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IFRS Foundation Chair Adopts Optimistic Outlook for U.S. Adoption

May 7, 2014

A change in leadership at the SEC and a $3 million commitment from the FASB’s parent organization have made IFRS Foundation officials more optimistic about the U.S. stance toward IFRS. But the institutional obstacles to a switch away from U.S. GAAP remain considerable, and it’s not clear that those obstacles can be reduced to a manageable size in the near future.

The IASB’s parent organization has grown more optimistic about the prospect of the U.S. making a deeper commitment to IFRS, according to a summary of the most recent meeting of the IFRS Foundation posted on April 30, 2014.

During an April 8-10 meeting in Sydney, Michel Prada, the IFRS Foundation chairman, outlined recent developments and reported on the outcome of his recent trip to meet with U.S. officials, including those at the SEC.

“On U.S. funding, there had been welcome news, with the recent $3 million contribution by the Financial Accounting Foundation (FAF), as well as a 50 percent increase in the funding contribution made by the Federal Reserve,” the summary noted. “There continued to be encouraging signs in the U.S., which was already a big user of IFRS, not least the plans by the Ford Motor Co. to transition to IFRS. It was noted that SEC Chair Mary Jo White had said she hoped to be able to come back to the trustees with some proposals in the next months, including the possibility to use the IFRS XBRL Taxonomy. The possibility of allowing an option by U.S. companies was for the first time mentioned in the conversations without explicit opposition.”

The foundation has been pushing the SEC for years to switch to IFRS, and hopeful news from the U.S. is a welcome change from the SEC’s Final Staff Report: Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers from July 2012. The report made no recommendations on what the SEC should do and at the same time described the difficulties the U.S. would face if it abandoned U.S. GAAP.

Since Mary Jo White assumed the chairman’s post in April 2013, nothing concrete materialized until the FAF in January announced its $3 million commitment to the IFRS Foundation to underwrite completion of the convergence projects. After the FAF made the announcement, criticism by various groups in the U.S. led the foundation to reconsider its obligation to pay the remaining balance.

“We have paid the first installment,” said Christine Klimek, a FAF spokesperson. “We will evaluate future payments as the year progresses.”

The SEC didn’t respond to a request for comment on the IFRS Foundation’s report as this story was being written. On several occasions, agency officials have said the remaining rules from the Dodd-Frank Act and the JOBS Act are their main priority. Some observers questioned the meaning of Prada’s statement.

“I don’t know how much they are hoping as opposed to, this is reality,” said former FASB Chairman Dennis Beresford, now a professor of accounting at the University of Georgia.

The significance of the reference to Ford was also unclear but may have referred to the company’s decision to switch to IFRS for internal reporting at the beginning of this year.

“We will continue to report in U.S. GAAP for external purposes until if, and when, the SEC makes the change,” said Todd Nissen, a spokesman for the automaker. Ford decided to use IFRS internally “because IFRS is used widely outside of the U.S. We wanted to have internal consistency with other markets where we do business.”

The 50 percent increase in payments from the Federal Reserve may have a limited long-term implications, given that it amounts to an increase to $75,000 from $50,000 and is a small fraction of the IFRS Foundation’s yearly budget.

“We rely upon financial information prepared using IFRS for some of the significant work we perform supervising foreign banking organizations in the U.S.,” said Steven Merriett, the Fed’s chief accountant. “We rely upon the international use of IFRS and a long-term convergence between IFRS and U.S. GAAP to ensure a relatively level playing field upon which to implement globally consistent regulatory capital and other supervisory approaches.”

Nicolas Veron, a visiting fellow with the Peterson Institute for International Economics in Washington, viewed Prada’s statement as a reopening of the debate in the U.S. following the FAF’s announcement on funding.

Veron also said the IFRS Foundation and IASB are now taking a more “measured and pragmatic” approach in not demanding full adoption but asking the SEC to allow companies to voluntarily report in IFRS.

“I think that’s a much more reasonable approach for the U.S. than the big bang vision,” he said. “I think that’s a good thing, actually having an incremental progress.”

In the views of Paul Miller, a professor at the University of Colorado at Colorado Springs, and Paul Bahnson, a professor at Boise State University, it is politically unfeasible for the SEC to adopt IFRS.

A recent column from the academics said White made a mistake in approving the FAF payments.

As they see it, the costs are enormous with no tangible benefits.

There “will never be enough political power to grant the IASB the status of being the SEC’s designated standard-setter because of the insurmountable obstacles inherent in the commission’s statutes, due process, and political context,” Miller and Bahnson wrote.

“In short, merely gaining a sympathetic ear or nod from the SEC chair would be a microscopic step up an extremely steep and high mountain of obstacles,” they concluded. “The chair has but one vote out of five, and a decision as momentous as this one would be legitimate only if it were unanimous.”

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