The Securities and Exchange Commission’s chief accountant said Monday that participants in the U.S. capital markets will “hear more from” the regulator about international financial reporting standards “in the near term.” That likely means it will be early next year when the SEC will decide as promised whether to require U.S. public companies to file financial results using IFRS.
Speaking at the annual conference of the American Institute of Certified Public Accountants, chief accountant James Kroeker reiterated points he made earlier this year about the SEC’s ongoing assessment of more than 200 comment letters received on the proposed “road map” to switch from U.S. generally accepted accounting principles to IFRS by 2014. While most comment letters agreed with the concept of improving transparency and comparability by moving to a single set of global standards, there has been continual debate about the approach.
For instance, Kroeker noted yesterday that some commenters are lobbying to postpone the switch until the completion of the standards-convergence project by the U.S. Financial Accounting Standards Board and the International Accounting Standards Board. (They argue that the inconsistencies between U.S. GAAP and IFRS should be worked out before American companies are forced to adopt international standards.)
The comment letters pointed out other lingering issues that the SEC must consider before mandating IFRS in the United States, added Kroeker, such as improving the consistency of rule interpretation and enforcement across countries; clarifying the ongoing role of FASB if a switch to international standards gets the green light (the IASB, not FASB, is the standard-setter for international accounting rules); and clarifying accounting-change effects that affect other regulatory regimes (such as tax and utility-specific regulations) as well as bank covenants, corporate-governance rules, and lawsuit contingencies.
There are also the more practical issues of whether corporate staffs and information-technology systems will be ready for a switch, and whether the auditing community, including firms, universities, and state boards that administer CPA exams, will be ready for a move to IFRS.
“Regardless of any potential future action by the SEC,” said Kroeker, it’s important for FASB and the IASB to continue on the convergence path, because “quality” standards are of great importance to the global markets. He suggested addressing the quality issue through various avenues, with input from a “broad range of stakeholders,” and promoting an independent standard-setting process.
Kroeker warned against rewriting accounting standards at the whim of market fluctuations. “I believe it would be a serious mistake…to take our focus off of investors’ need for unbiased and transparent information in order to design, as some may suggest, accounting standards that attempt to compensate for today’s banking crisis,” he said.
To that end, Kroeker spoke out against designing standards that “portray an artificial stability, mute the impacts of real business cycles, mask a lack of adequate risk management or supervision, or favor one industry or business practice over another.” During the past two years, both FASB and the IASB have been accused by the banking lobby and others of exacerbating the global credit crisis with accounting standards that forced companies to record the fair value of certain financial instruments, resulting in massive write-downs in the values of those assets on company books. “It is times when pressures are highest, and investor confidence has the greatest potential to be shaken by uncertainty, that the importance of a credible and independent standard-setting process in the interest of investors is most pronounced,” said Kroeker.
The chief accountant also addressed drops in asset values in the context of consolidation and off-balance-sheet accounting. “I am quite sure structured finance will evolve,” said Kroeker, referring to the way “creative structures” have been used by some companies to remove underperforming assets from the balance sheet with little or no transfer of risk.
He pointed to the elimination of qualified special-purpose entities (QSPEs) and “a focus on a clear consolidation objective” as two rulemaking activities that FASB has pushed to the forefront to shut down structured-finance loopholes. In May FASB issued guidance requiring companies to disclose more about how they consolidate variable-interest entities and classify the transfer of financial assets as a sale. The guidance was aimed at erasing the appearance of joint control of off-balance-sheet assets when, in reality, the original owner retains the risk. Later in the year, FASB issued a rule eliminating QSPEs, which forced some companies, including many banks, to bring securitized assets back on their balance sheets.
In discussing aggressive financing structures, Kroeker cautioned auditors and preparers to “remain vigilant when evaluating the substance, or lack thereof, of elements of transactions included to achieve specific accounting results.” He followed that comment by assuring the audience that his office would “work closely” with the SEC’s Division of Corporation Finance and Division of Enforcement to evaluate the implementation of FASB’s new rules in financial statements filed in 2010.