Peeling away financial reporting issues one layer at a time

SEC Staff Report on IFRS Roadmap: The Public Deserves to Know More

Last February the SEC announced, that their IFRS Roadmap had morphed into a "staff work plan." The staff was supposed to publish its first progress report sometime in October, and wouldn't you know, it was posted to the SEC's website on the last workday of the month.

It's appalling how little the SEC staff has accomplished over the ensuing eight months. If I were the SEC's 'thesis adviser', I would be torn between two painful conclusions: this progress report was a rush job from a student with an attitude problem; and/or, she is just not capable of getting the job done.

As for the SEC, I'm betting on the rush job scenario. That fits with the gestalt of recent IFRS developments:

  • The February announcement from the SEC, with barely a tip of the hat to the overwhelmingly negative feedback from virtually everyone except the Big Four and a few mega corporations.
  • The putative resignation of FASB Chair Bob Herz, and the opportunity FAF created for itself to stack the FASB to its liking;
  • The rush to judgment on 19 major projects by the FASB, and now the sudden deferral of four of them without any serious thought given as to the implications;
  • The progress report itself, which contains very little information regarding actual progress on the key factors that the SEC should be considering.

Is This the Level of Disclosure the SEC would Accept from an Issuer?

Let's start with a critical question the staff is not asking: Why are we working on convergence with IFRS in the middle of the worst economy we will likely ever see? The scuttlebutt I heard while attending a financial reporting conference this week is that Canadians were not happy about the conversion costs they were forced to incur for little perceived benefit. First-time costs ran as high as $1,000,000 for even small companies. That's money that could have been better spent on marketing instead of accounting, don't ya think?

In the U.S., we also need to ask, and the SEC is not, whether contemplation of a fundamental change in financial reporting policies is the best use of scarce resources at the SEC, FASB, and especially by private enterprise. Even after the deferral of four projects, the FASB is asking preparers to provide their comments to the FASB on 15 major convergence proposals, which they aim to finalize by June 15, 2011 just to keep IFRS convergence on track. Separate and apart from the questionable assumption that high quality standards can come from accelerating projects that historically have taken 5 to 15 years to resolve, is this the best use of executive resources in these trying times? Absolutely not: too many companies need that money for R&D or marketing.

As to the questions that are being asked, there are about a zillion of them with vague indications as to how they will be addressed between now and June 2011. Here is a typical example:

"The Staff intends to explore the extent to which the IASB promotes the pre-eminence of investor views. For example, the Staff will review the IASB's practices, as compared to the requirements detailed in the Constitution, Handbook, and other relevant IFRS Foundation and IASB documents and constituent expectations, to assess the IASB's focus on the pre-eminence of investor views." [italics supplied]

Why, after eight months, has none of this work been done yet? Why does the SEC presume that mere examples of their plans and the factors they are considering constitute a sufficient description of its processes?

The public deserves reasonably complete descriptions of everything of which the staff is aware that is reasonably likely to affect future SEC policies on IFRS. To borrow a phrase from the SEC's own interpretive guidance to issuers (on MD&A), these progress reports are an opportunity for the public to see the IFRS project "through the eyes" of the SEC staff. But, instead of concise tables and bulleted lists – the stuff the SEC wants to see from issuers – we have only general narratives of peripheral issues, which skirt the two key issues: whether IFRS can be better than GAAP by June 2011; and whether the IASB is the most appropriate standard setter for serving the interests of U.S. investors.

As regards to the quality of IFRS, the staff reasonably sees a two-pronged approach to this question: (1) whether the current convergence projects will pass muster; and (2) whether the other differences between IFRS and GAAP are suitable for use by U.S. public companies. But, even though the staff acknowledges that IFRS quality is the most relevant consideration for any future determination as to the status of IFRS by the SEC, there is not a single indication as to where their answer might lie. Here's a quick list of items that are indisputably major, and that the staff must have been thinking about for years and years already:

  • Impairment and recovery of PP&E, goodwill and inventory; for each of these, IFRS is substantially differ;
  • Restructuring charge accruals;
  • IFRS option to not recognize minority interest portion of goodwill in acquisitions;
  • Differences in consolidation rules – both voting- and variable interest entities;
  • Presentation of actuarial gains and losses on pension plans in other comprehensive income;
  • Differences in accounting for graded vesting plans;
  • Differences in definitions of "hedging" and "derivative";
  • Capitalization of development costs in IFRS;
  • No uncertain tax position disclosure in IFRS;
  • Differences in accounting for loyalty programs;
  • Provisions for obligations that are not legally required;
  • Fair value option for classes of PP&E;

For each of these differences between GAAP and IFRS, not to mention all of the additional interpretive guidance in GAAP that is absent in IFRS, the public is entitled to know how the SEC staff sees their future disposition – or how their disposition will be determined. I don't think that is too much too expect after eight months – and years of thinking before that.

Notwithstanding my strong views against the SEC's policies towards IFRS adoption – or convergence, or even acceptance from foreign issuers without reconciliation – I tried my best to find a silver lining in the February announcement that the SEC, despite all the negative feedback, has continued to be committed to working hand-in-hand with the IASB. At least, I wrote, a statement with "convergence" as opposed to "adoption" in its title gave me hope that the SEC was no longer fixated on replacing the FASB with the IASB as the principal standards setter. I also wrote that I felt the SEC did a pretty thorough job of laying out the issues that will determine whether IFRS adoption is even feasible or can be accomplished at a reasonable and predictable cost.

Now, however, the poor quality of the staff's first report has me wondering, and worrying that thoroughness, rigor and reason will not be the determinants of the SEC's future policies on IFRS.


  1. Reply IFRS November 22, 2010

    Could you please guide regarding the difference between convergence with IFRS and Adoption of IFRS. Are these terms different or can they be used interchangabiy

  2. Reply Tom Selling November 23, 2010

    I use the term “IFRS adoption” to mean that U.S. companies would have to comply with IFRSs as issued by the IASB. Convergence would mean that U.S. companies would still have to comply with U.S. GAAP, but U.S. GAAP would become more similar to IFRSs.
    I hope this helps.

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