SEC Report Backs Away from Convergence

The commission's staff expresses hesitation about merging international standards and U.S. GAAP.
Kathy HoffelderSeptember 1, 2012

The final staff report from the Securities and Exchange Commission on global accounting-standard convergence could make that goal a little more remote.

In its 137-page report released in July, the SEC considered all possible ways to align international financial reporting standards (IFRS), which are set by the International Accounting Standards Board, with U.S. generally accepted accounting principles. But the report made it clear that putting the IASB in the driver’s seat would be out of the question.

The report pushes the convergence effort back a few steps, says Keith Peterka, shareholder with accounting firm Mayer Hoffman McCann. That might well be a good thing, he adds, because enforcing one uniform global accounting standard could be daunting. The SEC is the “gold standard for enforcement mechanism,” he says, and matching that level globally could be difficult.

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The report came as a surprise to financial-reporting mavens who expected the SEC staff to move further toward convergence. Many CFOs and accounting professionals, however, still expect the SEC to come out with an Americanized version of IFRS to coexist with GAAP. Not having the United States on board right now, though, puts the global accounting standards effort in question. “The U.S. is obviously such an important economy. It is very difficult to hold out that you truly have global standards without the U.S. being a participant,” says Stephen Chipman, CEO of Grant Thornton.

The SEC staff began the onerous task of studying whether or not to move from U.S. GAAP to IFRS in 2010, while the Financial Accounting Standards Board and the IASB have been working toward accounting convergence since 2002.

In its report, the SEC staff cited several areas in which the accounting approaches diverge, such as impairment models for property, plant, and equipment, as well as inventory and intangible assets. The significant expense that both large and small companies could incur in any switch from GAAP to IFRS was also a sticking point. “Many of the issuers indicated that the costs of full IFRS adoption could easily be among the most significant costs ever required from an accounting perspective,” the staff noted.

Some observers were unhappy with the reasons cited in the report for caution on convergence. Michel Prada, chairman of the trustees of the IFRS Foundation, regretted that the SEC did not make a recommendation about IFRS adoption, saying the report only adds to the uncertainty. “For the benefit of both U.S. and international stakeholders, the Trustees look forward to the SEC resolving the continued uncertainty regarding the U.S.’s commitment to global accounting standards,” he said in a statement.

The SEC staff noted that the commission has not actually approved the report. But it will undoubtedly be a key tool for making the decision about whether the U.S. should adopt international accounting standards. A formal SEC decision could still come at any time, or it could take months, since the SEC has not released a formal time frame for making a recommendation on IFRS.

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