|
|
|
|
The Ideas and Analysis Letter: The Sanchez “Take”
June 2011
He Who Hesitates is Lost!
I have been struggling with the following two idioms or phrases.
First, “haste makes waste.” This refers to acting too soon, jumping the gun; doing things before they are well thought out. Usually this causes hardship in the long run in the form of error, inefficiency, waste etc. Acting too quickly can actually slow things down.
Secondly, “he who hesitates is lost.” This refers to those who don’t act on a timely basis; delay making a decision; defer action; postpone, vacillate, waver etc. A person who spends too much time deliberating about what to do, loses the chance to act altogether.
These idioms haunt me when I think about the current situation in the US with regard to International Financial Reporting Standards (IFRS) for financial statements.
Prior “Take” on IFRS
The October 2009 “Sanchez Take” provided an overview of the IFRS situation. It pointed out important differences and similarities between IFRS and US GAAP (generally accepted accounting principles), and it applauded the efforts made at that time by the FASB (Financial Accounting Standards Board) and IASB (International Accounting Standards Board) towards convergence of the two different sets of standards into one global set of standards. It also pointed out some highlights from the then current AICPA survey that showed continued support - albeit waning and less enthusiastic - for global accounting standards.
It also highlighted that at that time US CPAs were looking for SEC leadership in the IFRS adoption approach.
That “Take” also pinpointed some concerns about IFRS adoption, and it warned that a “waffling” or delayed approach or perception of such an approach would not be a good thing for the US accounting profession.
This “Take”
This June 2011 “Take” provides a brief IFRS historical convergence summary, including the latest report (the 5/26/11 SEC staff paper).
IFRS Momentum in U.S.
November 14, 2008 – Road Map
This was a work plan to continue the study of IFRS and its implementation with a goal of voting in 2011 on whether to mandate US conversion to IFRS.
February 24, 2010 – SEC Statement of Support
The SEC announced that it supported convergence in Release 33-9109, “Commission Statement in Support of Convergence and Global Standards.” The SEC supported one set of high quality global Standards and uggested that 2015 would be the earliest possible date for mandatory reporting by US companies under IFRS.
June 2, 2010 – IASB/FASB Joint Statement.
The Joint Statement provided detailed modifications to the strategy and sought more stakeholder input. It also suggested that the time line to mandate IFRS convergence might be extended.
October 29, 2010 – SEC Progress Report
The Progress Report was a statement by the SEC that modifications would not significantly affect the original work plan of November 14, 2008.
May 26, 2011 SEC Staff Paper
On May 26, 2011 the SEC Office of the Chief Accountant issued the staff paper, “Work Plan for Consideration of Incorporating IFRS into the Financial Reporting System for U.S Issuers: Exploring a Possible Method of Incorporation.” In that paper the SEC made it clear that it had not yet made a decision as to whether and, if so, how, to incorporate IFRS into the financial reporting system for the U.S. issuers.
The paper provided background on the ways other countries have dealt with the acceptance of one global standard. The other jurisdictions used or use either of the following two approaches:
· The Convergence Approach
· The Endorsement Approach
1. Convergence ApproachUnder the Convergence Approach, jurisdictions do not adopt IFRS as issued by the IASB or incorporate IFRS into their accounting standards directly. Instead, they maintain their local standards but make efforts to converge those standards with IFRS over time. One example of a country using the Convergence Approach is the People’s Republic of China (“PRC”), which is moving its standards closer to IFRS without incorporating IFRS fully into its national financial reporting framework. The PRC has indicated that it intends to make an effort to eliminate the existing differences between its Accounting Standards for Business Enterprises (“ASBEs”) and IFRS.
2. Endorsement ApproachBased on the SEC staff’s research, a large number of countries [e.g., countries within the European Union (“EU”)] appear to follow a form of the Endorsement Approach. Under this approach, jurisdictions incorporate individual IFRSs into their local standards. Many of these jurisdictions use stated criteria for endorsement, which are designed to protect stakeholders in these jurisdictions. The degree of deviation from IFRS as issued by the IASB can vary under this approach. In some cases, countries appear to adopt standards exactly as issued by the IASB with a high threshold for any country-specific deviation. In other cases, countries translate IFRS as issued by the IASB into their local language. Because words or expressions may not have direct equivalents in some languages, translated versions of IFRS may be understood and applied differently from IFRS as issued by the IASB in English. In still other cases, countries make modifications or additions to individual IFRS upon incorporation for various reasons (e.g., to address the perceived need for country-specific or industry-specific guidance or to incorporate interpretative guidance previously issued by a jurisdiction’s regulator).
The 5/26/11 paper introduced a new approach called the “Condorsement” Approach.
The SEC “Condorsement” Approach
This new SEC approach to incorporation of IFRS into the US Financial System is in essence an Endorsement Approach that would share characteristics of the Convergence Approach.
During the transitional period, the framework would use aspects of the Convergence Approach to address existing differences between IFRS and US GAAP.
The framework would retain a US standard setter (e.g., the FASB) and would facilitate the transition process by incorporating IFRS into U.S. GAAP over some defined period of time (e.g., five to seven years).
At the end of this period, the objective would be that a U.S. issuer compliant with U.S. GAAP should also be able to represent that it is compliant with IFRS as issued by the IASB.
Incorporation of IFRS through the framework would have the objective of achieving the goal of having a single set of high-quality, globally accepted accounting standards, while doing so in a practical manner that could minimize both the cost and effort needed to incorporate IFRS into the financial reporting system for US issuers.
The Condorsement Approach would align the US with other jurisdictions by retaining the national standard setter’s authority to establish accounting standards in the US.
After many years of discussions about one global standard, the SEC in this white paper did very little to explain what “convergence” would look like.
The SEC seems to be concerned that the FASB could become merely a “rubber stamp” for IASB decisions.
The “Condorsement” suggestion in the white paper provides a path towards IFRS in the U.S but it doesn’t necessarily provide a path that will lead to one single set of worldwide accounting standards.
One top European regulator has expressed his view that the white paper is a disappointment. It lacks a clear commitment to US adoption of IFRS. European officials are growing impatient. They believe the SEC needs to simply endorse IFRS. Nearly a decade of convergence efforts has made it clear that additional time and information are no longer needed to make the decision to adopt IFRS.
Where are We Now?
We have come a long way with IFRS adoption. It is already 2011. It is time for adoption.
Some believe the white paper is a step towards a U.S. commitment to IFRS. Others believe it is simply a delaying or stalling tactic.
The mandatory adoption date is still unclear and US companies are still spending time, money and effort struggling with technical issues and administrative issues in order to comply by 2015.
The targeted implementation date is still for 2015 which is misleading because, for a calendar-year-company, the 2015 first year IFRS financial statements must have three years of comparative data. Thus, data will be needed for 2015, 2014 and 2013.
For all practical purposes the IFRS conversion date is really 2013.
Companies would need to start IFRS internal accounting on January 1, 2013. Therefore,2011 and 2012 are preparation years.
Compression of Time Demands Serious Commitment
Time is short. Action is needed.
Because of the three-year reporting requirement upon initial adoption, companies must be prepared to run parallel systems from 2013 to 2015.
Dual reporting may also be needed if the SEC requires supplemental GAAP reporting.
In addition, each company must have in place a proper, full-time “IFRS Person” or “IFRS Team” working toward implementation.
The Corporate Boards, particularly their audit committees, must oversee the transition.
Now is the time to go “full steam ahead” for those who are about to make the effort to convert to IFRS and for the many others who have already been working hard toward convergence.
Now is not the time to develop new questions about whether the US is committed to convergence.
If there is delay at this time, when IFRS is finally adopted it may truly be “too little too late” and we will truly know the meaning of “he who hesitates is lost.”
Paul J. Sanchez CPA, CBA, CFSA President Professional Service Associates
|