SEC Chief Accountant Has a Fourth Alternative on IFRS

by Edith Orenstein

In remarks at a U.S. Chamber of Commerce conference Wednesday, U.S. Securities and Exchange Commission Chief Accountant Jim Schnurr said he is considering ‘another possible alternative’ for the use of International Financial Reporting Standards by U.S. public companies.

In an apparent reference to the SEC’s February, 2010 “Statement in Support of Convergence and Global Accounting Standards,” Schnurr told the U.S. Chamber group, “While the Commission is on record and I personally believe the US is still committed to one set of global standards, it is important whatever we do from a rulemaking standpoint has to be in best interests of U.S. investors.”

Earlier this year, the SEC’s updated Strategic Plan stated that the Commission, “will consider, among other things, whether a single set of high-quality global accounting standards is achievable,” as previously reported by the Wall Street Journal.

Three Alternatives to Date – and a Possible Fourth

Schnurr described three possible alternative actions with respect to the use of IFRS by U.S. public companies that have been considered in that past:

  1. “Turning the keys over to the IASB” (the International Accounting Standards Board),
  2. Providing registrants the option to file IFRS financial statements, and
  3. The “condorsement” approach suggested by his predecessor, Paul Beswick, (i.e., in which FASB would endorse new IFRS standards and incorporate them into U.S. GAAP).
“I’m hoping that in the not too distant future I could go public with another possible alternative,” said Schnurr, that “we would like to get feedback on.” However, he indicated a precursor to floating his new IFRS alternative was for him to complete the rounds of dialogue he is currently having with SEC Chair Mary Jo White and the other four SEC commissioners.

Commission Considerations

Whether any of the three alternatives outlined by Schnurr above, his possible fourth alternative (as I or others may imagine, see “My Two Cents on a Fourth Alternative,” below) or other alternatives will be up for consideration, depends on certain foundational points outlined by Schnurr.

“First and foremost, the analysis I am doing, and whatever counsel or recommendation I would give to Chair White, would have to be in the best interest of us investors,” said Schnurr.

Secondly, Schnurr told the conferece audience that “there have been significant changes in the landscape” since the SEC voted to permit Foreign Private Issuers to file with the SEC using IFRS, without reconciliation to U.S. GAAP.

“First of all , the standards today are more closely aligned,” Schnurr noted of the convergence efforts between FASB and the IASB that, although recognizing some areas, have diverted or could divert, citing insurance accounting in particular.

Perhaps most significantly, the chief accountant noted, “There does not appear to be what I call a significant demand — nobody pounding the table from what I can tell — that the U.S. investor is looking for a significant increase the use of IFRs by U.S. registrants.”

This observation parallels remarks by former SEC Division of Corporation Finance Chief Accountant, now PwC partner Wayne Carnall at FEI’s CFRI Conference, in which Carnall noted that, "Back in 2008, a large number of multinational companies wanted to use IFRS; we have seen that interest wane."

“Each one of th[e] alternatives has its own legal, statutory and practical considerations that have to be dealt with by the commission in order to reach a decision to move forward,” Schnurr said, adding, “Right now, all I can say is, stay tuned.”

My Two Cents on a Fourth Alternative

Personally, I would venture to guess Schnurr’s fourth alternative may be to permit – but not require (although an interesting twist would be if the proposal is indeed to require, after a sufficient period of time for companies, auditors and investors to get up to speed on) - supplemental provision of IFRS financial statements and related footnotes.

Importantly I believe certain ‘safe harbors’ would have to be considered for any such supplemental IFRS information as well. For example, would the ‘supplemental’ IFRS financial statements have to be audited? Or would the cost of auditing that info cancel out the benefit of providing it (to the extent a benefit for providing IFRS supplementally, is identified).

And, whether or not the ‘supplemental’ IFRS information is directly audited, would there be any companion safe harbor under the existing rules of the Public Company Accounting Oversight Board, related to the auditors’ responsibility to read and consider ‘other information’ contained in a filing that includes the audited (U.S. GAAP) financial statements? Lastly, what standard of liability would management be held to, with respect to any such supplemental IFRS information?

Why do I personally think a ‘fourth alternative’ could consist of the SEC permitting – or requiring – IFRS information supplementally? The main reason could be to promote IFRS experience and education, through means of the SEC’s public filing platform. and then, once the comparable IFRS information has been made widely available, decide whether investors find the information valuable, and consider cost-benefits to preparers, auditors and others.

However, the potential downside of any such ‘experiment’ with supplemental provision of IFRS material, as some may view it, would be the incurrence of costs with what many may view as limited to no benefit, particularly if some years down the road, the SEC were to make a subsequent decision to disallow the inclusion of such supplemental information. The cost-benefit question, as relates to investor protection and capital formation which fuels business and job growth, will likely be closely watched by the U.S. Chamber and other groups as the Commission takes its next step on an IFRS Roadmap for U.S. public companies – a step which Schnurr indicated at FEI’s CFRI conference, he wants to ‘expand the dialogue’ on.