Views on improving the integrity of global capital markets
31 August 2011

CFA Institute Weighs in: Premature to Choose Method of Incorporating IFRS into U.S. Financial Reporting System

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:   

1.) Countries Should Maintain Endorsement Authority and Endorsement Criteria Should Be Pre-Established – An endorsement- based incorporation approach would permit the U.S. to retain its sovereign right to set accounting standards in the U.S., which may work to protect investor interests; however, such endorsement criteria should be pre-established and not utilized to fix quality concerns.
2.) Support Standard-by-Standard Review but Prefer Single Adoption Date – Though we are supportive of a standard-by-standard review, our membership is divided on the matter of a single or staged adoption date. We suggest that, when the standards review is complete, there is a single adoption date for all reviewed standards. This will create initial discontinuity, but we believe that it is preferable to a period of ongoing discontinuity.

3.) Proposed Transition Creates Significant Information Discontinuity for Investors – We believe the proposed transition suggests a significant period of information discontinuity and appears more preparer than investor focused, both due to the lack of comparability which will be generated and the suggestion that all new standards be incorporated prospectively. 

4.) Strongly Oppose Prospective Adoption – We are soundly against prospective adoption of standards without providing comparative information, which is essential for investor analysis. 

5.) FASB and SEC Should Retain a Key Role – Our view is that the FASB and SEC must maintain a significant role in the standard-setting process and be sufficiently funded to attract and retain quality personnel.

6.) Doubtful That Objective of U.S. GAAP Being Equivalent to IFRS Will Be Achieved – We are unconvinced that the equivalence of IFRS and U.S. GAAP will be achieved in the near term given the possible approach. We believe the term U.S. GAAP should be retained.     



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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

About the Author(s)
Sandy Peters, CPA, CFA

Sandy Peters, CFA, is head of financial reporting policy and serves as spokesperson for CFA Institute to key financial reporting standard setters including the IASB, FASB, and the US Securities and Exchange Commission. She holds the Certified Public Accountant (CPA) designation.

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