Feeds:
Posts
Comments

Posts Tagged ‘Road map to IFRS’

J. Edward Ketz is my round tuit.  ???  A round tuit is anything that unlocks your sense of inertia, allowing you to start working on some task that has been delayed far too long.

An example helps.  Have you, like me, ever been nailed for procrastinating?  All the time.  It probably followed this thought, “I’ll get a round tuit when there’s a free moment.”  But everything else doesn’t get done and there’s no free time, so you never get a round to it.

Ed is my round tuit.

On February 25, 2010, the Securities and Exchange Commission (SEC) released a formal Commission Statement in Support of Convergence and Global Accounting Standards.

I never got around to reacting.  Yesterday (March 29, 2010), Ed Ketz published his reaction, “The Iffiness of IFRS“.  It’s better than anything I can  write (anything Ed writes is always better than anything I can ever write, just take it for truth).  Better late than ever, here are my personal reactions.

(more…)

Read Full Post »

In yesterday’s Accountancy Age appeared an interesting piece by IFRS reporter-advocate Mario Christodoulou, “The long and winding roadmap”.  He does an adequate job, I think, even if he didn’t quote any of the many things I’ve said about U.S. adoption of or conversion with IFRS.

His quotation of fellow blogger Tom Selling statement of the differences between the GAAP and IFRS positions is priceless,

“Not only were Kroeker’s and Niemeier’s positions as different as black and white… Niemeier’s inspiration clearly sprang from a foundation of cited broad-based analyses produced by published rigorous, peer-reviewed, independent research.  The source of Kroeker’s remarks apparently came from nothing more than his own wishful thinking,” prominent blogger Tom Selling said in September last year.

I recall thinking at the time his statement was something that I very well might have written, had Tom not said it first.  There is every sound reason for the U.S. to retain its GAAP.  Reasons for switching to IFRS are specious, sophist all the way.

Christodoulou goes on to say that the push for IFRS has too much momentum for the U.S. to continue to buck the trend.  He might very well be right, but I’ll continue fighting it never-the-less.

Regardless, isn’t it time that someone came up with some good reasons for the U.S. to switch to IFRS?  No one has ever stated one.  Not that one is absolutely needed, because when governments decide to do something no good reason is needed.  I mean, didn’t Ben Bernanke say this week that the multi-billion USD bailout didn’t actually cost a single cent?  So, in government speak, Kroeker’s reason for moving to IFRS–for enhanced comparability–isn’t that bad.  Of course, it is a false reason and no on in the world truly believes it.  It is nonsensical.

And, governments frequently make bad decisions when it come time to regulate some aspect of society.  In deed, governments in North America are more likely to get something wrong than right.

But as I say, isn’t it about time that we had some real reasons for moving the U.S. to IFRS (convergence accomplishes pretty much the same thing as a switch-over)?  I have studied this topic for a few years.  Researching government regulation of accounting and auditing is what I do.  So far, I know of two reasons for the U.S. to switch to IFRS:

  1. Large audit firms hope to realize in excess of $100 billion in fees from services related to the switch over.  This represents a wealth transfer from stockholders.
  2. Europe hopes that when investors can compare U.S. and European companies using IFRS-generated statements, they will decide to move upwards of a couple trillion USD from the U.S. to Europe.

I am aware of no other benefits to any other identifiable party for the U.S. switching from GAAP to IFRS.  Shouldn’t there be some high-minded benefits from putting out so many millions of Americans and taxing the U.S. economy by a couple trillion dollars?  I just don’t think that putting money in audit-partner pockets so they can buy luxury goods, or whatever, is a good enough reason.

So come on, all of you pro-IFRS folks.  Kroeker has never come up with a reason for why the U.S. can make a change.  Please leave a comment and help us all out.  A good reason, or two, would make us all feel better.

Debit and credit –  – David Albrecht

Read Full Post »

A letter from three former SEC chairmen, printed in today’s Wall Street Journal, is today’s big news.   I am referring to:   “Don’t Let Banks Hide Bad Assets:   In times of distress, there’s always pressure to change accounting standards,” by Roderick M. Hills, Harvey L. Pitt, and David S. Ruder,”  The Wall Street Journal, November 19, 2009.

Independent accounting standards have helped make American capital markets the best in the world. In making financial decisions, investors rely heavily upon the integrity of corporate financial reports prepared in accordance with accounting standards established by the independent Financial Accounting Standards Board (FASB). That board is supervised by the Securities and Exchange Commission (SEC).

Now, the Obama administration is on the verge of transferring accounting standards responsibility from the SEC to a systemic risk regulator. Such a radical move would have extremely negative consequences for our capital markets.

Although there may be good reasons for establishing different regulatory capital standards for financial services firms, those reasons cannot justify dispensing with the FASB’s accounting standards. Acting in accord with powers given to it by the Sarbanes-Oxley Act, the SEC has formally recognized the FASB as the definitive standard-setting body, capable of “improving the accuracy and effectiveness of financial reporting and the protection of investors.”

The SEC treats accounting standards adopted by the board as authoritative. If the SEC has concerns about, or disagrees with, accounting standards promulgated by the FASB, it can refuse to give them deference.

As I blogged yesterday, it is a fact of life that accounting standards frequently have economic consequences.  It is government’s responsibility to adjudicate between competing economic interests.

Banks are currently trying to use the political arena and the Congressional branch of government to influence accounting rules.  Specifically, I am referring to an amendment sponsored by Representative Ed Perlmutter (D-CO) to the Financial Stability Improvement Act, currently being considered by the House Financial Services Committee.

Although I do not favor the bank position on fair value accounting, I applaud their attempt to use Congress to influence accounting standards.

Why?  The SEC has two relevant policies. First, any country adopting IFRS should use them lock-stock-and barrel. Second, it endorses the notion of one universal set of global accounting standards, and is poised to announce the adoption of IFRS for U.S. reporting.

It seems to me that the SEC is about to abdicate its responsibility and role, in oversight of accounting standards. If the SEC continues along its intended path, there will be no U.S. governmental control over accounting standards. Oh, there is the hope that the SEC can influence the IASB. Europe has that same hope. Last week we saw that several countries in Europe have concerns over the lack of European control over the IASB, and continued use of IFRS in Europe is a little doubtful.

Well, if the SEC is anxious to get out of the business of overseeing accounting standards (and adjudicating competing economic interests), then it seems reasonable to me that it is in the self-interest of concerned economic interests in the U.S. to preserve a governmental solution to oversight of accounting standards. As I blogged yesterday, any nation that cedes control over some aspect of its economy to an extra-national body is incredibly stupid. Today I add that it is brainless, dazed, deficient, dense, dim, doltish, dopey, dull, dumb, foolish, futile, gullible, half-baked, half-witted, idiotic, ill-advised, imbecilic, inane, indiscreet, insensate, irrelevant, laughable, ludicrous, meaningless, mindless, moronic, naive, nonsensical, obtuse, out to lunch, pointless, puerile, rash, senseless, shortsighted, simple, simpleminded, slow, sluggish, stolid, stupefied, thick, thick-headed, trivial, unintelligent, unthinking, and witless (synonyms supplied by thesaurus.com).

Consequently, I do not think it a bad thing the banks are appealing to Congress.

Now we have three previous Chairmen of the SEC speak out on the issue.   Their position is that the SEC role in determining accounting standards should not be overridden. They cite the pre-eminence of U.S. capital markets and attribute it in part to American accounting standards.   At first glance, this seems like a defense of continuing the status quo of FASB-SEC working partnership. I mean, if it isn’t broken, why fix it?

But that isn’t what they mean. There is no more vocal proponent of IFRS than Harvey Pitt, now writing for Compliance Week. Ruder has been interested in the U.S. adopting IFRS for decades.

What these three previous chairmen of the SEC mean is that the Perlmutter proposal upsets the applecart of the inexorable march toward IFRS in the United States.  The SEC has no intention of letting anything get in the way of that.

Why can’t these guys say what they mean?  Oh, they’re politicians.

It could very well be that the Perlmutter proposal is the last opportunity to derail IFRS adoption in the U.S.  Defeat of his proposal would clear the way for an SEC announcement that the U.S. has adopted IFRS.

To be continued.

Debit and credit – – David Albrecht

Read Full Post »

600px-united_states_securities_and_exchange_commissionsvgJust to ease your efforts, I’ve scanned through the 184 page SEC Proposed Roadmap to IFRS and have picked out the issues for which the SEC is requesting comment.  There are 66.  Comments due on or before February 19, 2009. Comments can be sent via e-mailto rule-comments@sec.gov.  Include “File Number 87-27-08” on the subject line.

Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers

1.  Do commenters agree that U.S. investors, U.S. issuers and U.S. markets would benefit from the development and use of a single set of globally accepted accounting standards? Why or why not? What are commenters’ views on the potential for IFRS as issued by the IASB as the single set of globally accepted accounting standards?

2. Do commenters agree that the milestones and considerations described in Section III.A. of this release (“Milestones to be Achieved Leading to the Use of IFRS by U.S. Issuers”) comprise a framework through which the Commission can effectively evaluate whether IFRS financial statements should be used by U.S. issuers in their filings with the Commission? Are any of the proposed milestones not relevant to the Commission’s evaluation? Are there any other milestones that the Commission should consider?

3. Do commenters agree with the timing presented by the milestones? Why or why not? In particular, do commenters agree that the Commission should make a determination in 2011 whether to require use of IFRS by U.S. issuers? Should the Commission make a determination earlier or later than 2011? Are there any other timing considerations that the Commission should take into account?

4. What are commenters’ views on the mandated use of IFRS by U.S. issuers beginning in 2014, on an either staged-transition or non-staged transition basis? Should the date for mandated use be earlier or later? If the Commission requires the use of IFRS, should it do so on a staged or sequenced basis? If a staged or sequenced basis would be appropriate, what are commenters’ views on the types of U.S. issuers that should first be subject to a requirement to file IFRS financial statements and those that should come later in time? Should any sequenced transition be based on the existing definitions of large accelerated filer and accelerated filer? Should the time period between stages be longer than one year, such as two or three years?

5. What do commenters believe would be the effect on convergence if the Commission were to follow the proposed Roadmap or allow certain U.S. issuers to use IFRS as proposed?

6. Is it appropriate to exclude investment companies and other regulated entities filing or furnishing reports with the Commission from the scope of this Roadmap? Should any Roadmap to move to IFRS include these entities within its scope? Should these considerations be a part of the Roadmap? Are there other classes of issuers that should be excluded from present consideration and be addressed separately?

7. Do commenters agree that these matters would affect market participants in the United States as described above? What other matters may affect market participants? Are there other market participants that would be affected by the use by U.S. issuers of IFRS in their Commission filings? If so, who are they and how would they be affected?

8. Would a requirement that U.S. issuers file financial statements prepared in accordance with IFRS have any affect on audit quality, the availability of audit services, or concentration of market share among certain audit firms (such as firms with existing international networks)? Would such a requirement affect the competitive position of some audit firms? If the competitiveness of some firms would be adversely affected, would these effects be disproportionately felt by firms other than the largest firms?

9. What are commenters’ views on the IASB’s and FASB’s joint work plan? Does the work plan serve to promote a single set of high-quality globally accepted accounting standards? Why or why not?

10. How will the Commission’s expectation of progress on the IASB’s and FASB’s joint work plan impact U.S. investors, U.S. issuers, and U.S. markets? What steps should be taken to promote further progress by the two standard setters?

11. The current phase of the IASB’s and FASB’s joint work plan is scheduled to end in 2011. How should the Commission measure the IASB’s and FASB’s progress on a going-forward basis? What factors should the Commission evaluate in assessing the IASB’s and the FASB’s work under the joint work plan?

12. What are investors’, U.S. issuers’, and other market participants’ views on the resolution of the IASB governance and funding issues identified in this release?

13. What steps should the Commission and others take in order to determine whether U.S. investors, U.S. issuers, and other market participants are ready to transition to IFRS? How should the Commission measure the progress of U.S. investors, U.S. issuers, and other market participants in this area? What specific factors should the Commission consider?

14. Are there any other significant issues the Commission should evaluate in assessing whether IFRS is sufficiently comprehensive?

15. Where a standard is absent under IFRS and management must develop and apply an accounting policy (such as described in IAS 8, for example) should the Commission require issuers to provide supplemental disclosures of the accounting policies they have elected and applied, to the extent such disclosures have not been included in the financial statements?

IV. PROPOSAL FOR THE LIMITED WOULD ENHANCE COMPARABILITY A. Eligibility Requirements

16. Do commenters agree that certain U.S. issuers should have the alternative to report using IFRS prior to 2011? What circumstances should the Commission evaluate in order to assess the effects of early adoption on comparability of industry financial reporting to investors?

17. Do commenters agree with the proposed criteria by which the comparability of an industry’s financial reporting would be assessed? If not, what should the criteria be?

18. Which eligible U.S. issuers have the incentive to avail themselves of the proposed amendments, if adopted? Are there reasons for which an issuer that is in a position to file IFRS financial statements under the proposed amendments would elect not to do so? If so, what are they?

19. Is limiting the proposal to the largest 20 competitors by market capitalization an appropriate criterion? Should it be higher or lower? Should additional U.S. issuers be eligible to elect to report in IFRS if some minimum threshold of U.S. issuers (based on the actual number or market capitalization of U.S. issuers choosing to report in IFRS) elects to report in IFRS under the eligibility requirements proposed? To the extent additional U.S. issuers are not permitted to report in IFRS even if such a minimum threshold is met, are such non-eligible U.S. issuers placed at a competitive disadvantage vis-à-vis U.S. issuers reporting in IFRS?

20. Would the use of different industry classification schemes as proposed be unclear or create confusion in determining whether an issuer is IFRS eligible? Should we require that all issuers use a single industry classification scheme? Why or why not?

21. What impact will the Commission’s determination to allow an industry to qualify as an “IFRS industry” without majority IFRS use have on the Commission’s objective of promoting comparability for U.S. investors? How will this impact U.S. investors, U.S. issuers, and U.S. markets? Is the use of IFRS more than any other set of financial reporting standards the right criterion? Should it be higher or lower?

22. Should the Commission permit additional industries to qualify as IFRS industries, and thus additional U.S. issuers to become early adopters, as more countries outside the U.S. adopt IFRS? Alternatively, should the group of potential industries and early adopters be limited to those that qualify at the time the Commission determines to permit early adoption?

23. Do commenters have any suggestions about the procedural aspects of the proposed eligibility requirements, e.g., the procedure for obtaining a letter of no objection from the Commission staff or the minimum contents of the required submission? Is such a procedure necessary? Do commenters agree that such a procedure would assist both issuers and investors? Should the procedural aspects of the proposed eligibility requirements be less formal? Should the procedure be similar to that in the no action letter process regarding shareholder proposals under Rule 14a-8 of the Exchange Act? Should the letter of no objection be advisory only? Should obtaining a letter of no objection be optional? Is the method for calculating eligibility clear and appropriate or are there alternative suggestions that should be considered? Should the Commission publish standards or criteria to guide the staff’s determination? What do commenters believe the respective role of the Commission and its staff should be in making these eligibility determinations? Should the Commission post on its Web site all submissions and responses, including those for which the staff does not issue a no-objection letter?

24. Currently, some public companies in the U.S. public capital market report in accordance with IFRS and others in accordance with U.S. GAAP. Today, however, this ability to report using IFRS exists only for foreign companies. What consequences, opportunities or challenges would be created, and for whom, of extending the option to use IFRS to a limited number of U.S. companies based on the criterion of improving the comparability of financial reporting for investors?

25. Do commenters agree that the criterion of enhanced comparability is the correct one? Are there other criteria that should be used? For example, should issuers be eligible based on their size or their global activities? If a size criterion were used to include the largest U.S issuers, what should the cut-off be? Should there be a criterion based on the absence of past violations of the federal securities laws111 or based on shareholder approval?

26. Do commenters agree that the proposed required disclosures are appropriate? If not, what disclosures should be provided?

27. What are commenters’ views on the accounting principles that should be used by those U.S. issuers that elect to file IFRS financial statements if the Commission decides not to mandate or permit other U.S. issuers to file IFRS financial statements in 2011? Should the Commission require these issuers to revert back to U.S. GAAP in that situation?

28. Is it appropriate to exclude investment companies, employee stock purchase, savings and similar plans and smaller reporting companies? Are there other classes of issuers or certain industries that should be excluded?

C. Transition

29. Should we limit the first filing available to an annual report on Form 10-K, as proposed? If not, why not? Is the proposed transition date of fiscal years ending on or after December 15, 2009 appropriate? Should it be earlier or later, and why? What factors should be considered in setting the date?

30. Are there any considerations that may make it difficult for an eligible U.S. issuer to file IFRS financial statements? Are there considerations about filing IFRS financial statements that would weigh differently for an eligible U.S. issuer than they would for a foreign private issuer that files IFRS financial statements?

31. What difficulties, if any, do U.S. issuers anticipate in applying the requirements of IFRS 1 on first-time adoption of IFRS, including the requirements for restatement of and reconciliation from previous years’ U.S. GAAP financial statements?

32. What would affect a company’s willingness to use IFRS if it were eligible to do so? For example, some market indices, such as the S&P 500, currently only include issuers that report in U.S. GAAP. Are there other investment instruments or indices that would affect companies that would be eligible to use IFRS under the proposed criteria? Would the ability to be included in the S&P 500, or other instrument or index affect whether an eligible U.S. issuer decides to use IFRS? Would these indices be prepared to accept IFRS, and, if so, how long would it take for them to change their criteria? Would more issuers be likely to use IFRS after they do? Should these considerations influence our decision on whether or when to permit or require U.S. issuers to use IFRS in their Commission filings?

33. To facilitate the transition to IFRS, should we add an instruction to Form 10-K and Form 10-Q under which an issuer could file two years, rather than three years, of IFRS financial statements in its first annual report containing IFRS financial statements as long as it also filed in that annual report three years of U.S. GAAP financial statements? Under such an approach, an issuer could, during its third year after beginning its IFRS accounting, choose to file a Form10-K/A with IFRS financial statements covering the previous two fiscal years. For the current (third) fiscal year, the issuer could then file quarterly reports on Form 10-Q using IFRS financial statements. For example, a calendar-year issuer that began its IFRS accounting for the 2010 fiscal year would use U.S. GAAP to prepare its Forms 10-Q and Forms 10-K for the 2010 and 2011 fiscal years. In 2012, that issuer would have the option of filing a Form 10-K or a Form 10-K/A with IFRS financial statements for 2010 and 2011, which would allow it to use IFRS in its quarterly reports during 2012, or continuing to use U.S. GAAP. In either case, the Form 10-K covering the 2012 fiscal year would include three years of IFRS financial statements.

D. Alternative Proposals for U.S. GAAP Information

34. What are commenters’ views on Proposals A and B relating to U.S. GAAP reconciling information? Which Proposal would be most useful for investors? Is there a need for the supplemental information provided by Proposal B? Would the requirement under Proposal B have an effect on whether eligible U.S. companies elect to file IFRS financial statements? To what extent might market discipline (i.e., investor demand for reconciliation information) encourage early adopters to reconcile to U.S. GAAP even in the absence of a reconciliation requirement?

35. What role does keeping a set of books in accordance with U.S. GAAP play in the transition of U.S. issuers to IFRS? What impact will keeping U.S. GAAP books have on U.S. investors, U.S. issuers, and market participants?

36. How valuable is reconciliation to U.S. investors, U.S. issuers, and market participants? How valuable is reconciliation to global market participants? Are there some financial statements (such as the statement of comprehensive income) which should not be required to be reconciled to U.S. GAAP?

37. Under either Proposal, would investors find the U.S. GAAP information helpful in their education about IFRS or in being able to continue to make financial statement comparisons with U.S. (and non-U.S.) issuers that continue to prepare U.S. GAAP financial statements? Would one alternative be more helpful to U.S. investors, regulators, or others in understanding information prepared under IFRS or to continue to make comparisons with issuers who prepare U.S. GAAP financial statements?

38. Should we be concerned about the ability of U.S. issuers that elect the early use of IFRS to revert to U.S. GAAP? Would either Proposal be preferred to facilitate such a reversion, should that be appropriate or required as described above?

39. Under Proposal B, should the proposed U.S. GAAP financial information be audited? Is the proposed role of the auditor appropriate? Should the proposed U.S. GAAP financial information be filed as an exhibit to the Form 10-K annual report, instead of as part of the body of the report? Is the proposed treatment of the information appropriate? For example, should the information be deemed “furnished” and not “filed” for purposes of Section 18 of the Exchange Act? Should we require that the supplemental U.S. GAAP information be contained in the annual report that is prepared pursuant to Exchange Act Rule 14a-3(b)? Should the supplemental U.S. GAAP information appear as a note to the financial statements? Is the proposed role of the auditor appropriate?

40. Under either Proposal, should we provide more guidance as to the form and content of the information called for? Under either Proposal, should we require that additional information be provided, such as a “full reconciliation” as is required under Item 18 of Form 20-F? Is there an intermediate position between the reconciliation under Proposal B and the reconciliation under Item 18 of Form 20-F?

41. Under either Proposal, should we require that the issuer’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” prepared under Item 303 of Regulation S-K contain a discussion of the reconciliation and the differences between IFRS as issued by the IASB and U.S. GAAP?

42 Should we require supplemental U.S. GAAP information, such as that in Proposal B, for all quarterly periods covered by IFRS financial statements?

43. Should the option to report under IFRS, whether under Proposal A or Proposal B, automatically terminate as of a date certain? If so, should that date be a set period of time? For example, should it be three years following the effective date of an adopting release? Should it be a longer or shorter time period? Should it be measured from another date (e.g., the first permissible compliance date or the date of the first letter of no ofction issued)? What considerations should be part of our decision as to the date or duration?

44. Under Proposal B, does providing U.S. GAAP information require issuers electing to file IFRS financial statements to maintain sufficient information, records and controls in order to revert back to U.S. GAAP? If not, what additional information, records or controls must be maintained?

45. Under Proposal A, what additional information, records or controls would be necessary for U.S. issuers electing to file IFRS financial statements to maintain so that they could revert back to U.S. GAAP?

V. DISCUSSION OF PROPOSED AMENDMENTS A. The Use of IFRS Financial Statements in Commission Filings by Eligible Issuers 1. Proposed Amendments to Rule 4-01 of Regulation S-X 2. Proposed Definition of “IFRS Issuer”

46. Are the criteria for issuers eligible to file financial statements in accordance with IFRS as issued by the IASB clear from the proposed definition of “IFRS issuer?” If not, in what way is the definition unclear, and what revisions would be necessary to eliminate any lack of clarity?

47. Is there any ambiguity in the proposed amendments regarding the reasons for the distinction between “IFRS issuer” and foreign private issuer, and the application of the rules to each? If so, what is the nature of the ambiguity and what would be necessary to provide clarity?

48. Is the application of Regulation S-X and Regulation S-K to financial statements prepared in accordance with IFRS as issued by the IASB clear from the proposed amendments, or are there other items within those regulations that should be specifically amended to permit the filing of financial statements prepared in accordance with IFRS as issued by the IASB? If so, how would the application of Regulation S-X and Regulation S-K be unclear if there were no changes to those other than those proposed? What changes would be suggested in order to make them clear?

B. Application 1. Article 13 of Regulation S-X

49. Is there any reason why an issuer would be unable to assert compliance with IFRS as issued by the IASB and obtain the necessary opinion from its independent auditor?

50. Is the application of Articles 1 through 12 of Regulation S-X to IFRS financial statements clear from the proposed Rule 13-02? If not, what further clarification is necessary? Are there other rules contained in Articles 1 through 12 that do not, or may not, apply to financial statements prepared in accordance with IFRS as issued by the IASB and that are not addressed in proposed Rule 13-02? If so, what are they and how should they be addressed?

51. A U.S. issuer engaged in oil and gas producing activities that has followed the successful efforts method and carries forward that practice under IFRS will have consistent reserves disclosure under FAS 19, FAS 69 and Industry Guide 2. If that issuer were to apply another method accounting permitted under IFRS, it may lead to inconsistencies between Industry Guide disclosure, FAS 69 disclosure, and the financial statements. Would such potential inconsistencies create ambiguity for users of that information or otherwise be a cause for concern? If so, what would be an appropriate means of addressing the inconsistencies?

2. Proposed Clarifying Amendments with Respect to References to IFRS as Issued by the IASB

52. With regard to specific references to U.S. GAAP in our regulations, should we amend the references to U.S. GAAP pronouncements to also reference appropriate IFRS guidance, and, if so, what should the references refer to? Would issuers be able to apply the proposed broad approach to U.S. GAAP pronouncements and would this approach elicit appropriate information for investors? Should we retain the U.S. GAAP references for definitional purposes?

53. With regard to general references to U.S. GAAP, is our proposed approach appropriate and sufficiently clear? If not, how should these matters be addressed differently and why?

54. Is our proposed approach sufficiently clear on how to address general caption data, segment data and schedule information outside the financial statements? If not, what changes should we make? Are there other places in our regulations that need to be addressed?

C. Proposed Amendments to Item 10(e) of Regulation S-K and Regulation G D. Related Disclosure and Financial 1. Selected Financial Data

55. Will three years of selected financial data based on IFRS be sufficient for investors, or should IFRS issuers be required to disclose in their selected financial data previously published information based on U.S. GAAP with respect to previous financial years or interim periods?

2. Market-Risk and the Safe Harbor Provisions

56. Should the Commission address the implications of forward-looking disclosure contained in a footnote to the financial statements in accordance with IFRS 7? For example, would some kind of safe harbor provision or other relief or statement be appropriate?

3. Disclosure of First-Time Adoption of IFRS in Form 10-K

57. Is the proposed disclosure in Form 10-K sufficient in prominence and content to indicate to investors that the issuer has changed its basis of financial reporting from that used in previous filings? If not, what further disclosure should be provided, and where? Should we require that an issuer disclose the criteria under which it is eligible to file IFRS financial statements? Should issuers be required to reference the letter of no objection in their first IFRS filing?

58. Should we amend Form 8-K to require “forward-looking” disclosure relating to an issuer’s consideration of whether it will file IFRS financial statements in the future? If so, what type of information should be disclosed, and at what point in time prior to the issuer actually filing IFRS financial statements? Would a requirement to make such forward-looking disclosure have any impact on an issuer’s decision to adopt IFRS? If so, what would the effect be?

4. Other Considerations Relating to IFRS and U.S. GAAP Guidance

59. Are there issues on which further guidance for IFRS issuers would be necessary and appropriate?

E. Financial Statements of Other Entities under Regulation S-X F. Pro Forma Financial Statements Provided under Article 11

60. Is the application of the proposed rules to the preparation of financial statements and financial information described in Sections V.D and V.E above sufficiently clear? If not, what areas need to be clarified? Are any further changes needed for issuers that prepare their financial statements using IFRS as issued by the IASB?

61. Under the proposed rules, an IFRS issuer or foreign private issuer may file financial statements of an entity under Rule 3-05, 3-09 or 3-14 prepared in accordance with IFRS as issued by the IASB even though the entity does not meet the definition of “IFRS issuer.” Should we also accept financial statements required under Rule 3-05, 3-09 or 3-14 prepared in accordance with IFRS as issued by the IASB without regard to the status of the issuer as an IFRS issuer or foreign private issuer? Should our acceptance depend on characteristics of the entity whose financial statements are being provided, such as that the entity already prepares IFRS financial statements or the entity principally operates outside the United States?

62. Are there other rules in Regulation S-X that should be specifically amended to accommodate our proposal? If so, how would the application of those rules be unclear if there were no changes to those rules, and what changes would be suggested in order to make them clear?

G. Industry Specific Matters 1. Disclosure Pursuant to Industry Guides

63. Should an IFRS issuer be required to continue to comply with the disclosure requirements of FAS 69? What alternatives may be available to elicit the same or substantially the same disclosure? Proposed Rule 13-03(d) of Regulation S-X is modeled on an instruction relating to FAS 69 in Item 18 of Form 20-F. Does this proposed rule need to be modified in any way to more clearly require filers to provide information required by FAS 69?

H. Application of the Proposed Amendments to Other Forms, Rules and Schedules 1. Application of Proposed Amendments to Exempt Offerings 3. Application of IFRS to Tender Offer and Going-Private Rules

64. Is the guidance in this proposal sufficient to avoid any ambiguity about the use of IFRS financial statements in exempt offerings? If not, what additional clarification is needed? Is any revision to forms or rules necessary?

65. Are there other rules or forms under the Securities Act or the Exchange Act that should be specifically amended to permit the filing of financial statements prepared in accordance with IFRS as issued by the IASB? If so, how would the rules or forms be unclear if there were no changes to those forms, and what changes would be suggested in order to make them clear?

VI. GENERAL REQUEST FOR COMMENTS

66. Are there other considerations in addition to those discussed in this release that the Commission should consider as part of the proposed amendments to permit the limited use of IFRS or its future decision regarding the use of IFRS by U.S. issuers?

Over and out – – David Albrecht

Read Full Post »

Mary Schapiro testifying before Senate Committee on Banking, Housing and Urban Affairs

Mary Schapiro testifying before Senate Committee on Banking, Housing and Urban Affairs

Yesterday brought a very big piece of news.  Mary Schapiro appeared before the U.S. Senate Committee on Banking, Housing and Urban Affairs.  A video of the appearance is here.    Here is my best attempt at transcripting the most relevant part of the hearing.

Senator Jack Reed (D-RI): Much of what you are going to do will have complications and consequences overseas as well as here in the United States, and one of the areas is IFRS road map.  We have repeated written to Chairman Cox, who tried to determine and develop a very deliberate road map, and I think there’s a rush to judgment on this issue.  In fact, I met witih the CEO of the Honeywell Corporation who has similar concerns over disparate treatment under international rules thata can be used to change income, that can be used to state R&D expenses differently.  There’s a host of … an opportunity for arbitrage between the two systems that I think we have to avoid.  Can you give us a notion of how you wish to proceed with this international accounting with recognition that eventually we’ll have that in a global economy and hopefully we will converge to a set of high level standards.

Mary Schapiro: Well, I would proceed with great caution so that we don’t have a race to the bottom.  I think we all can agree that a single set of accounting standards used around the world would be a very beneficial thing, would investors to compare companies around the world.   With that said, I have some concerns with the road map that has been published by the SEC and is out for comment now.  I have some concerns about IFRS standards generally.  They are not as detailed as the U.S. standards.  There’s a lot left to interpretation.  Even if adopted, there will still be a lack of consistency,  I believe,around the world on how they are implemented and how they are enforced.  The cost to switch from U.S. GAAP to IFRS is going to be extraordinary, and I’ve seen some estimates that range as high as $30 million for each U.S. company in order to do that.  This is a time when I think we have to think carefully about whether we impose those sorts of costs on U.S. industry, really make sense.  Perhaps my greatest concern is the independence of the International Accounting Standards Board and the ability to have oversight over their process as they make standards and the amount of rigor that exists in that process today.  So, I will tell you that I will take a great big breath and look at this entire area again, carefully, and will not necessarily feel bound by the existing road map that is out there for comment.

First of all, I am so happily surprised  that Mary Schapiro made these comments.  They are more protective of U.S. GAAP than I ever imagined would come out of the Obama administration.  I am grateful that the IFRS opposition apparently has been listened to, even though it has not been properly understood.  Welcome aboard, Mary Schapiro.  I hope that you frequently read The Summa for advice on how to handle the IFRS issue.

Her statement, coming during the confirmation process, is not binding.  However, it does give U.S. based opponents of IFRS some hope.  There seems to be an open mind in the Obama administration, that is very good news!

Her statements, however, cannot be considered binding  for three reasons.  First, it could simply be posturing in order to ease concern over her nomination so that she can gain confirmation.  Is this a possibility?  Of course.  Paid $3 million per year to head the NYSE/NASDAQ self-relatory group, her FINRA investigated and failed to catch the  $75 billion Madoff fraud.  Moreover, several key national publications have come out against her confirmation.  She will be confirmed, of course, because Republicans are going to fight a different nomination and not hers.  Never-the-less, she could simply be posturing to gain votes for confirmation.

Second, I don’t think she will have the authority to make the final call over IFRS.   IFRS adoption is an international political issue, and U.S. adoption will be negotiated at the international state level.  It is very possible that the U.S. could bargain away GAAP in order to gain European help to relieve our troops in the Middle East.  Under this scenario, investor protection in the U.S. simply is irrelevant.  National security is the key, and with Obama promising to run up trillion dollar deficits, he will want to save money by bringing home the troops.  Plus, one additional factor.

Third, as I’ve written before, Obama is relying on economists, such as Paul Volcker, for guidance on regulation-related matters, such as accounting standards.  Volcker has been a member of the IASC parent organization for the IASB.  He has been strongly in favor of the U.S. switching to IFRS, for a long time.  He will do everything possible to bring about IFRS in the U.S.  Of course Volcker is out of his depth here, having no background in accounting or finance, and really does not understand the nuances of the issue.  But that isn’t going to stop him.

However, there is no use in saying the sky is falling.  I’m going to take Mary Schapiro at her word and proceed as if the GAAP-IFRS issue is still open.  I have a few comments about her specific words.

First, she says, “I think we all can agree that a single set of accounting standards used around the world would be a very beneficial thing, would investors to compare companies around the world.”  Well, we can’t, because I don’t, nor do others.  One need only to read Shyam Sunder’s work to realize international differences in accounting standards are good.  Countries have different interests, and it is simply ignorant thinking to presume that a single set of standards can satisfy the very different interests that are out there.  For example, the U.S. places a high priority on protecting the investor, and this is reflected in the great amount of detail in our rules.  However, not everyone agrees to that priority.  Nor should they.  Different priorities and national interests will lead naturally to different accounting standards.  This is fundamental and we cannot trust Mary Schapiro to protect U.S. GAAP until she acknowledges it.  No matter what else she says, if she doesn’t get this point then she her thinking is compatible with Paul Volcker, the IFRS champion.

Second, her additional comments sound pretty good.  She seems to be well read.  Don’t know if she’s only read Charley Niemeier, or whether she’s read the other six critics of IFRS.  But at least she has comprehended some of the arguments.  Never-the-less, everything here must be interpreted in the context that she believes a single set of world-wide accounting standards would be beneficial and is attainable.  As I said before, it is not necessarily beneficial, and I’ve argued for a long time that it is unattainable.  For her to continue down this road is simply wasted thinking.

Third, she expresses a desire for the SEC to have oversight with respect to the IASB accounting standard generating process.  Well honey, every other country in the world is going to want to have the same oversight desires.  It seems clear that you want some control over the process, but everyone else wants that also.  Why, Europe has already exerted that control with respect to forcing certain changes to the fair value standard.  Let’s get this straight–the SEC will never, ever, get the degree of oversight it desires with respect to IFRS.  I believe that this should be sufficient to bury the IFRS issue forever.  I don’t even know why you are going to spend time on it.

I’m still going to submit a comment to the SEC on Cox’s proposed road map. And I’m going to continue to write about the benefits for the U.S. to retain GAAP.  If it weren’t for international politics, it would be a no brainer.

Debit and credit – – Dave Albrecht

Read Full Post »

Well, the die seems to be cast.  President Obama will call for a big-bang switchover to IFRS, this much is likely.  I personally predict that the last year GAAP may be used in the U.S. by SEC reporting companies is for fiscal years ending December 31, 2010.  The Obama administration will rework the proposed Road Map.

Today’s topic, though, is a preliminary discussion on how accounting education must change under the new regime.  I think accounting professors must now teach financial statement  planning and strategy in the same way that tax professors teach tax planning.

Under IFRS, flexibility and alternatives are the key  words.  According to Harvey Pitt, former Chairman of the SEC, “The reality is that it will likewise be possible that two companies in the same industry will report differently under IFRS.  Investors and regulators will have to adjust to life under this new regime, and there is no time like the present—or at least the near future—to start getting used to it. ” (Pitt, 2008)  The only limiting factor will be for corporate executives to decide what, in their professional judgment, they wish to report in the financial statements.  Almost anything will go.

If corporate executives are being given the freedom to report any number they wish in the financial statements, then what should be the guiding principle(s) behind their choices?  The answer, loyal readers, is that Income Smoothing has again come to the United States.

Once upon a time in the United States, Income Smoothing was a common practice in the United States.  Income Smoothing, quite simply, is judicial use of accounting machinations to change accounting reports so that they tell a desired story.  In its purest form, Income Smoothing takes a time-series of reported net income and smooths it until a trend is apparent.  Peaks are squashed, valleys are filled in, and an aesthetic trend line remains.

Income Smoothing as applied to a bumpy stream of actual net income.

Income Smoothing as applied to a bumpy stream of actual net income.

(more…)

Read Full Post »

Don't get distracted, better keep all eyes on the bouncing ball of IFRS

Do not get distracted, better keep all eyes on the bouncing ball issue of IFRS

Oh sure, the sub-prime crisis and the federal bank bailout are all important, but let’s all keep our eyes on what is really, really important–the push to switch the U.S. from GAAP to IFRS.

I am somewhat frustrated that it is taking the SEC so long to get the proposed road map published.  Despite labeling the coming publication as a proposal, everything said about it seems to scream out that a commitment to IFRS has been made.  Do you recall the movie masterpiece Absolute Power?  In one scene the Laura Linney character said to the Clint Eastwood character, “Father, what have you done now?!”

I keep reading and rereading the wording of the SEC August 27, 2008 press release, SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily. FOR IMMEDIATE RELEASE 2008-184, trying to make sense of it all.  “SEC, what have you done now?!

WSJ reporters Kara Scannell and Joanna Slater have a take on 8/27, the “SEC Moves to Pull Plug On U.S. Accounting Standards“.  Previously, the SEC announced its intention to pull the plug.  What’s next?  SEC finally pulls plug. Because the SEC is judge, jury and executioner on, we can conclude that GAAP is a dead man walking.

The move to IFRS in the United States is controversial.  On one hand, business execs and large audit firms are having orgasmic fits of anticipation of windfall profits if the move to IFRS goes through.  Investor groups, who will have to supply the windfall profits, are angry that the execs and the auditors have appropriated the investor pockets.  Accountants, who care about getting things right, cringe at the thought of having to implement the loose standards of IFRS.

Presidential candidate John McCain would have SEC Chairman Cox fired.

Presidential candidate John McCain would have SEC Chairman Cox fired.

But it does not seem controversial from the perspective of the SEC.  Why?  SEC Chairman Cox, a bull politico, has been let loose in the financial system china house with predictable results. It is very unusual for an SEC chairman to have done such a poor job that a presidential candidate can score points by saying he should be fired.

Back to the proposal.  Cox and SEC spokespersons attempt to deflect criticism by saying that this proposal does not commit the U.S. to IFRS.  However, to the chagrin of investors and accountants this proposal does not decommit the U.S. from IFRS.  An implicit assumption of eventual conversion to IFRS underpins the entirety of what the SEC is about.

The proposal is all about how to prepare for IFRS.  Shall we prepare for IFRS this  way, or that way?

I ask you.  Does it not seem reasonable to conclude that if the proposal set before us is how to plan and get ready for IFRS, then the decision to adopt IFRS is either a difficult to change bedrock, or it is a very done-deal?

Commissioner Elisse B. Walters (possibly the commissioner least inclined to accept IFRS) describes one of the milestones, “Education and training are crucial in readying the United States for the transition of U.S. issuers from U.S. GAAP to IFRS reporting.  Three years is not a very long time, and I believe that the Commission must do everything it can to educate investors and support the training of accountants, auditors, and others involved in preparing and using IFRS financial statements.”  I think this shows, more clearly than anything else, that the move to IFRS is a done-deal.  The process of educating (all) investors, (all) accountants, (all) auditors, (all) others, such as systems people is unnecessary and extremely wasteful unless IFRS is sure to be adopted.  What will this one milestone cost?  Undoubtedly a few hundred billion USD in opportunity cost!  It could be more, depending on the assumputions used in your calculations.  Does it make common sense that the SEC could call for the incurrence of a few hundred billion dollars while simultaneously saying the U.S. is not committed to IFRS?  Give me a break.

Another of the desired milestones is for a test group of approximately 120 large companies to generate IFRS-based financial statements during the three year period 2009-2011.  The CEO of British Petroleum announced that his company spent the equivalent of 100 million USD for the first year of IFRS reporting, with additional expense expected the second and third years.  Extrapolating to the test group, the road map calls for certain U.S. corporations to spend approximately $20 billion USD in total to experimentally convert to IFRS.  What would be the charge if all SEC reporting corporations were to convert to IFRS?  Just shy of $1 trillion USD.  Fortunately for my friends in the Big Four, almost all of this trillion goes into their pockets.  What a windfall for them!.  And, we haven’t even addressed the scientific fact that companies that report on IFRS instead of GAAP experience higher costs of capital and investors experience lower rates of return.  My point is that requiring this $30 billion expenditure by some U.S. corporations seems to include an implicit promise that their sacrifice won’t be made in vain

My main point is there should be no need at all to plan as if we are going to convert to IFRS unless there also is a basic, unchangeable bedrock assumption that the switch to IFRS will be made, no matter what.  Because the plan is being pitched so hard (and all commissioners are on public record as favoring going ahead with the plan), it seems obvious that even a blind man can see that an irreversible commitment to IFRS has been made.

There is something stinky to the SEC claim that the U.S. is not committed to IFRS

There is something stinky to the SEC claim that the U.S. is not committed to IFRS.

How can SEC representatives stand before us with a straight face and say the U.S. is not committed to IFRS.  It doesn’t ring true.  As a good friend and trusted colleague would say, there’s something stinky to this story.

I would feel better if the proposal was about whether or not we should plan for the conversion to IFRS.  I’d definitely feel much better if the proposal was about whether or not we should switch to IFRS at all.  Unfortunately, the proposal certainly seems is about whether or not to adopt this one particular way to get ready for IFRS.

The logical order for the series of voiced questions is: (1) should we adopt IFRS, (2) if yes, is now the best time to start planning for it, (3) if yes, then is this the best plan to get ready for IFRS.  However, the SEC has chosen to ask the questions in a different order:  (1) is this the best plan to get ready for IFRS, (2) if yes or no, then no question, we’re going to start planning now, (3) if we have completed planning and preparation for the conversion, is the conversion something we really want to do after all?

Give me a break!  Of course they have already decided to make the conversion.  The IFRS decision is as irreversible as a 1913 decision to levy a federal income tax in the United States.

Every intelligent person I know tells me not to get worked up to fight the adoption of IFRS, because it simply will be a waste of time.  They say, no use beating a dead horse, or no use beating your head against a brick wall, or no use beating your head against a dead horse.  My reasoning brain agrees with them  It will be a waste of time and utterly useless to attempt to fight the adoption of IFRS in the U.S.  That fight took place a long time ago.   It was very hush-hush.  Then never told us about it when it happened. They won, we lost.

Never-the-less, I believe that there should be hope.  Isn’t there always hope?  No matter how dark the night, we can hope in a bright new dawn  I refuse to give up hope that saner heads will arrive to intercede and justice will prevail.

Just because President Bush and the SEC are out to favor business executives and public auditing firms at the expense of investors and the general public, it does not mean that we have to accept it without a fight  I hope that everyone reading this article will make a commitment to write in during the 60 day comment period with anti-IFRS sentiments.  The exercise has only a snowball’s chance of survival in hell, but I feel life is most worth living when the fight is for good to triumph over bad.

Over and out – – David Albrecht

Read Full Post »

Older Posts »

%d bloggers like this: