Idea of U.S. Companies Adopting IFRS is Over

As I was drinking my triple espresso in the cafeteria and reading yesterday’s article on called SEC Staff Pulls Back on Accounting Convergence, I couldn’t believe my eyes. The long-standing issue of converging U.S. GAAP and IFRS was being put on the back-burner, and the FASB wanted to be put in the driver’s seat, instead of IASB.

My first thought was surprise; the SEC Staff seemed so negative. I thought the U.S. was moving forward slowly, but surely, on the path to convergence.

My second thought was: “I wonder what my buddy Seamus Moran, our resident accounting expert, would say about this?”

Then, lo and behold, I look up and see Seamus Moran standing in front of me.

Me: “Hi, Seamus, it seems like the SEC is no longer kicking the can down the IFRS road; they’ve shelved it.”

Here’s what Seamus had to say:

That’s right, Theresa. Last Friday on July 13th the SEC Staff published a report to the SEC Board in which they indicated a reluctance to simply adopt IFRS. In other words, there’s no final decision on whether IFRS should be incorporated into the U.S. financial reporting system and if it were, how it should be implemented.

If the Board of the SEC accepts their Staff’s recommendations, it is anticipated that each IAS and IFRS statement will be “exposed” by the FASB for review by the U.S. GAAP community before it chooses to adopt it to become U.S. GAAP. In this way, FASB will be responsible for the quality of the IFRS standards.

The SEC may adopt another approach, but they have not signaled any to the financial community.  The IASB are hoping for a more positive response.  The issue of quality worldwide accounting standards is a matter of economic and public policy, so many views will be considered.

Many countries have adopted IFRS using this process – the national standard setter works with the IASB, then exposes the standard domestically, and finally adopts it if it meets domestic general acceptance.

What Happens If the Public Do Not “Generally” Accept the Text of an Existing IFRS Principle?

It is back to the drawing board at both the national standard setter (FASB) and international (IASB) levels. In the end, it makes for well thought-out standards, addressing issues across many countries.

However, this does NOT impact the following three sets of major changes that are currently in process for both FASB and IASB:

  • Revenue Recognition
  • Lease Accounting
  • Reporting Activities of Banks

On the topic of Rev Rec, the comment period for the Revenue Recognition Exposures Drafts was completed earlier this year. The drafts were exposed by both the FASB and the IASB under both sets of review conventions. The accounting principle, whose text is shared by both U.S. GAAP and IFRS, is expected to be published next year.

For Lease Accounting, it is due for re-exposure later this year. The Boards have reached consensus on what they believe is generally acceptable with the expectation that a final standard will be published late next year.

Neither standard will be effective before 2015, probably more like 2016, but both have retroactive reporting we can anticipate to begin a year after publication.

Financial reporting of the banking industry continues to be an issue with regulators, governments, Basel III, and both the FASB and IASB. There have been advances in the consensus on financial reporting, but the difficulty in evaluating capital adequacy and safety and contrasting that to the investors’ view remains unresolved.

What Does this Mean for U.S. Company Filers?

In short, U.S. public company filers will not be announcing that they are an IFRS company on a given date. No U.S. company will say “in effect March 31, 20XX, we are an IFRS company.” However, they will be up taking “Revenue from Contracts with Customers” and “Lease Accounting” during the next few years under U.S. GAAP. And after that, you can expect that U.S. companies will adopt common standards with their overseas competitors and peers as FASB exposes the IAS and IFRS statements as ASUs (Accounting Standards Updates) to the U.S. GAAP codification.

What Does this Mean for Non-U.S. Filers?

Non U.S. filers that already use IFRS can expect to uptake “Revenue From Contracts with Customers” and “Lease Accounting” during the next few years as IFRS, and then uptake revisions to IFRS as the Boards work through elements of the existing IFRS literature that fail to meet general acceptance in the U.S.

Any Upside to This?

It means that the SEC, the Government and other authorities will hopefully work together to ensure an even application of the IFRS standards to avoid things like the following:

  • China IFRS versus U.S. IFRS or EU IFRS versus U.S. IFRS
  • Old US GAAP rules as a crutch for IFRS in the U.S. when they are not used overseas, holding ourselves to a more particular standard
  • Particular instances of IFRS, such as the EU carve-out on financial reporting by banks

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