Incorporating IFRS into the U.S.
Financial Reporting System
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Incorporating IFRS into the U.S. Financial Reporting System
By Jim Pitrat, CPA - Practice Leader, Assurance & Advisory Practice
TUESDAY, JUNE 7, 2011
Summary: In November 2008, the SEC issued a proposed “roadmap” for the potential use of IFRS by U.S. domestic registrants in financial statements filed with the SEC (see Bulletin No. 2008-46 dated November 2008). Although the SEC has not made a decision regarding whether IFRS should be adopted and, if so, the manner in which this should be accomplished, the Office of the Chief Accountant has published the Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers - Exploring a Possible Method of Incorporation. The paper presents one possible approach. APPROACHES USED IN OTHER COUNTRIES
The Staff has identified two approaches used by other countries in adopting IFRS: • Convergence: Countries do not directly adopt IFRS as their accounting standards. They maintain local standards while making efforts to converge such standards, over time. • Endorsement: Countries directly incorporate individual IFRS into their local standards.
The approach presented in the Staff Paper is referred to as “Condorsement,” which includes parts of convergence and endorsement. A brief summary follows: The General Framework 1. Retain a U.S. standard setter (the FASB) 2. Incorporate IFRS into U.S. GAAP over a defined period of time (e.g., five to seven years), with the ultimate goal being that a U.S. issuer compliant with U.S. GAAP would also be able to assert that it is in compliance with IFRS. Role of the FASB The FASB would continue to play an active part in assisting in the development of high-quality globally accepted standards. The FASB would ensure that U.S. interests are addressed in the development of those standards.
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The FASB would 1. 2. 3. 4. Aid in the process of developing IFRS Advance U.S. perspectives in the development of IFRS Incorporate IFRS into U.S. GAAP through endorsement Be a resource assist U.S. constituents to facilitate the understanding and proper application of IFRS for the purpose of promoting continued improvement in the quality of U.S. financial reporting.
The FASB would retain the authority to modify IFRS requirements or add to them, subject to an established protocol, which would include consideration of the public interest and the protection of investors. The FASB would maintain its authority as the national standard setter by issuing application or interpretive guidance in IFRS. The Role of the SEC The SEC would maintain its oversight over the FASB, and the Commission’s responsibility under the federal securities laws to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation would not be affected. The approach would also not dilute the Commission’s ultimate authority to prescribe accounting principles and standards to be followed by U.S. public companies and by other entities providing financial information to the SEC. Suggested Transition The condorsement approach is mainly that of endorsement, however, the transition element includes an element on convergence. Convergence would require the full replacement of existing U.S. GAAP through incorporation of IFRS on a phased-in system. If IFRS is to be incorporated into the U.S. financial reporting system, the FASB would develop a comprehensive transition plan which would require the analysis of individual standards. The FASB evaluation process could include categorization of individual IFRS: • Category 1: IFRS subject to “Memorandum of Understanding” (or MoU) projects • Category 2: IFRS included on the IASB’s current agenda • Category 3: IFRS not on the IASB’s agenda for future standard setting Category 1 projects include those on financial instruments, revenue recognition, leases, the presentation of comprehensive income, fair value measurement, balance sheet netting of derivatives and other financial instruments, and consolidation, all of which the IASB and FASB have committed to complete during 2011. Category 2 projects: U.S. GAAP requirements would continue to apply until the IASB issued new or modified IFRS. At that time, the FASB would review individual IFRS to determine the manner in which such new or revised IFRS should be incorporated into U.S. GAAP . The FASB would perform an assessment of individual Category 3 IFRS for the purpose of determining when and how they should be incorporated into U.S. GAAP The transition plan for Category 3 IFRS would be to allow prospective application whenever . possible.
FOR FURTHER INFORMATION, PLEASE CONTACT ONE OF THE FOLLOWING:
Jim Pitrat: JPitrat@singerlewak.com 310.477.3924 Practice Leader Assurance & Advisory Harmeet Singh: HSingh@singerlewak.com 408.294.3924
Business Combinations Subject Matter Expert
Gale Moore: GMoore@singerlewak.com 949.261.8600
Business Combinations Subject Matter Expert
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