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Support for IFRS in U.S. Disappears

SEC Chief Accountant James Schnurr is developing a set of recommendations to let U.S. companies supplement their U.S. GAAP financial statements with IFRS information. Schnurr offered few details about what his proposal will include, he made clear that the SEC will not consider making mandatory adoption of IFRS for U.S. companies. The agency has also found little support for allowing U.S. companies to choose between reporting in IFRS or U.S. GAAP.

SEC Chief Accountant James Schnurr said he is developing a recommendation for the agency’s five commissioners that would allow U.S. companies to provide IFRS financial information as a voluntary supplement to their U.S. GAAP financial statements.

Speaking at Baruch College in New York on May 7, 2015, Schnurr offered few specifics about what the recommendation will include. He made clear, however, that two options once seriously considered viable in the U.S., mandatory adoption of IFRS, or allowing U.S. companies to choose between reporting in IFRS or U.S. GAAP, were officially off the table.

“There’s virtually no support to have the SEC mandate IFRS for registrants,” Schnurr said. “There’s little support for the SEC to allow an option allowing companies to prepare financial statements in IFRS.”

Saying there were “real impediments” to the two options, he said they would not be included in the recommendation he is preparing.

“In the outreach we had with constituents, there was no interest in those two alternatives. It is reasonable to conclude those would not be in my recommendation,” he said.

Schnurr did not commit to a specific timeline for delivering his recommendation to the SEC’s five commissioners but said the proposal was “pretty close” to being vetted by SEC Chair Mary Jo White’s office.

Schnurr said the SEC was committed to a single set of global accounting standards, but with no mandate for IFRS in sight, and the FASB and IASB coming to different conclusions on major issues such as lease accounting and credit impairment, it is unclear how such a goal can be realized.

Speaking to reporters after the speech, Schnurr said he believed that continued cooperation between the FASB and the IASB to work on common accounting standards through convergence would be the way to achieve global standards. But he acknowledged the difficulties of this happening.

“We may never get there,” Schnurr said. “We may not have every standard converged, but we’ll get to the point where they’ll be close enough.”

An IASB spokesman did not respond to a request for comment as this story was being written.

Schnurr highlighted the FASB and IASB’s work on their respective credit impairment standards, which are considered the standard-setters’ chief responses to the 2008 financial crisis. The boards wanted to write a global standard that would require banks and other financial businesses to record earlier losses on loans and other debt securities than what current accounting allows, but they could not agree on the mechanics of a single accounting standard.

U.S. investors and regulators will want to be able to compare an international bank’s credit losses estimates to a U.S. bank’s, and having supplemental IFRS information would be helpful, he said.

“And so if that is the case, it’s actually important for commission to do something right now to eliminate the impediments of doing what is considered to be a non-GAAP measure,” he said.

Schnurr’s proposal to allow companies to provide supplemental IFRS information is a far cry from earlier proposals mulled by the SEC. Eight years ago, when the FASB and IASB were committed to completing the convergence of their standards, full-scale adoption of IFRS in the U.S. looked nearly certain.

In 2007, the SEC allowed foreign companies to report under IFRS with 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 floated the idea of adopting IFRS as the primary financial reporting regime for U.S. companies.

Then the financial crisis hit. The FASB and IASB continued to work on their convergence projects. But had to abandon most of them in 2011 because the boards were stretched beyond their capacity trying to write all the standards they had agreed to in a short amount of time. The boards continued to work on four projects — revenue recognition, insurance contracts, lease accounting, and financial instruments — for the next two years. By 2013, the convergence efforts for all but revenue had broken down as it became clear that requirements for international financial reporting had two many differences from the needs for the U.S.

As the convergence projects collapsed, members of both boards openly expressed their frustration in a process that required them to meet face-to-face at either the IASB’s offices in London or the FASB’s offices in Norwalk, Connecticut. The meetings often went on for three days, with some of the discussions taking up most of the day. As the convergence projects dragged on for several years, the boards often revisited the same topics in their discussions with no resolution.

Since then, board members have expressed relief that the convergence effort is over, even if the results were inconclusive, and no interest in resuming it.

In 2012, the SEC released a much-awaited report on IFRS in the U.S., but it made no recommendations on whether international accounting standards should be used in the U.S. Instead, Final Staff Report : Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers, described the challenges of using IFRS in the U.S.

“I think one of the reasons they’ve not gone forward is because as deeper analysis was done by commission staff, it was determined that it would be very difficult for the commission to actually move to those proposals, which is why we’ve had these long periods of time where nothing happened,” Schnurr told reporters.

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