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State Accounting Boards Question $3 Million Payment to IASB’s Parent

February 19, 2014

The Financial Accounting Foundation’s (FAF) decision to subsidize the IFRS Foundation with a $3 million payment is causing some concern among a number of accounting organizations. The National Association of State Boards of Accountancy (NASBA) has asked the FAF for a detailed explanation of the payment. NASBA also said it wondered if the decision contradicted previous SEC and FASB statements.

The January 28, 2014, announcement by the Financial Accounting Foundation (FAF) that it will give $3 million to the IASB’s parent organization, the IFRS Foundation (IFRSF), to support completion of the international convergence projects has opened the FAF to some continuing criticism.

“This funding decision appears to have been made without the usual transparency and due consideration of stakeholder input that have historically been hallmarks of FAF practice,” wrote Carlos Johnson, chairman of National Association of State Boards of Accountancy (NASBA) and Ken Bishop, the group’s president and CEO, in a February 14 letter to the FAF, which oversees the FASB and GASB. “This divergence from typical FAF policy of openness is concerning as we would have expected FAF to follow the same openness policies it mandates of its own standard-setting boards.”

NASBA isn’t the only organization asking questions.

“We support the attempt to reach convergence on accounting standards,” said Donna Fisher, a senior vice president with the American Bankers Association (ABA). “However, the justification for shifting a material amount—when compared to the FAF’s annual funding—away from the FAF is difficult to follow. U.S. public companies are required by law to fund the FASB. Is this where those funds were intended to go?”

Fisher was referring to the accounting support fee authorized by the Sarbanes-Oxley Act of 2002 and collected each year from U.S. public companies to fund the PCAOB’s budget and most of the FASB’s operations.

The NASBA also asked whether the FAF considered “the appropriateness” of redirecting corporate funding to the IASB, which the SEC doesn’t recognize as an authoritative third-party standard-setter for U.S. public companies.

“We appreciate any comments we get from our constituents, and we will consider any comments we get from our constituents on this or other issues,” said Robert Stewart, the FAF’s senior vice president of public affairs.

A spokesman for the IFRS Foundation had no comment.

The FAF said it made the decision after consulting with the SEC and that the payments will aid the accounting boards as they wrap up work on the convergence projects for revenue recognition, lease accounting, financial instruments, and insurance contracts. The FAF expects to make the payments in three $1 million installments from its reserve funds.

However, the NASBA said the announcement didn’t offer a clear reason for the contribution and asked why the FAF would pay the IFRS Foundaton when the FASB has similar costs tied to convergence. The NASBA also wanted to know how the amount was determined, given that the contribution represented a large proportion of the IASB’s total funding.

According to the IFRS Foundation’s 2012 annual report, the most recent one available, the total income from all activities was £25.5 million ($42.5 million).

In a note posted on the FAF’s website on February 4, FAF president Terri Polley said the contribution is consistent with the FASB’s commitment to complete the joint convergence projects. She said the FAF’s reserves come from revenue from the sale of publications and subscriptions, and investment income. In recent years, the FAF has maintained a reserve account equal to approximately five quarters of operating expenses for the FAF, FASB, and GASB.

“Any publication, investment or unanticipated income that raises the reserve fund over the five-quarter target historically has been used to offset FASB and GASB operating expenses, thereby reducing accounting support fees,” Polley wrote. “We refer to these funds as ‘residual reserves.'”

Polley said the FAF recently decided to reduce the reserve account by about 20 percent, to the equivalent of one year’s worth of operating expenses, and that reduction will take place over the next three years.

The planned reduction will support the payment to the IFRS Foundation, while any leftover excess will be used to underwrite FASB operations. Polley said accounting support fees in 2014 are expected to be 6 percent lower than in 2013.

Nonetheless, the NASBA wanted to know more about the SEC’s role in the FAF’s decision.

Have the SEC and FAF “implicitly agreed that continued convergence is open-ended, or conversely, that, with funds being redirected to IASB, the option of IFRS for all publicly traded companies is on the horizon?” NASBA asked.

The SEC didn’t immediately respond to a request for comment.

The NASBA said the action only adds to the confusion and uncertainty about the future of accounting standard-setting in the U.S.

According to NASBA, the SEC’s 2012 Final Staff Report: Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers said the FASB would remain the only accounting standard-setter for U.S. public companies. But the $3 million payment could reopen what has been a contentious debate.

“I think a lot of people thought IFRS was on the back burner,” said Gaylen Hansen, a former NASBA chairman, in explaining that the letter wasn’t written to criticize the FAF and FASB but to ask for some clarification. “What’s going on here? We would like some answers.”