Conforming IFRS to GAAP Via Condorsement Process
It's not a word in the English language, yet the SEC chose "condorsement" to describe the proposed process going forward to implement International Financial Reporting Standards (IFRS) in the U.S. SEC Deputy Chief Accountant Paul Beswick explains condorsement as an approach that permits U.S. Generally Accepted Accounting Principles (U.S. GAAP) to continue to exist. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) would work to finish their joint convergence projects. After completion of their joint projects, FASB would work to converge U.S. GAAP to IFRS over a period of time for standards that are not on the IASB’s work plan.
At the same time, FASB would have a process to consider new standards issued by the IASB for incorporation into U.S. GAAP. The new standards could be incorporated into U.S. GAAP with or without U.S. modifications. The condorsement approach would allow FASB to retain control over U.S. GAAP. It would also mitigate the effort associated with a full scale, mandated switch to IFRS. The condorsement approach moves the SEC away from its originally stated goal of convergence of GAAP and IFRS.
For almost 40 years a movement has been underway to establish one set of international accounting standards for all countries around the world in order to facilitate international trade and investment. Since it is no longer unusual to have foreign companies list their stock on the New York Stock Exchange, one common set of accounting standards should go a long way towards increasing the understandability of international financial reports. Until recently, listing rules required that non-U.S. companies must reconcile their financial statements prepared under home country standards to U.S. GAAP.
I have previously blogged about the SEC proposed roadmap for the adoption of IFRS in the U.S. that was a reaction to the pressure to adopt IFRS because members of the European Union did so in 2005 and many other countries have or will be adopting IFRS within the next few years. To date about 120 nations have adopted IFRS as their home country standards. The final decision of the SEC to mandate IFRS will be based on whether those accounting standards are of high quality and sufficiently comprehensive. The SEC’s existing convergence approach is based on the notion of “improve and adopt” IFRS before giving its stamp of approval. The Commission has been assessing whether IFRS develops a high quality of financial reporting relative to the standards which may be replaced.
The condorsement approach is in essence an Endorsement Approach that would share characteristics of the incorporation approaches with other jurisdictions that have incorporated or are incorporating IFRS into their financial reporting systems. However, during the transitional period, the framework would employ aspects of the Convergence Approach to address existing differences between IFRS and U.S. GAAP. Importantly, the framework would retain a U.S. standard setter and would facilitate the transition process by incorporating IFRSs into U.S. GAAP over some defined period of time (e.g., five to seven years). According to the recently issued SEC work plan, at the end of this period, the objective would be that a U.S. issuer compliant with U.S. GAAP should also be able to represent that it is compliant with IFRS as issued by the IASB. Incorporation of IFRS through the framework would have the objective of achieving the goal of having a single set of high-quality, globally accepted accounting standards, while doing so in a practical manner that could minimize both the cost and effort needed to incorporate IFRS into the financial reporting system for U.S. issuers. It also would align the United States with other jurisdictions by retaining the national standard setter’s authority to establish accounting standards in the United States.
The irony of condorsement is that IFRS have snuck in through the back door and are already spreading across the United States. For example, when a foreign entity using IFRS obtains control over a U.S. entity, the former would then prepare its financial statements in accordance with IFRS, not U.S. GAAP. International Accounting Standard (IAS) 27, “Consolidations and Separate Financial Statements,” states that, “a group must use uniform accounting policies for reporting like transactions and other events in similar circumstances. Assume a German entity purchases 75 percent interest in a U.S. entity on Jan. 1, 2011. The German entity has a calendar year end and it prepares its financial statements using IFRS. Because of IAS 27, the U.S. subsidiary will have to adopt the same accounting policies (IFRS) as the parent in 2011.
Peter Margaritis writing for the Maryland CPA Association points out another instance in which an IFRS sighting can occur is when a foreign company begins operations in the United States. Viewed another way, Canada and India are adopting IFRS in 2011. Mexico is adopting IFRS in 2012 and Japan is adopting IFRS in 2016. The European Union and Australia adopted IFRS in 2005. In this global economy, IFRS is all around us. CPAs will increasingly come in contact with companies using IFRS. Industry accountants and auditors of multinationals must understand IFRS and how they comply with GAAP. An organization could suddenly need to switch to IFRS because of underlying structural changes.
As a university accounting professor I am afraid the condorsement approach may have the unintended consequence of providing an excuse to delay teaching IFRS, and that would be unfortunate. Moreover, many of our accounting graduates go to work for large CPA firms with clients having overseas subsidiaries that are required to report in IFRS so these students will need to be conversant in IFRS. We do them a disservice to delay incorporating IFRS instruction into the accounting curriculum.
Blog by Steven Mintz, aka Ethics Sage, July 1, 2011