As part of the decade-long convergence debate, the.SEC recently offered a hybrid approach as a possible method of incorporating IFRS into the U.S. financial reporting regime.
This approach, colloquially referred to as “condorsement” (as it comprises elements of both the convergence and endorsement processes) includes the following key provisions:
- U.S. GAAP would continue to exist
- FASB and IASB would finish key convergence projects included in 2006 Memorandum of Understanding
- FASB would not undertake major new projects
- FASB would initiate standard-by-standard review to converge existing U.S. GAAP to IFRS
- FASB would develop endorsement mechanism and criteria for newly issued IFRS standards
The condorsement approach is complex, both in the concepts it communicates and its potential implementation, particularly during the transition phase. Our views, outlined in a comment letter to the SEC, sets forth the following:
- Support for Single Set of High-Quality and Investor-Focused Global Standards: We reiterate the support of CFA Institute members for the goal of a single set of high-quality global financial reporting standards. However, our support for IFRS as that single set of standards is predicated on the need for high-quality standards, independence in IASB standard setting, and uniform endorsement and consistent enforcement of IFRS. The two most important conditions — the quality of IFRS and IASB independence — are included in the SEC’s “Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers” as the “characteristics of IFRS.” But the evaluation of these characteristics has yet to be completed. Understanding the SEC’s assessment of these pillars of IFRS is essential to investor support of IFRS adoption/incorporation in the U.S.
- Decision on IFRS Incorporation Is Premature Prior to SEC’s Completion of Work Plan: Until the SEC completes a full analysis of its Work Plan, it is premature for the SEC to consider whether, or how, IFRS should be adopted or incorporated into the U.S. financial reporting regime. Further, we believe the SEC should take the time necessary to complete the Work Plan and not be beholden to a 2011 decision date regarding U.S. incorporation of IFRS.
- Key Observations on SEC Staff Paper: There Is Work to Be Done to Ensure Investors Interests Are Best Served: On the condorsement approach, we made the following observations:
While our membership supports the goal of a single set of high-quality global financial reporting standards, they have told us they expect that an interim step will likely be IFRS as a global reference point, specifically IFRS as interpreted by the SEC in the U.S. We acknowledge that IFRS with regional differences may not result in uniformity; however, it is a step forward in terms of greater comparability if there is transparency regarding regional IFRS differences. That said, we should not abandon the pursuit of a single set of high-quality global financial reporting standards as the ultimate objective.