Wednesday, August 1, 2012

IFRS and US GAAP - Towards global accounting standards?

On July 13, 2007, the SEC Office of the Chief Accountant has published a staff report on the incorporation of IFRS standards into the financial reporting system for US issuers.

This report has been received negatively by the financial press. On July 15, the Financial Times wrote:

“SEC staff issued a non-committal paper on the subject on Friday that gave no clue as to when an already-delayed decision on possible IFRS incorporation would be taken by the US markets regulator.”

Michel Prada, chairman of IFRS Foundation, is cited as follows:

“While recognizing the right of the SEC to determine the method and timing for incorporation of IFRS in the United States, we regret that the staff report is not accompanied by a recommended action plan for the SEC.”

What is the the report about? As will be explained below, the report contains interesting information about the differences between IFRS and US GAAP and the consequences of an IFRS adoption in the US. However, it does not define what the intentions of the SEC in this matter are and what it intends to do about it in the future.

The report starts off by saying what it is not about:

  • The staff report does not imply that the SEC has taken a political decision about a possible incorporation of IFRS accounting rules in the US financial reporting system.
  • It is also not about the question of how to incorporate IFRS into GAAP.

Criticisms of IFRS

In the report, the SEC staff raises the following main criticisms against the IFRS accounting system that might cause problem when implementing it in the US:

  • As of today, the US internal support for the IFRS standard seems to be low as regards domestic reporting purposes.
  • The IFRS Interpretations Committee should carry out adequate and timely maintenance of its accounting standards in form of providing faster interpretation support and authoritative guidance.
  • The IASB should consider greater reliance on national standard setters.
  • To allow a comparable financial analysis in different jurisdictions, the IFRS accounting standards must be applied and enforced on a consistent basis which is not entirely the case today.
  • As a private not-for-profit organization, the IFRS foundation might have problems to ensure its financing. The SEC staff mostly criticizes IASB's continued reliance on funding by the large public accounting firms.
  • Investor education on IFRS accounting issues and changes in the accounting standards are not uniform and, all too often, investors rely on the large public accounting firms to understand recent changes to accounting standards.
  • The SEC staff has reviewed financial statements prepared under IFRS and observed that, although being overall compliant with IFRS, the issuers could enhance the quality of their application of the IFRS rules namely regarding transparency and clarity of the financial statements. In addition, the diversity in the application of IFRS can present challenges to the comparability of financial statements across countries and industries.
  • IFRS provides only limited guidance for certain topical areas, such as accounting for several common control transactions, recapitalization transactions, reorganizations, acquisitions of minority shares not resulting in a change of control and similar transactions, and the push down of a new accounting basis in an entity’s separate financial statements.
  • In addition, IFRS lacks regulation of specific industries, such as those related to utilities, insurance, extractive activities, and investment companies.
  • The application of IFRS accounting principles should be more transparent.
  • Compared to US GAAP, the IFRS accounting guidance is less detailed and prescriptive.
  • Large accounting organizations are structured as networks of independent member firms. As a consequence, individual firms develop viewpoints on IFRS interpretation issues that might lack internal coordination. Thus, there is a possibility of those firms reaching differing conclusions.
  • Each IFRS jurisdiction might contain different managers’ reporting incentives, regulatory enforcement environment, and auditing regulation that can significantly affect the comparability of financial reports under IFRS.

To achieve a more consistent enforcement of IFRS financial statements, the SEC staff suggests installing the following mechanisms:

  • Database of previous IFRS member decisions;
  • Periodic conference calls with IFRS members;
  • Implication of members in the IFRS legislative process through consultative joint comment letters.

In addition to the above criticisms, the SEC staff sticks to some additional issues that might conflict with an IFRS adoption in the US:

  • Countries usually adopt IFRS only indirectly by incorporating it into local legislation. This can trigger inconsistencies in the adoption and subsequent application of IFRS.
  • Full adoption of IFRS may cause significant costs for US companies as well as confusion for investors in US securities.
  • An adoption of IFRS would need substantial legal work on the existing US GAAP regulation and, therefore, lead to substantial legal costs.
  • Sufficient time must be given to US investors for a transition from US GAAP to IFRS as they have not developed sufficient IFRS knowledge yet.
  • Even though they are not legally bound to prepare financial statement under US GAAP, many private US firms use US GAAP in practice. Those rather small companies will be particularly hit by a possible introduction of IFRS as they usually don't have the internal capacities to deal with such exceptional project work.
  • Current contracts of US companies refer extensively to US GAAP provisions. Therefore, an introduction of IFRS would lead to high legal costs for reviewing and renegotiating existing contracts.


A very interesting part of the report is the SEC staff's comparative analysis of IFRS / US GAAP fundamental and minor differences:

Fundamental differences:

The SEC staff has observed fundamental differences in the following areas:

Minor differences

Somewhat minor differences have been identified in the following areas:

  • Business combinations: Certain differences exist in the recognition and measurement of specific transactions (non-controlling interests, contingent consideration, and common control transactions).
  • Accounting for debt in specific industries is more precisely regulated under US GAAP than it is under IFRS.
  • Share-based compensation: The scope of application of the standards differ and, in addition, US GAAP contains more illustrative and application guidance than IFRS does.
  • Compensation components other than share-based compensation
  • Earnings per share

IASB’s Governance Structure

The SEC staff report goes on describing IASB's three-tier governance structure:

  • The IASB is a private standard-setting body that is responsible for the development of IFRS.
  • The IFRS Foundation oversees the IASB.
  • The Monitoring Board oversees the IFRS Foundation.

Overall, the staff report acknowledges that the current IFRS regulation setting standard serves the organization pretty well and achieves a good balance between the needs of public accountability and the independence of IASB’s standard-setting process.

Some isolated criticisms of the governance structure pertain to

  • the need for greater clarification and definition of the respective roles of the IFRS governmental institutions;
  • removal of any confusion to ensure greater transparency;
  • the reporting structure for post-implementation reviews of IFRS which should involve IFRS Foundation Trustees directly.

The section on the IASB governance structure is very detailed. However, I am missing more concrete conclusions in this section as well as an appraisal as to how this governance structure could fit / not fit adoption criteria from an US GAAP standpoint.

IFRS Funding Approach

In the staff report, the SEC outlines the major IFRS funding maxims, e.g. broad-based, compelling, open-ended, and country- or jurisdiction-specific.

These characteristics seem to be met: As a matter of fact, IFRS funding relies on

  • the donor’s long-term commitment;
  • public sponsorship, excluding any direct or implicit governmental or regulatory support;
  • flexibility of funding schemes from one jurisdiction to the next;
  • proportional commitments of the major economies of the world depending on the individual GDP level;
  • publicly accountable funding schemes.

The SEC only criticizes the fact that the IFRS Foundation continues to rely significantly on voluntary contributions from the large accounting firms.

IASB Standard-Setting Process

In its report, the SEC staff focused on the following 3 components of IASB’s standard-setting process:

Impact of IFRS on the US regulatory environment

The SEC staff analyzes the impact of an IFRS introduction in the US in great detail. In summary, it holds that

  • the impact would be significant;
  • , unless IFRS would be introduced in the US indirectly through incorporation in US GAAP, its introduction would lead to significant work (and costs) for amending references in state laws and regulations;
  • the US GAAP industry-specific standards are important for specific US regulators;
  • ongoing changes in US GAAP could cross the introduction of IFRS, leading to investors' confusion.

As a general comment, I think that the SEC staff report is very informative as regards the major differences between IFRS and US GAAP as well as the practical consequences of an IFRS introduction in the US. However, I miss a genuine debate on the question whether to implement or not to implement IFRS in the US. As a matter of fact, the SEC writes a lot about the consequences and costs of the introduction. However, I cannot find any substantial argument of the SEC against the adoption itself. The question then remains: Why is there no specific time table for the introduction of IFRS in the US?


  • SEC Office of the Chief Accountant – Final Staff Report on the Incorporation of IFRS into GAAP dated July 13, 2012
  • “IASB hits out at SEC stance on rules” in FT dated July 15, 2012