Responding to what it sees as a growing expectation that the Securities and Exchange Commission will put international financial reporting standards (IFRS) on track for incorporation in the United States this fall, the American Institute of Certified Public Accountants proposed today that big U.S.-based multinationals have the option to adopt the global standards.
“An adoption option would provide a level of consistency in the treatment of U.S. companies and foreign private issuers that report under IFRS that does not exist today, and would facilitate the comparison of U.S. companies that elect IFRS with their non-U.S. competitors that use IFRS,” wrote Paul Stahlin, the AICPA chairman, and Barry Melancon, president and chief executive of the group, in a letter to the SEC dated today. “[W]e believe U.S. issuers should be given the option to adopt IFRS as issued by the [International Accounting Standards Board].”
Citing “anecdotal evidence,” they contended that the number of companies that would choose the option would not be large enough “that system-wide readiness would become an issue.”
Stahlin and Melancon stated their agreement with a goal outlined in a May 26 SEC staff paper, to empower a U.S. company that is compliant with generally accepted accounting principles “to be able to represent that it is compliant with IFRS as issued by the IASB.” The AICPA executives expressed reservations about an SEC approach that would combine the “convergence” of existing U.S. and global standards with U.S. endorsement of future standards to be generated by the IASB, however.
The SEC described the approach in a May 26 staff paper that looked at a possible framework for IFRS adoption. The paper described a “condorsement” (combining the words convergence and endorsement) model for IFRS adoption in this country. The concept envisions convergence of existing GAAP and IFRS standards, followed by an approach in which the IASB would put forth new standards and the Financial Accounting Standards Board would endorse them for use in the United States.
In their letter, Stahlin and Melancon listed a number of “practical challenges that could limit the effectiveness of the proposed methodology in achieving the SEC’s objective.” The SEC paper proposed, for instance, that the commission and FASB could change or add to IFRS.
If those powers are “applied imprudently,” more differences would crop up between U.S. standards and IFRS than exist in the financial reporting of other developed nations, according to the letter. To curb such differences, the AICPA leaders proposed “that the threshold for modifications to IFRS be set high so that . . . modifications would be a rare occurrence.”
To cut the cost and effort of compliance, endorsed accounting standards should be applied prospectively “wherever possible,” the AICPA officials advised. But prospective application doesn’t meld with an IFRS standard for first-time adoption that requires the standards to apply to some situations in a company’s past.
If that standard, IFRS 1, holds sway, “U.S. issuers would not be able to unequivocally state compliance with IFRS,” warned Stahlin and Melancon. “Accordingly, we would encourage the SEC and its staff to work with the IASB to accommodate the needs of U.S. issuers in making the transition to IFRS.”