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On May 26, 2011 the SEC floated a trial balloon as to an approach to the potential adoption of IFRS by issuing a paper entitled "Exploring a Possible Method of Incorporation". In this document (the "Paper"), the SEC Staff in numerous places indicates that this is only one of several alternatives being considered. Yet, it is easy to see why this approach may ultimately be preferred by the SEC and is reasonably consistent with its historical and current practice. As such, this potential approach should be taken seriously by preparers and users of financial statements.
The Staff calls the approach "Condorsement", which is a combination of the two approaches that have been following in the worldwide adoption of IFRS to this point in time. The "Convergence" approach is followed by countries that converge local standards with IFRS without a firm commitment to incorporate all aspects of IFRS as issued by the International Accounting Standards Board (IASB). Under this approach, the local standard setting body remains in place and considers aspects of IFRS both at initial adoption and thereafter. This approach has been followed by many countries throughout the world, including the People's Republic of China.
The "Endorsement" approach can be viewed as a more full-acceptance approach with few or no exceptions to IFRS, although each country does review and comment on standards as they are proposed for comment in the drafting stage. This approach has been followed by members of the European Union, which are required through membership in the EU to follow international standards.
The elements of the Condorsement approach as considered by the SEC Staff can be summarized as follows:
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Follow the Convergence approach during an undefined, but multi-year, transition period.The approach being followed for current joint FASB/IASB projects, such as revenue recognition, leases and others, would need to be expanded to all aspects of IFRS to prepare for adoption into US GAAP. |
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Endorse IFRS after the transition period and incorporate IFRS into US GAAP. |
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Retain a US standards setter, most likely the FASB, with oversight by the SEC. |
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Participate in and endorse the IFRS standards setting process as the representative of U.S. interests, as opposed to creating new U.S. standards outside the IFRS process. |
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Retain the ability to adjust or add to the IFRS rules. |
Why does this approach have appeal? From the SEC's viewpoint, some aspects of control are retained. It is easy to envision an approach much like the current model under which the SEC overlays additional requirements and guidance on US GAAP in its role as protector of investors. (Of course, these additional SEC requirements would not be applicable to private issuers.) From the view of preparers and users, this approach avoids a "big bang" adoption through the gradual convergence during the transition period. During this period, those affected become cognizant and fluent in the various IFRS rules as they are incrementally converged into US GAAP.
Who will be opposed? Clearly large, international companies that have a near term desire to move to IFRS may be frustrated by the slower pace to convergence. Although not specifically addressed in the Paper, foreign multinationals may also view Condorsement as a less desirable approach. The intent at the endorsement stage indicated above is that an issuer would be able to state that its financial statements have been prepared in accordance with both US GAAP and IFRS. However, an issuer that strictly follows IFRS (such as a foreign issuer) will most likely not be able to claim that it complies with US GAAP. Will that be an issue?
The above are the views of the author. If you would like more information on this topic, please contact your representative at Kieckhafer Schiffer & Co. or Mark Merriman.
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