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.

FASB, IASB Agree on Something!

The Financial Accounting Standards Board and the International Accounting Standards Board finally agreed on something after a number of public differences of opinion over the last year. They have agreed to define fair value as an exit price, as a result of a recent joint meeting.

Both the FASB and the IASB have been controversial recently as they have come under pressure to revise fair value and “mark to market” standards to give financial institutions more flexibility in valuing assets that became difficult to trade during the crisis.

The two boards have decided to meet on a monthly basis, to resolve outstanding issues in areas such as fair value, revenue recognition, leases and consolidation.

The agreed-upon definition provides that when markets become less active, the two boards tentatively decided that an entity should consider observable transaction prices unless there is evidence that the transaction is not orderly. If an entity does not have enough information to determine whether the transaction is orderly, it should perform further analysis to measure the fair value.

The boards also decided (tentatively):

• that a transaction price might not represent the fair value of an asset or liability at initial recognition if, for example, the transaction is between related parties, the transaction takes place under duress or the seller is forced to accept the price in the transaction, the unit of account represented by the transaction is different from the unit of account for the asset or liability measured at fair value, or the market in which the transaction takes place is different from the market in which the entity would sell the asset or transfer the liability.
• to confirm that a fair value measurement is market based and reflects the assumptions that market participants would use in pricing the asset or liability. Market participants should be assumed to have a reasonable understanding about the asset or liability and the transaction based on all the available information, including information that might be obtained through due diligence efforts that are usual and customary. A price in a related-party transaction may be used as an input to a fair value measurement if the transaction was entered into at market terms.
  

Why IFRS Adoption will Slow Down in the U.S.

Recent political battles in Europe over IFRS may have slowed the timeline on progress of adoption of an IFRS road map in the U.S.

Reports suggest that the International Accounting Standards Board is in turmoil over the independence of standard-setters among other issues. With the U.S. watching on the sidelines, conflicting signals are being sent and questions are being asked about what the rush is toward adoption of IFRS in the U.S.—if the IASB, which sets IFRS standards, can’t agree on things, why would the U.S. buy in?

Politics won’t go away if and when the U.S. buys in to IFRS. The U.S. will not submit to the whims of accounting standards controlled by Europe, especially with the French government recently refusing to adopt certain IFRS standards affecting financial institutions. That is why the SEC has called for certainty about governance and funding before it sets a firm adoption date for IFRS.

In a recent article, Alfred M. King, vice chairman of Marshall & Stevens, a financial valuation and consulting practice cited six IFRS myths—a bit too late for Canadians, who are on track to adopt in 2011, and Australia and Europe, who have already adopted.

What follows below is Mr. King's article.

SIX IFRS MYTHS

No. 1: IFRS will improve U.S. accounting. I have yet to see any proof that financial reporting by U.S. companies will be improved if we substitute IFRS for GAAP. However one slices it, accounting is an artificial construct. That GAAP and IFRS are different is self-evident. That IFRS is superior to GAAP is an assertion, not a proven hypothesis. The principal argument of proponents is that IFRS is "principles-based" while GAAP is "rules-based."

Who says principles are better than rules? If IFRS is so superior, shouldn't it produce better economic outcomes? Few people would support the thesis that the U.S. economy somehow suffers in comparison to countries that use IFRS - our capital markets are larger and stronger.

If IFRS is superior, economic data do not make that case. That leads us to principles versus rules.

No. 2: IFRS is principles-based while GAAP is rules-based. Why do we have rules-based accounting in the U.S.? Because auditors want certainty against the threat of lawsuits. The proponents of IFRS have not asserted that the legal system in our country will be modified to prohibit class-action lawsuits against accounting firms. Until or unless the legal system changes, auditors need the protection they get when they follow accounting "rules."

Further, every observer with deep IFRS experience says the same thing: Whenever an IFRS accounting issue arises, the usual response is, "What does GAAP say?" In other words, IFRS itself defers to GAAP as being intellectually superior.

No. 3: To be competitive, U.S. companies must adopt IFRS. This assertion sounds good, but it's only a sound bite. There is not a shred of evidence either that accounting under GAAP is a hindrance or that there would be any positive change in economic performance were IFRS to become the dominant accounting system in the U.S. The track record of the countries in the EU, however, does suggest a high probability of economic decline.

IFRS usage worldwide might make the task of security analysts easier, but within both GAAP and IFRS there are still significant differences among companies in the same industry. That adoption of IFRS will suddenly make accounting differences disappear flies in the face of experience over the last 75 years.

No. 4: To be a good international citizen we cannot continue to be the only country with GAAP. Hogwash. This could easily be turned upside down by an assertion that IFRS users would be better citizens were they to adopt GAAP. After all, the U.S. accounts for a substantial portion of global GDP. Perhaps the economic health of many European firms is worsened by IFRS. Indeed, they might be better off with a more robust accounting system, i.e., GAAP.

No. 5: We are going to do it sooner or later, so why not start now? This sounds like the used-car salesman who says, "If you don't buy this beauty (wreck?) today, you'll be left behind tomorrow."

Implicit in this concept is that convergence will happen because of some innate superiority in IFRS. The real issue is that proponents fear a public debate with knowledgeable opponents of this bad idea. Advocates say that the faster the U.S. gets on board, the sooner we will see the "benefits" of IFRS. But what are those benefits?

No. 6: The upfront costs of conversion or convergence will be more than offset by future savings. That there would be substantial cost in converting to IFRS is a given. To companies, that cost would represent cash outlays to auditors and consultants. No wonder the major firms support IFRS. They see tons of revenue awaiting them.

The costs to companies are real and tangible. The future savings are speculative and opaque. Will companies spend less time on internal controls and financial reporting if IFRS replaces GAAP? If that is the case, let IFRS proponents prove the case. Not assert it - prove it.

Much more likely is that the cost to companies of developing and disseminating financial information under IFRS will be about the same as it is today, once the initial conversion costs are past. So where will these savings come from? Maybe, like the current health care debate, the Congressional Budget Office could "score" a conversion to IFRS. Skepticism abounds that the Obama administration's estimate of cost savings from its health care proposals will ever come to pass. Will Medicare really be reduced by $400 or $500 billion?

It is possible that IFRS can generate savings. But where the savings will come from, and whether anyone other than consultants and accounting firms will actually gain, appear to be well-kept secrets.

KING'S CONCLUSIONS--Mr. King's conclusions are set out below.

There appears to be a rush to judgment to dump GAAP and embrace IFRS. But once we see who benefits from such a change, the case for IFRS becomes much weaker.

It is up to IFRS supporters to lay out a detailed explanation of all the costs and to quantify all the benefits. Hiding behind generalizations such as we must be good corporate world citizens or principles are better than rules does not provide rigorous support to offset the known costs that switching to IFRS would entail.

SEC and Goodwill Impairment

In the current economic environment, the SEC continues to ask issuers to support their assertions around goodwill impairment. SEC staff comments often arise when a company’s revenues significantly decline or when market capitalization significantly declines below book value, since such declines may indicate impairments in intangible assets and goodwill.

SEC staff also request additional disclosures about goodwill impairments. SEC staff have indicated that in future they will request even more disclosures about how the conditions that caused impairment will affect a company’s business in the future.

Documentation of support for impairment test results is important as SEC staff includes valuation experts who may request and review a company’s goodwill valuation reports.

The staff has also been asking for more robust and comprehensive disclosures about goodwill impairments, including the following:

• Policies for impairment testing
• Organization of reporting units
• Goodwill allocated to the reporting units
• Description of the steps performed to review goodwill for recoverability
• Nature of the valuation techniques used, including descriptions of the significant estimates and assumptions used to determine the fair value of the reporting units
• Results of the most recently completed impairment tests.

Examples of SEC Comments
Goodwill Impairment Testing — We see that goodwill comprises approximately [XX%] of your assets at [year-end]. We also note that revenues and net income continued to decline in the first quarter of 2009 due to decreases in volume, a slowdown in the economy, declining demand from the [XXX] and [YYY] markets and increased competition from imports. Please tell us how you considered these factors in determining whether goodwill was impaired at [year-end]. In addition, tell us whether these items are indicators of potential impairment that would require you to perform a goodwill impairment analysis subsequent to [year-end].

Goodwill Impairment Testing — We note that you recognized a goodwill impairment charge during the year. . . . In the interest of providing investors with a better insight into management’s judgments in accounting for goodwill impairments, please revise future filings to provide the following disclosures as part of your critical accounting policy:

• The reporting unit level at which you test goodwill for impairment and your basis for that determination;
• Sufficient information to enable an investor to understand how you estimate the fair value of your reporting units and why management selected that method as being the most meaningful in preparing your goodwill impairment analyses;
• A . . . description of the material assumptions used;
• If applicable, how the assumptions and methodologies used for valuing goodwill in the current year have changed since the prior year, highlighting the impact of any changes; and
• If or how you consider your market capitalization relative to your net book value in evaluating goodwill for impairment.

Goodwill Impairment Testing — We note there was a significant decline in your market capitalization during the third quarter. . . . It appears this is a triggering event that could require you to reassess your goodwill for impairment. Please tell us what consideration you gave to reassessing the recoverability of your goodwill in the third quarter. If you did not perform impairment tests, please explain why. To the extent that impairment tests were performed tell us how you determined that no impairment existed including in your response what impact the current economic environment had on your cash flow assumptions.

Long-Lived-Asset Impairment Testing — Please revise to describe the impaired long-lived assets or asset groups, the facts and circumstances leading to the impairments and the segment in which impaired long-lived assets or asset groups are reported.

Wayne Carnall, chief accountant in the SEC’s Division of Corporation Finance, recently observed that even though “registrants have provided voluminous disclosures regarding goodwill impairments within the critical accounting policy section of [MD&A], it is not always clear how the information is meaningful to investors.” The disclosures have often focused on the noncash nature of the goodwill impairment but have not addressed the business and economic conditions that gave rise to the charge. We understand that the SEC staff will be asking for more disclosures in MD&A about what the conditions that resulted in impairments mean to the registrant’s business as well as for more forward-looking information about the risk of future impairments, such as:

• Percentage by which the fair value of the reporting unit exceeds its carrying value as of the most recent step 1 test
• Goodwill allocated to the reporting unit
• Assumptions that drive the estimated fair value and a discussion of the uncertainty associated with the key assumptions
• Discussion of any potential events, circumstances, or both, that could have a negative effect on the estimated fair value
• Carnall also stated that the SEC staff “is considering providing . . . guidance in the near-term to provide registrants with a better understanding of its expectations in this area.”

Control Premium and Goodwill Impairment

Robert Fox, a professional accounting fellow in the SEC’s Office of the Chief Accountant, recently raised several points about goodwill impairment. For example, he remarked that the market capitalization of a registrant may not fully reflect the aggregate fair values of all the registrant’s reporting units. Mr. Fox pointed to ASC 350-20-35-22 and 35-23 (formerly paragraph 23 of Statement 142), noting that “an entity might derive ‘substantial value’ from the ability to obtain control.” Accordingly, this control premium may cause the fair value of all the registrant’s reporting units to exceed the registrant’s market capitalization. He also indicated that while it would be “prudent” for an entity to reconcile the aggregate fair value of its reporting units to its market capitalization, the entity should also consider other factors when assessing goodwill for impairment.

Recent IFRS Developments and News

The AICPA has an excellent monthly news digest of current IFRS news. Below is their most recent release. You can subscribe using the link at the bottom of this post.

Panel to study issue of accounting standards for private companiesA panel created by the AICPA and the Financial Accounting Foundation with support from the National Association of State Boards of Accountancy will explore questions about the future of standard setting for U.S. private companies. Recommendations are expected this year. AICPA President and CEO Barry Melancon, CPA, said he sees potential for significant action resulting from the group's work. "There has never been an effort at this level to address this issue," Melancon said. JournalofAccountancy.com (12/17)

Boards: Politics won't halt push to converge accounting rulesPolitical pressure has caused convergence efforts between the International Accounting Standards Board and the U.S. Financial Accounting Standards Board to drift apart. In October, the two standard setters met and subsequently issued a statement reaffirming their commitment to convergence of major topics by June 2011. Forbes (12/15)

Disregard IFRS 9 standard, says IASB's LeisenringJames Leisenring urged an audience at an accounting conference to ignore the new IFRS 9 standard for financial instruments issued by the International Accounting Standards Board in November. According to Leisenring, the board -- of which he is a member -- was influenced by political pressures when it recommended the standard. Mandatory adoption is five years away and there may be changes as the FASB works on its standards for financial instruments. WebCPA (12/10)

Other News

Adoption of IFRS 9 prompts confusion in year-end reportingComputeractive (U.K.) (12/19)

Tokyo Stock Exchange's chief cites concern about move toward U.S. fair-value systemFinancial Times (tiered subscription model) (12/31)

Issues remain regarding harmonization of accounting standardsDirector of Finance (U.K.) (12/21)

IPSASB achieves convergence with IFRSWebCPA (12/22)

Regulatory Developments

SEC signals that action on IFRS is forthcomingThe Securities and Exchange Commission could consider further action on IFRS adoption early this year, according to Commissioner Elisse Walter. Walter's comments came at an AICPA conference, on the heels of SEC Chief Accountant James Kroeker's comments that more information about IFRS adoption would be coming "in the short term." For daily updates, training and other resources, visit IFRS.com. JournalofAccountancy.com (12/9)

EU regulator warns of division on standardsSenior European Union regulator Eddy Wymeersch has called for an independent review of international accounting standards and said the International Accounting Standards Board is increasingly at odds with U.S. standards. The IASB's mixed-model method of valuing assets, the first part of so-called IFRS 9, differs from the U.S. fair-value model. Meanwhile, officials from 33 countries met in Paris in early December to discuss enforcement of IFRS around the world. Financial Times (tiered subscription model) (12/2) , Risk.net (12/7)

Analysis: How IFRS adoption will impact taxesAn analysis by John R. McGowan and Matt Wertheimer examines how a shift to International Financial Reporting Standards by the Securities and Exchange Commission would affect tax policy in the U.S. The Tax Adviser (12/2009)

Japan's voluntary IFRS adoption puts pressure on U.S.Japan's Financial Services Authority put pressure on the U.S. to adopt International Financial Reporting Standards after it said it would allow voluntary domestic use of the standards, starting with fiscal years ending on or after March 31, 2010. Japan had been the biggest country after the U.S. to hold out on adopting the standards. "The FSA's decision to permit domestic use of IFRS represents a first step towards a mandatory use of IFRS in Japan, and is an important milestone on the path towards global standards," International Accounting Standards Board Chairman Sir David Tweedie said in a statement. WebCPA (12/11)

China would get boost from Hong Kong's acceptance of standardsHong Kong intends to accept Chinese accounting standards. The move would push forward Beijing's efforts to globalize China's financial sector. The effort has faced delays over concerns about Chinese auditors. The New York Times/Reuters (12/30)

Argentine companies to use IFRS accounting rules by 2012All Argentine companies with publicly traded securities will be required to adopt International Financial Reporting Standards starting in 2012, the government announced Dec. 29. Companies will have the option of adopting the standards in 2011. The Wall Street Journal/Dow Jones Newswires (12/30)

2010 will be year of new regulationsWith new financial regulations seemingly imminent, Menaka Doshi asked three of India's most prominent chief financial officers whether the country is ready for such changes in regulatory and tax law. Neither companies nor regulators are prepared to adopt International Financial Reporting Standards, according to Y.M. Deosthalee of Larsen & Toubro. MoneyControl.com (India)/CNBC-TV18 (India) (1/4)

Financial executives give advice on implementing IFRS In a new article on IFRS.com, three financial executives from large international companies discuss their experiences with preparing to move to International Financial Reporting Standards. Learn what they believe are the keys to a successful transition from U.S. GAAP.

Contribute to wiki on IFRS for Small and Medium-Sized Entities comparison to U.S. GAAP The AICPA is developing a resource that compares the International Financial Reporting Standard for Small and Medium-Sized Entities with corresponding requirements of U.S. generally accepted accounting principles. This resource is available in a wiki format and all are invited to contribute to its development. To learn more, view available sections and contribute to its content, click here.

AICPA looking for IFRS experts to help develop certificate of accomplishment program The AICPA Learning team is developing an IFRS Certificate of Accomplishment program for CPAs and chartered accountants that will equip participants with the knowledge and experience to apply IFRS in the U.S. The AICPA is seeking subject matter experts with extensive IFRS knowledge and experience in IFRS application and/or training to help develop the program. SMEs should have active CPA or CA credentials; broad knowledge of both IFRS and U.S. GAAP; experience applying IFRS at the transaction and financial reporting levels; experience converting an entity from a national GAAP to IFRS; and experience training others in IFRS. For more information, click here.

Learn key IFRS concepts with IFRS Digest

FASB Chairman: Fair Value Not Cause of Crisis; Separate Banking Regulation from Accounting

Journal of Accountancy is monitoring the AICPA SEC PCAOB conference this week.
They report here on a speech by FASB Chairman Robert Herz on Tuesday that addressed head on criticism of the role of accounting standards in the financial crisis and called for GAAP to be “decoupled” from bank regulation.

Herz, speaking at an AICPA conference, contended that many of FASB’s critics simply do not understand its mission. “There seems to be some confusion in the media and elsewhere about the relationship between the accounting standards we set and regulation of financial institutions,” said Herz. He explained that FASB does not determine the capital levels banks are required to maintain, but under laws enacted in the wake of the savings and loan crisis, bank regulators determine regulatory capital caccstarting with GAAP numbers. But bank regulators can adjust the GAAP figures, and they also have other tools to address capital adequacy, liquidity issues, and concentrations of risk at regulated institutions, Herz said.

He said that while FASB has a deep interest in the strength and stability of the financial system and the economy, its public policy mission and focus is designed to be different from that of banking regulators. “Our focus as accounting standard setters is on the communication of relevant, reliable, transparent, timely, and unbiased financial information on corporate performance and financial condition to investors and the capital markets,” he said. “The transparency provided by external financial reports contributes to financial stability by reducing the level of uncertainty in the system—and a lack of transparency can hide the extent of risks facing financial institutions from both investors and regulators.”

The mandate of the Federal Reserve and other banking regulators, according to Herz, differs in that it relates to ensuring the soundness of banks and the overall stability of the financial system. He says most of the time FASB and banking regulators can find common ground, but in some situations they’re actually in conflict. “In dire situations, bank regulators may be appropriately concerned that public release of data on severe losses and asset impairments could spark a run on a bank,” said Herz. “But investors would likely want to know the extent of the problems on a timely basis.”

The answer to this problem, according to Herz, is to “decouple” bank regulation from U.S. GAAP reporting requirements. “Doing so could enhance the ability of both the FASB and the regulators to fulfill our critical mandates,” he said.

And Herz, citing a 1991 GAO report following the S&L crisis, seemed to indicate that he believes that although GAAP and specifically much-criticized fair-value accounting did not cause the financial crisis, a GAAP unencumbered by pressure from banking interests would have done a better job of alerting investors and other stakeholders of an impending crisis. “The [1991] GAO report found that regulatory call reports significantly overstated the values of loans and debt securities (and hence the financial condition and capital) of failed banks,” he said.

He pointed out that the stress tests banking regulators recently conducted of the 19 major U.S. bank holding companies also found that the bulk of the $600 billion of potential additional losses revealed under the more adverse scenario related to loans and other receivables carried on a historical cost basis such as that used in the 1980s and not to items carried on a mark-to-market or fair value basis. In other words, fair value accounting, which is currently applied to only some financial assets, has done a better job of indicating the true financial condition of those assets than the cost basis.

Addressing another criticism of fair-value accounting, Herz admitted that reporting fair values can have procyclical effects on behavior. But he contends that “timely recognition of problems at financial institutions can have countercyclical effects through lessening the impact of financial downturns by providing an early warning of developing problems.”

This year both FASB and the IASB, under pressure from political influences, have struggled to agree on changes to accounting for financial instruments, which involves the fair value applications that have been most widely criticized. Herz provided assurances that FASB and the IASB would continue to work together on these issues, while acknowledging that the two boards have recently had differences in approach and timing. “Next year, once we have received comments and other input on our proposal, we will redeliberate at public board meetings all the key issues identified including discussing them with the IASB and making changes as appropriate,” he said. “Only after having completed this very extensive and thorough public due process will we issue a final standard carefully considering effective dates and transition.”

Original Journal of Accountancy article by Matthew G. Lamoreaux

Top Ten U.S.Non-IFRS Accounting Issues and Articles from 2009

The AICPA has an interesting daily email list providing interesting articles from various sources. Below is their summary of the top non-IFRS issues and articles of 2009. Where they use "we" below, they are referrng to CPAs or the AICPA.

This past year brought historical changes and challenges for everyone, CPAs included. Much has been written about the worldwide financial collapse and the hard road to economic stability. In looking back, what strikes me is how CPAs in all work environments held fast to our values of integrity, objectivity and competence despite great adversity. The AICPA joined forces with CPAs throughout the nation to educate Americans on financial literacy and fiscal accountability, helping to move our country forward.

In protecting the interests of the public and investors, as well as those of the dedicated members of our profession, we spoke out on a range of issues and achieved success for our positions. For instance, pending congressional legislation to create a Consumer Financial Protection Agency would provide CPAs with a specific exclusion for the advice and counsel they offer to individuals and businesses. The AICPA, along with state CPA societies, wrote letters requesting a delay in enforcement of the Federal Trade Commission's "Red Flags" rule, which was granted -- twice. Last month, the AICPA filed a lawsuit challenging the FTC's application of the rule to CPAs. In support of the Financial Accounting Standards Board's independence, we worked with a House committee to revise an amendment that would have moved accounting standards oversight authority from the Securities and Exchange Commission to a new proposed government agency. Another example is a letter we sent to a Senate committee expressing our opposition to expansion of aiding and abetting liability to third parties in securities fraud claims.

At the same time, we maintained focus on the resources and issues needed to keep CPAs up to date and technically prepared to serve their clients, employers and communities. Major advances were made in pressing areas, from private company financial reporting and globalization of business and the CPA profession, to sustainability and filling the CPA pipeline for the future. We also won mobility for CPAs, extending interstate practice privileges to a total of 45 states in a collaborative effort with state CPA societies, state boards of accountancy and the National Association of State Boards of Accountancy.

Top 10 news stories clicked by the AICPA's SmartBrief readers in the past year.
Madoff critic: Fraud case "gift-wrapped and delivered" to SEC (2/4)
CPAs get pre-filing-season update on tax laws governing individuals (1/2009)
Does personal goodwill still exist? (4/2009)
Tax aspects of debt modification and discharge (4/2009)
Stimulus bill contains several tax breaks for individuals (2/15)
New tax laws increase 401(k) contribution limits (1/6)
Senate reaches deal on tax credit for home buyers (10/28)
How to calculate gambling gains and losses for tax purposes (2/2009)
Obama's tax proposal draws fire from legislators, business (5/5)
Analysis: Letting estate tax lapse will cause problems

AICPA SEC Conference: No Deadline for IFRS Adoption Yet

Those waiting for clarity from the SEC regarding its road map for adopting International Financial Reporting Standards in the U.S. are still waiting following a speech by the agency’s chief accountant Monday.

In an October speech, Chief Accountant James Kroeker said the Commission would provide greater clarity on the future of its proposed road map by Dec. 21. In his speech Monday at an AICPA conference in Washington, he gave few additional details, but added, “You can expect to hear more from us in the short term.”

However, during a question and answer session, Kroeker addressed issuers’ concerns over whether they should invest in making changes to their systems. “It’s something that I think you can all expect we’re taking very seriously,” said Kroeker. “If, for example, there was a determination about a date, I don’t think you’re going to wake up in the morning and realize that date means you suddenly have to convert tomorrow to IFRS.”

Kroeker emphasized that the effect on investors would take precedence over other concerns in the SEC’s decision process. “I believe the fundamental focus of our evaluation of implementing a single set of high quality standards must be on the impact to investors,” Kroeker said. “I believe that implementing a set of global accounting standards for U.S. issuers can and must be done only in a manner that is beneficial to U.S. capital markets and consistent with the SEC’s mission of protecting investors.”

While acknowledging that there was no clear consensus on how to conduct the transition, Kroeker highlighted “widespread and strong support” from investors and issuers for U.S. publicly-held companies to migrate to a single set of global accounting standards.

He went on to outline SEC considerations that had similarities to milestones laid out in the SEC’s proposed road map including:

• Carefully and fully assess U.S. investors’ understanding of and perspectives on IFRS;
• The development and application of IFRS, particularly for its use as a single set of standards within the U.S. capital markets;
• The impact on the U.S. regulatory environment;
• Preparer considerations including changes to accounting systems, changes to contractual agreements, corporate governance considerations and litigation contingencies;
• Human capital readiness; and
• The role of the FASB in achieving the goal of a single set of global standards.

He emphasized the fundamental nature of changes currently being made to both IASB and U.S. GAAP under the boards’ Memorandum of Understanding (MoU) which identifies major projects due to be completed jointly by June 2011. “If revenue recognition is going to be changing and the platform in the U.S. and the platform under IFRS is changing, I don’t know how an entity would go about putting a system in place to adopt IFRS.”

But he seemed to indicate that the Commission does not plan to wait until after FASB and IASB complete their MoU projects before providing more clarity on its intentions. “That doesn’t mean people don’t need or want a greater level of clarity; I said earlier you can expect to hear more from us in the short term.”

But Kroeker said that regardless of future action by the SEC he believes it is important for “FASB to continue to work closely with the IASB to raise the quality of financial reporting standards in the U.S. and around the globe.”

Original article by Matthew G. Lamoreaux, Journal of Accountancy

Top Ten IFRS Stories from 2009

The AICPA has an informative IFRS mailing list. Listed below is a summary of the year’s most clicked IFRS articles on their site.

It has been an interesting year for International Financial Reporting Standards. After a flurry of activity in 2007 and 2008, the first eight months of 2009 were fairly quiet. Other than stakeholders commenting on the proposed IFRS road map released in November 2008, there was no regulatory action. Then, in mid-September 2009, the Securities and Exchange Commission's chairwoman and chief accountant began to make public statements that would reignite the IFRS discussion. Most importantly, they said more information on IFRS for public companies would be provided by winter, which is right around the corner.

The SEC's draft Five-Year Strategic Plan released in early October included support for a single set of high-quality global accounting standards and promotion of ongoing convergence initiatives between the U.S. Financial Accounting Standards Board and the International Accounting Standards Board. Moreover, in late October, the FASB and the IASB reaffirmed their commitment to improve both U.S. GAAP and IFRS and to intensify their efforts to complete the major projects described in their 2006 memorandum of understanding, as updated in 2008, by June 2011.

The AICPA is on record as supporting one set of high-quality global accounting standards for public companies, and we are working to ensure a smooth transition should the SEC decide to adopt IFRS.

Regarding private companies, in July the IASB released IFRS for Small and Medium-sized Entities (IFRS for SMEs). The AICPA welcomed the introduction of the new standard, which gives private companies an additional accounting and financial reporting option.

Now, we eagerly await the SEC's next move for public companies. Private companies already have the option to use IFRS or IFRS for SMEs because of the AICPA governing Council's action in May 2008 to recognize the IASB as an international accounting standard setter.

Members can stay current on developments and access many helpful resources from the AICPA IFRS resources Web site.

Top 10 news stories identified by the AICPA SmartBrief readers in the past year.
IASB publishes accounting standard for SMEs (7/9)
G-20 calls for single set of accounting standards by June 2011 (9/27)
Survey: Execs say IFRS will cost U.S. firms more than Europeans spent (3/30)
Schapiro discusses IFRS with IASB's Tweedie (2/12)
Accounting-rule changes would affect equipment leasing (8/14)
IFRS conversion to affect most aspects of operations (9/2009)
FASB, IASB will work more intensely to reach common set of standards (10/29)
CPA Exam to get makeover, include IFRS questions (9/30)
Herz: Full convergence shouldn't delay U.S. adoption of IFRS (4/30)
How to launch a successful IFRS conversion (4/2009)

IFRS News Roundup

This news roundup is courtesy of the AICPA, and includes a plug for their product at the end.

Monitoring Board lauds convergence talks between IASB, FASBThe Monitoring Board, a key accounting oversight panel, said it is pleased with the direction of the convergence talks between the International Accounting Standards Board and the Financial Accounting Standards Board. "The Monitoring Board is pleased by the responsive approach of the IASB and the FASB to address concerns regarding the potential for the IASB and the FASB to reach different [conclusions] on the major projects," the board said. Accountancy Age (London)

Will convergence be enough?: If efforts to merge international accounting standards are successful, the idea of U.S. companies having to switch standards may become a nonissue, according to this article. The Financial Accounting Standards Board and the International Accounting Standards Board are trying to complete their convergence projects in 2011. CFO Magazine

IASB completes part of new financial-instruments accounting standardThe International Accounting Standards Board has published a new standard on classifying and measuring financial assets. The standard completes the first phase of a three-part project to replace IAS 39, Financial Instruments: Recognition and Measurement. JournalofAccountancy.com (

IFRS aims to level playing field but causes some concernsThe possible adoption of International Financial Reporting Standards by the U.S. is meant to level the global playing field and make it easier to compare financial statements of companies around the world. However, as this article notes, critics and concerned parties say that the benefits of the global accounting standards would vary considerably among different companies in the U.S. CFO.com (11/20)

EU postpones introduction of changes to accounting rulesA major overhaul of accounting rules for financial instruments came into force in much of the world recently, but the European Commission decided to postpone adoption of the rules. Analysts said the changes would disproportionately hit some European banks. Other banks in Europe are upset with the decision because they are concerned they will be at a disadvantage compared with their international counterparts. Financial Times (tiered subscription model) (11/13) , Risk.net (11/13)

SEC's Casey urges continued development of single set of accounting standardsSecurities and Exchange Commission member Kathleen Casey called for continued efforts to converge international accounting standards. The SEC is considering a plan that would have companies use International Financial Reporting Standards. "The commission and the [Financial Accounting Standards Board] would be remiss and fail the needs of investors if we do not continue to support the development of a single set of high-quality global accounting standards," Casey said. Reuters (11/17)

Some companies may use new IASB rules despite delay in BrusselsSome European companies may prepare "proforma" accounts as if new accounting rules were in place even as the EU signals it may delay implementation of the so-called IFRS 9 rules. Four companies said they may use the rules to prepare accounts for internal use before the end of 2009. The new rules from the International Accounting Standards Board address how financial institutions value assets. For IFRS daily updates, training courses, case studies and other resources, visit IFRS.com. Financial Times

OCC questions IASB's proposed loan-loss accounting standardJohn Dugan, comptroller of the currency, said a loan-loss accounting standard proposed by the International Accounting Standards Board is "potentially too restrictive." Dugan said accounting standard setters are heading in the right direction, but he raised concern about some of the proposals. "If expected loss is interpreted in a way that constrains it so you don't get to look forward, then we will not have made much progress," Dugan said. Risk.net

CESR chairman says review of IASB governance is neededEddy Wymeersch, chairman of the Committee of European Securities Regulators, told the European Parliament's economic and monetary affairs committee that an assessment of the governance of the International Accounting Standards Board is needed. Wymeersch raised questions about the accountability of the accounting standards setter. The New York Times/Reuters

HSBC's CFO urges Europe to quickly adopt IFRS 9Douglas Flint, chief financial officer at HSBC, says he wants to see Europe adopt the International Accounting Standards Board's new rule on fair-value accounting, known as IFRS 9. Flint says he believes critics pressured the IASB for political purposes. "Many of the objectors to IFRS 9 sought to take the IASB to a position they knew it could never support, because their agenda was to create conflict with the IASB as part of a larger political agenda," Flint said. Accountancy Age (London)

AICPA to release IFRS Accounting Trends & Techniques; order now to get pre-publication discount IFRS Accounting Trends & Techniques provides a close look at the reporting practices of international companies that have already tackled the conversion to IFRS. Like other titles in the best-selling Accounting Trends & Techniques series, this international version captures today's prevailing financial reporting practices with illustrative examples from the actual financial statements of 100 publicly traded companies from around the world. IFRS Accounting Trends & Techniques is available for pre-order. Order now and get a special pre-publication 10% discount (use coupon code SLR); time is running out.

Proposed U.S. Law Changed, FASB Independence Maintained

A U. S. Congressional committee last week removed language from an bill that would have given a new regulator power to oversee FASB standard-setting activities for U.S. GAAP.

The legislation, from the House Financial Services Committee would have transferred the SEC's accounting standards oversight authority to a proposed new regulator with a mandate to take an active role in accounting standards that it deemed could pose systemic risks.

The SEC has statutory authority to establish financial accounting and reporting standards for publicly held companies under U.S. law. Historically, however, the SEC has supported FASB’s independence and relied on FASB to set accounting standards.

The amendment passed Thursday acknowledged that the proposed systemic risk regulator that would be created under the bill would have the ability to comment, like other interested parties, on FASB standards-setting issues.

The AICPA, the Center for Audit Quality (CAQ) and many state CPA societies opposed earlier versions of the legislation and the CAQ held a joint press conference to highlight opposition to a legislative proposal that they said could put bank regulators in control of U.S. accounting standards and circumvent the key role of due process in standard setting.

Earlier in November, AICPA President and CEO Barry Melancon sent a letter to the leadership of the House Financial Services Committee to state that the Institute is “strongly opposed” to any legislation that would “undermine the independent accounting standard process as currently carried out by FASB.” Melancon noted that the SEC and FASB “have made great strides” to improve financial reporting, and that if Congress were to follow through, “it will be viewed by many as disregard for the interests of investors.”

The CAQ, the U.S. Chamber of Commerce and the Council of Institutional Investors expressed similar opposition to the idea.

Accountants to Politicians, Bankers: Hands Off Accounting Standards

Leaders of the American Institute of CPAs and the Center for Audit Quality told legilators that bankers should not regulate accounting.

The accounting and auditing organizations are worried about proposed legislation setting up a systemic risk regulator for the financial sector. The legislation proposes creation of an oversight council that would have the ability to change accounting standards in the event of a crisis—replacing the FASB as SEC’s acconting standard-setter.

The Centre for Audit Quality states that standards are for the benefit of investors so that they can get the information that they need so that they can make valid investment decisions, and that the SEC acts as an investor advocate and is the right oversight party for helping the FASB maintain independent standard setting. Having financial and banking regulators be part of that process with veto power over accounting and auditing standards is not a good model. Particularly in this time of financial crisis, it is a bit ironic that we would be talking about watering down the process that’s designed to protect investors.”

AICPA president and CEO Barry Melancon noted that banking regulators already have the ability to adjust capital requirements and the SEC can suspend accounting rules when needed, as the SEC has the ability to suspend accounting rules, even without a crisis situation. Accountants fear a circumvention of the rule of due process in the accounting standard-setting process.

The legislation would go against SEC chair Mary Schapiro’s recent warning against interfering with the independence of the accounting standard-setting process, which seh referred to as “race for the bottom”.

Politics and Accounting: EU Delays Adoption of Fair Value Accounting Rule Changes

Politicians in the European Union have held up a radical overhaul of accounting rules for banks and insurers which came into force yesterday across most of the non-U.S. accounting world.

Politics comes to the fore in this as the rules have been postponed at a time when the commission itself is a lame duck because the commissioner’s job will come open with the new Commission beginning next year. Diplomats in Brussels say France is interested in the internal market commissioner's job in the next Commission.

The move highlights a major split among European financial institutions over the fair value new rules.

Analysts say some French, German and Italian banks with large investment banking activities would be hit disproportionately by the changes, forcing them to book losses on large holdings of derivatives.

The decision by the European Commission to delay the changes within Europe has angered other banks in the region who fear they will be put at a disadvantage compared to international peers.

The International Accounting Standards Board recently published major changes to the rules on fair value accounting, where assets are marked to market prices. Supporters of the new rules say this makes reporting more transparent. Critics believe fair value rules made the financial crisis worse by forcing banks to take losses on assets when markets fell.

The IASB fast-tracked the changes in response to calls by the G20 to make the changes by the end of the year. The European Commission said it would not adopt the changes until it had carried out an in-depth analysis, and would consider adoption in the new year.

The decision means that European banks and insurers will not use the new rules for their 2009 accounts while companies in more than 80 countries outside the EU will be required to do so.