Back in July a Staff report from by Securities and Exchange Commission (SEC) mostly poured cold water on converging international accounting standards. Nor did it stray far from its previous view that the US go the “condorsement” or gradual, standard-by-standard route.
But in a response to that July SEC review, the IFRS — although in agreement with many SEC viewpoints — disagreed with the phased-in approach, calling it costly and impractical. The SEC’s condorsement idea was proposed in 2011 and supported by a number of SEC staff and comment letters from companies. The idea was that the US would adopt the standards over a 5-7 year period. This would be beneficial, the SEC said because:
“In terms of costs, the staff notes respondents’ comments that savings could be achieved through a more ‘gradual’ development of the systems and processes necessary to implement IFRS. In terms of the effect of the transition on a stable platform (ie the need for certainty and stability so that issuers will be able to cope with change), the staff states that it believes that an endorsement-like approach that is ‘gradual’ and incorporates IFRS into US GAAP would address this difficulty. In the terms of the possible effect of the transition method on issuers’ litigation contingencies, the staff notes that a ‘phased approach’ would allow the opportunity to explore solutions.”
Big Bang theory. The IFRS, however, citing several countries that followed a “big bang” approach – where a closer date is selected and entities make the adjustment to meet the deadline – said dragging out the adoption doesn’t work. A drawn-out standard-by-standard approach to incorporation “may prove costly and disruptive to US entities without the commensurate benefit of adoption of IFRS being achieved,” the IFRS said. Furthermore, dragging out convergence has shown that independent boards “are likely to achieve independent outcomes.”
“In researching the use of IFRS around the world, we find no evidence of a jurisdiction having successfully adopted IFRS by following a Standard-by-Standard approach. Those jurisdictions that have evaluated this model (such as the UK) have ultimately concluded that it is not workable,” the IFRS said.
The IFRS also cited a study by the Institute of Charted Accountants in England and Wales (ICAEW) which concluded that: “Much time and effort over several years was expended in bringing individual standards into line with IFRS before it became clear that completing the process was impractical … The market is better able to deal with a single, well-understood change rather than a complex and protracted process of change.”
Agreement. Overall the IFRS letter sees many areas of agreement with the SEC Staff report, for instance the importance of achieving greater consistency in the enforcement of IFRS and that there are areas where IFRS can be improved. The IFRS also felt that since the US Big Four and MNCs have an “extensive understanding” of IFRS, this puts the US at a distinct advantage when compared to other countries making the transition. It did however note that smaller companies would be less prepared.