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IFRS Document Will Test Public Views on Principles-Based Reporting

SEC Chief Accountant James Schnurr said he hoped that a document about the use of IFRS in the U.S. will be issued in 2015. The paper is likely to contain questions about an idea first floated in December 2014 to let U.S. companies provide IFRS financial information as a voluntary supplement to their U.S. GAAP financial statements.

Despite a general lack of interest in IFRS among U.S. market participants, SEC officials are determined to publish a document to solicit public comment on the topic in the next few months.

“We are still working on it,” SEC chief accountant James Schnurr told Accounting & Compliance Alert on September 9, 2015. “I would hope it would be” this year.

It is unclear what form the document will take. The options include a staff paper or a concept release, a type of preliminary regulatory document. The paper is likely to contain questions about an idea first floated in December 2014 to let U.S. companies provide IFRS financial information as a voluntary supplement to their U.S. GAAP financial statements.

“My views have not changed,” Schnurr said when asked whether supplemental IFRS information will be included in the document.

Schnurr in December said the SEC wants to see IFRS used more widely in the U.S. without greatly increasing the cost of preparing financial statements and SEC filings.

However, observers said very few companies are likely to take him up on his offer given their unwillingness to bear the cost, especially if an audit will be required, when investors are not demanding the extra information.

The SEC could let companies know they have an option to provide unaudited IFRS information in the footnotes to the financial statements or in the management’s discussion and analysis of financial condition in a quarterly or annual filing.

But it is not clear that the information can be provided in this fashion without confusing investors about the meaning of unaudited numbers that may differ from the related dollar amounts in the audited U.S. GAAP financial statements. It is also unclear that companies will want to make the disclosures, given the efforts the SEC and FASB have under way to address the frequent complaints they get about disclosure rules that ask for too much information.

Schnurr’s plan does underscore the SEC’s lack of interest in writing a rule to mandate adoption of IFRS.

In May and June, Schnurr said publicly there is no support for an IFRS mandate and little support to provide an option to allow U.S. companies to prepare their financial statements in IFRS instead of U.S. GAAP.

Schnurr’s latest remarks come after a decades-long debate about the role international accounting should play in the U.S. markets.

In the late 1990s, then-SEC Chairman Arthur Levitt revived interest in international accounting standards in reaction to the Asian currency crisis.By 2001, the effort led to the replacement of the International Accounting Standards Committee with the International Accounting Standards Board accompanied by the appointment of former Federal Reserve Chairman Paul Volcker to head the foundation supervising the IASB.

Section 108(d) of the Sarbanes-Oxley Act of 2002 instructed the SEC to study the suitability of adopting a “principles-based” financial reporting regime for the U.S. capital markets.The study was intended to test the prospects of replacing “rules-based” U.S. GAAP with the principles-based system from IFRS.

By the mid-2000s, the SEC seemed to be on track to switch to IFRS. In 2007, before the financial crisis peaked, the SEC allowed foreign companies to report under IFRS in Release No. 33-8879, Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP.

In November 2008, the SEC published a proposal in Release No. 33-8982, Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers, which explored adopting IFRS as the primary financial reporting regime for U.S. companies.

But the SEC soon got caught up with post-crisis reforms, and Mary Schapiro, who took the agency’s helm in 2009, had a distinctly different view than her immediate predecessor, Christopher Cox. The IFRS initiative stalled over the next several years as staffers worked on a series of reports about the suitability of the international standards for U.S. markets.

In July 2012, the SEC published Final Staff Report: Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers, which described the challenges of using IFRS in the U.S. The report offered no recommendation to accept or reject the international accounting standards.

In the seven years since the SEC’s last round of IFRS rulemaking, the market environment has changed, and the interest among U.S. companies and investors in IFRS seems to have declined.

Schnurr, an IFRS proponent, has been the SEC’s chief accountant for less than year.After a series of statements early in his tenure that seemed to position the U.S. market regulator for a renewed push on IFRS, he quickly moderated his statements and has adopted a much more cautious approach.

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