On 7 July the U.S. SEC sponsored a series of roundtables designed to help determine whether incorporating International Financial Reporting Standards (IFRS) into the U.S. financial reporting system is in the best interest of U.S. investors and markets.
Commentators’ coverage of this event — which featured three separate roundtables representing investors, smaller public companies, and regulators — has been varied, with a range of opinions regarding the views expressed by the participants. Some even voiced the concern that investor participants were stacked by the SEC in favor of those who support incorporating IFRS into the U.S. financial reporting system.
CFA Institute was represented in the roundtable by Gerald I. White, CFA, chair of the Corporate Disclosure Policy Council (CDPC), which addresses issues affecting the quality of financial reporting and disclosure worldwide. White has been a financial analyst and investment adviser for more than 40 years.
The following topics were discussed in the session:
* U.S. investors’ current knowledge of IFRS and preparedness for potential incorporation.
* How and when U.S. investors educate themselves on changes in accounting standards.
* Extent, logistics, and timing necessary to undertake changes to improve investor understanding of IFRS.
* Potential methods of incorporation.
There was limited discussion about the possible methods of incorporating IFRS in the U.S. financial reporting system (i.e., adoption of IFRS, as issued by the International Accounting Standards Board (IASB), or regional/national incorporation of IFRS — either through convergence, endorsement, or some combination). The discussion centered mostly on matters regarding how investors use financial statements, investor education, and who should interpret the principles-based standards.
CFA Institute Support for High-Quality Global Accounting Standards
During his remarks, White pointed out that CFA Institute, an organization with a global membership, is a longtime supporter of a single set of high-quality global accounting standards. This position is backed by a CFA Institute survey conducted in June 2010 in which 94 percent of the respondents worldwide (88 percent of U.S. respondents) supported the objective of a single set of global, high-quality, understandable, and enforceable accounting standards. How to reach that goal is the main challenge, White stressed, adding that the lack of investor representation on the IASB and its governing body at the IFRS Foundation trustee level are among the other challenges being faced.
Interpretation of IFRS
White indicated that, although CFA Institute membership supports a single financial reporting language, the expectation is that ultimately there will be a common financial reporting language, but with different “dialects.” That is, jurisdictions adopting IFRS will interpret and enforce IFRS to suit their own needs. For the U.S., the expectation is that IFRS will be interpreted by the SEC.
To that end, there was considerable discussion regarding the role that various stakeholders, such as regulators and public accounting firms, currently play in interpreting principles-based standards, with White and others suggesting that the SEC consider how IFRS would be interpreted and applied. And rather than leaving the interpretation of the standards to others, such as large public accounting firms and regulatory enforcement actions, the IASB should fund and support a more robust interpretation effort.
White also expressed the view, with regard to the transition to IFRS, that CFA Institute membership strongly favors retrospective application to the prospective approach mentioned in the SEC Staff Paper on IFRS. A retrospective application will improve comparability, which is a cornerstone of decision-useful financial statements.
On the subject of investor knowledge of IFRS, White remarked that CFA Institute has included IFRS in its exam curriculum for many years but that knowledge of IFRS varies, particularly among investors who follow U.S. companies only. He also noted that there is broad, but not deep, knowledge of IFRS by investors so that, even if the SEC allowed additional time for incorporating IFRS, it would not likely boost investor education in the interim, as most analysts focus on accounting changes when they happen, not in advance.
For more information, view the recent CFA Institute webcast on the “SEC’s Release on Incorporating IFRS into the U.S. Financial Reporting System: Investor Considerations.”