 International Accounting Standards Board
 Transition Resource Group
 The Boards subsequently issued the Memorandum of Understanding (“MoU”) in February 2006, provided an update to the MoU in September 2008, and reaffirmed their commitment to convergence and the MoU in June 2010. . See related documents available at http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1351027337773&pf=true.