IFRS Roadmap Stretched

The SEC has lengthened its roadmap for adoption of IFRS by U.S. public companies by at least one year. The Commission unanimously approved on Wednesday a new timeline that suggests that 2015 is the earliest possible date for compulsory adoption of IFRS by U.S. public companies.

The SEC also called for more examination of IFRS and a vote in 2011 as to whether to move ahead with required adoption of IFRS.

The new timeline allows companies additional time beyond the previous 2014 deadline in the original road map, set in 2008.

The original road map also would have allowed certain U.S. companies to early adopt IFRS before 2014. The SEC said it is dropping the early adoption option.

The SEC is not excluding the possibility that companies may be permitted to choose between the use of IFRS or U.S. GAAP.

Up for consideration is whether the transition should be optional or mandatory and whether larger companies might transition forst, followed by mid-cap companies, etc.

Issues the SEC will be addressing:

• Whether IFRS is sufficiently developed and consistent in application for use as the single set of accounting standards in the U.S. reporting system.
• Ensuring that accounting standards are set by an independent standard setter and for the benefit of investors.
• Investor understanding and education regarding IFRS and how it differs from U.S. GAAP.
  Understanding whether U.S. laws or regulations, outside of the securities laws and regulatory reporting, would be affected by a change in accounting standards.
• Understanding the impact on companies both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations and litigation contingencies.
  Determining whether the people who prepare and audit financial statements are sufficiently prepared, through education and experience, to convert to IFRS.

SEC Chief Accountant James Kroeker said he could foresee FASB continuing to have a substantive role moving forward on IFRS, even post-transition.

FASB, IASB Fair Value Progress

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) tentatively decided this week on revisions to fair value accounting standards, particularly concerning nonfinancial assets.

Highest and best use of nonfinancial assets

The Boards tentatively decided:

• That a fair value measurement of a nonfinancial asset considers its highest and best use by market participants
• To describe the meaning of physically possible, legally permissible, and financially feasible.

Incremental value

The Boards tentatively decided:

• Not to require entities to separate the fair value of an asset group into two components when an entity uses an asset in a way that differs from its highest and best use
• To require entities to disclose information about when they use an asset in a way that differs from its highest and best use (and that asset is recognized at fair value based on its highest and best use).

Valuation premise for nonfinancial assets

The Boards tentatively decided:

• That the objective of a fair value measurement of an individual asset is to determine the price for a sale of that asset alone, not for a sale of that asset as part of a group of assets or business. However, when the highest and best use of an asset is to be used as part of a group of assets, the fair value measurement of that asset presumes that the sale is to a market participant that has, or can obtain, the “complementary assets” and “complementary liabilities.” Complementary liabilities include working capital but do not include financing liabilities.
• To describe the objective of the valuation premise without using the terms in-use and in-exchange because those terms are often misunderstood.

Measuring the fair value of financial instruments

The Boards tentatively decided:

• That the concepts of highest and best use and of valuation premise are relevant only for nonfinancial assets and are not relevant for financial assets or for liabilities
• To describe valuation adjustments that entities might need to make when using a valuation technique because market participants would make those adjustments when pricing a financial asset or financial liability under the market conditions at the measurement date. These valuation adjustments were described in the IASB’s Expert Advisory Panel report, Measuring and Disclosing the Fair Value of Financial Instruments in Markets That Are No Longer Active.

The Boards will discuss at a future meeting whether the fair value of financial instruments within a portfolio should consider offsetting risk positions, including credit risk and market risk.

Premiums and discounts in a fair value measurement

The Boards tentatively decided:

• To clarify what a blockage factor is and to describe how it is different from other types of adjustments, such as a lack of marketability discount, for an individual instrument
• To prohibit the application of a blockage factor at any level of the fair value hierarchy
• To specify that a fair value measurement in Levels 2 and 3 of the fair value hierarchy considers other premiums and discounts that market participants would consider in pricing an asset or liability at the unit of account specified in the relevant standard (except for a blockage factor).
  

SEC Refocuses on IFRS Roadmap

The SEC received over 200 comment letters on the IFRS Roadmap. The letters came from companies, Big 4 Accounting firms, investor groups, and others. James Kroeker, Chief Accountant at the SEC has stated that he is hopeful that the SEC will announce some kind of public follow up in early 2010.

Kroeker had hinted last year that the announcement would be made last fall, but the SEC made no announcement.

In an interview with WebCPA, Kroeker said that politics was no the issue. Rather the SEC’s “diligent and deliberate” efforts, ihave not allowed a quick response in combination with the SEC’s preoccupation with the U.S. financial crisis, plus “re-energizing the agency as a whole.”

Kroeker feels that there is a good relationship between the FASB and the IASB and that they each “hear the thinking of their counterparts.”

“I’m hopeful that it will be much more likely that they’ll come to a consensus on a common high-quality solution. That isn’t necessarily going to be the case on all issues, but I think it certainly increases the prospects.”

On the speed at which new standards are being completed, Kroeker takes comfort in the fact that the FASB and the IASB have completed a “detailed listing, project-by-project, of what they expect to work on, when they expect to work on it, and what they think the deliverables are. If you look at that, there is an awful lot of deliverables that they’re expecting over the next six to nine months. That’s where we’ll see the real results as to whether or not they are achieving the milestones they are setting out for themselves. The other thing that’s encouraging to me is they have also committed to keep that updated, so if there is, in fact, slippage against the milestones, they’re going to update folks as to where they think they are and why.”

Kroeker is cautiously optimistic that the two Boards will complete their planned milestone of agreeing on a common set of international standards by mid-2011.

Kroeker set a precautionary tone on the pace a twhich change can occur: “I’ve already started to hear in the system some commenters saying you may be able to get this done, but it is a lot of change for the system to absorb.

Kroeker contrasted potential approaches, speculating that the FASB and the IASB muct choose between a “implementation immediately, but do they then call for effectively a “big bang” to implement all of them at one point in time? Or do they say, ‘Hey, there’s actually some phase-in?”

IASB Backs Off on Convergence

A crack has appeared in the quest for a quick victory in the goal of having a common international set of accounting rules that includes the U.S.

The IASB (International Accounting Standards Board) appears to have abandoned its previously stated goal of having the U.S. on board the convergence effort. This week, the IASB said that it was no longer interested in accounting convergence with the US as “an objective in itself.”

The IASB has had athat goal of a “single high-quality accounting standard”; the G20 has recently supported this goal.

Adoption of IFRS by the US and the international convergence goal has become increasingly mired in politics. As well, governance issues have come to the fore recently, with the U.S. having doubts about joining a structure that potentially gives control of accounting standards over to what could be a “United Nations-like” structure whereby anti-U.S. forces could join together to adapt IFRS to meet European or Asian political whims.

The IASB’s oversight board has stated following a review of its constitution that it would “emphasize that convergence is a strategy aimed at promoting and facilitating the adoption of IFRS, but it is not an objective by itself”.

The Securities and Exchange Commission, which oversees the US standard setter, is due this year to give its view on convergence, having delayed making a statement twice last year. The loss of US sovereignty that would come with a move to IFRS is a crucial concern, say experts.

Politicians in the EU put heavy pressure on the IASB last year to accelerate reform of its fair value or mark-to-market rule to ease pressure on banks that have to price assets at depressed going rates. The IASB has also been criticized for being aloof and not listening enough to policymaker concerns about financial stability when it comes to drafting rules.

It’s possible that the IASB has adopted this stance to reassure critics who fear convergence with the U.S. at any cost will result in bad standards—a race to the bottom. However in many cases, for example Business Combinations and Financial Instruments, the U.S. has been seen to have more highly principled positions than IFRS.

The IASB also stated that their rules will be based on "clearly articulated principles”—a notice to politicians that principles cannot be messed with.

The IASB also changed its constitution so that:

• All rule changes must undergo due process and a new emergency procedure is introduced for accelerating reforms.
• Reform can only be accelerated in exceptional circumstances with approval of at least 75 percent of the IASB's trustees.
• There will be three-yearly public consultations on the board's technical work as part of efforts to become more accountable.
• The board will also listen to a broader range of stakeholders before changing rules.
  

IASB Finally Admits that Investors Exist

For the first time, Investors are specifically identified as the target audience for financial information.

This is seen as an attempt to side with accountants in the battle with politicians who say IASB rules should play a wider role such as by aiding financial stability.

The IASB made a number of annoiuncements yesterday, February 15, about its future direction and governance.

India to Adopt IFRS for Large Companies in 2011

IFRS is likely to be rolled out for large companies in India from April 1, 2011.

A core group on IFRS implementation, set up by the ministry of company affairs and headed by renowned chartered accountant Y H Malegam, is set to recommend that it be made mandatory only for big corporates in the first phase.

The panel has prepared a report recommending IFRS-based reporting only for the largest 80 companies in India.

These companies may have to prepare their financial statements under IFRS for financial year 2011-2012.

In the second phase starting 2013-14, all listed companies and companies with net worth greater than a certain threshold will convert.

As per the IFRS convergence road map prepared by the Institute of Chartered Accountants of India (ICAI), all listed companies were to adopt IFRS in 2011.

Some core group members, who spoke to Bloomberg-UTV on the condition of anonymity, said both companies and a vast majority of chartered accountants are not adequately trained to implement IFRS on such a large scale.

The group is keen to avoid the chaos that IFRS implementation created in Europe a few years ago.

Accounting World Does not Need Convergece with U.S.: Major UK Regulator

A major UK regulator said that US attempts to adopt international accounting rules could result in unnecessary complexity.

Adair Turner, chairman of the Financial Services Authority, Regulator of all providers of financial services in the UK, said that the International Accounting Standards Board (IASB) risks adding complexity to its fair value accounting rule, if it continues converging with US standards.

“It is not so much that they are in danger of compromising (international standards), it is that, in the process of trying to reconcile them, they make it more complex,” he said.

He went on to say the world didn’t need the US to adopt international standards.

“We have had a capitalist system without full convergence in the past, it can be a complete pain in the neck… it hasn’t stopped the system working,” he said.

Turner’s comments add to growing concern surrounding the convergence project. In July the Fédération des Experts Comptables Européens said there were “diminishing returns”, from further convergence. Two months later Nigel Sleigh-Johnson, head of financial reporting at the ICAEW, said the process needed to be kept under “close review”. More recently, Stephen Haddrill, chief executive at the Financial Reporting Council, said the process should not be about “translating American standards into an international shape”.

Lord Turner’s concerns centre on the boards’ divergent approaches to fair value. The rule forces companies to value assets at market price and was blamed for exaggerating the effects of the downturn.

In the months following the downturn, both boards, under pressure from world governments, sought to revise their fair value standards. FASB’s approach would result in all assets valued at fair value. The IASB exempted banks’ loan books.

The issue has proved a sticking point in negotiations.

Within the IASB there is little appetite for steering away from convergence. US adoption is a key reason driving other nations to adopt international standards. Walking away from convergence might also embolden Europe, especially German and France, which have attracted criticism for politicizing accounting standards. Haddrill said the IASB was “walking a tightrope” but had made progress addressing inter­national concerns. “Because of the politicization of differences in view in the continent, people are failing to see just how far the IASB has moved towards recognizing some of the concerns that Europe has had, whilst at the same time preserving the principles of fair value.”

“The IASB is again facing that inherit trade off between what are the divergent, and in a sense, incompatible demands.”

Do You Understand Chinese Accounting?

U.S. ENGAGEMENT

Sir David Tweedie had some interesting remarks after urging the FASB to converge to IFRS.

"Do you understand Chinese accounting? Do you understand Indian accounting? The answer is no. But you will when they use IFRS, and you will invest when you know where the answers are," Tweedie added.

In the United States, the IASB has held talks with the Financial Accounting Standards Board (FASB) for years to bring international accounting rules close together.

"Ultimately, we have to speak for the international community. If we disagree with FASB, we have to do what we think is right," Tweedie said. "We can't converge at all costs. At present, they wish a much (less rigid concept of) fair value than we believe the rest of the world would accept or even think is appropriate."

At the same time, he said he expects the U.S. Securities and Exchange Commission will produce a statement in the next few weeks saying what the United States will do about moving toward international accounting standards. "I think they will confirm they will make a decision next year."

"We have all the major economies signing up for IFRS except the United States... I think if they decide they don't want to use the standards, there will be a resistance in the world. I don't think the United States wants to be isolated," he said.