FEI, FAF, Audit Firms Weigh in on IFRS for U.S. Issuers

November 15, 2007

FEI Summary

Nov. 13, 2007 marked the end of the comment period on the U.S. Securities and Exchange Commission (SEC) concept release “On Allowing U.S. Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards (IFRS). Below is some information on comment letters filed with the SEC by FEI, the Financial Accounting Foundation (FAF), and major audit firms, as well as a related survey being conducted jointly by Duke and Oxford University.

Comment Letters Filed

In its comment letter filed on that day, Financial Executives International’s (FEI) Committee on Corporate Reporting (CCR) noted that it strongly supports providing a choice in the near term to U.S. issuers to prepare financial statements in accordance with International Financial Reporting Standards (IFRS) as published by the International Accounting Standards Board (IASB).

The FEI CCR letter emphasized voluntary adoption for the following reasons:

• Differences in the circumstances of U.S. companies and their readiness to adopt IFRS — “At one end of the spectrum are large multi-national companies that are required to prepare statutory filings on the basis of IFRS in a growing number of foreign jurisdictions and compete directly with foreign companies that utilize IFRS for financial reporting. At the other end of the spectrum are small and medium sized public companies (as well as some large companies) that compete in regional or national markets and justifiably have no interest in IFRS at this time. We believe that in taking a voluntary approach, the release appropriately recognizes these differences.”
• Significant work with respect to infrastructure (e.g., academic curricula, continuing professional education, certification, etc.) — “We believe that the most effective way to meet this challenge is to bring market forces to bear now. A voluntary program permitting U.S. companies to file financial statements in accordance with IFRS will provide the impetus for changes in education and certification.”

From a longer-term perspective, CCR noted that providing the IFRS choice is a logical and necessary step in the global movement towards a single set of high quality global accounting standards. In order for this to occur, the letter recommends the SEC establish a specific, phased timetable toward mandatory adoption of IFRS, no sooner than 2012.

The letter also reiterated its support for the separate SEC proposal to allow foreign private issuers to file financial statements in accordance with IFRS without reconciliation to U.S. generally accepted accounting principles (GAAP). The commission expects to vote on this separate proposal November 15.

FEI’s Committee on Finance and Information Technology (CFIT) also weighed in on the concept release, focusing on how changes in accounting standards will have a direct impact on eXtensible Business Reporting Language (XBRL). CFIT’s letter recommended putting quality control systems in place to deliver an updated IFRS and/or U.S. GAAP taxonomy, similar to the process adopted by the trustees of the IASB. This provides an opportunity, the letter stated, to focus on converging IFRS and U.S. GAAP taxonomies into a single platform.

In addition to the CCR and CFIT letters, the SEC has received 69 comment letters

on the concept release to date, including letters from the Financial Accounting Foundation (FAF) that provides oversight of the Financial Standards Board (FASB), and the top U.S. accounting firms, among others.

• The FAF letter provides for four key points:

1. U.S. public companies should move to an improved version of IFRS. The letter opposes choice between IFRS and U.S. GAAP as it adds to overall reporting system complexity.
2. Supports development of a “blueprint” for moving U.S. public company to IFRS that identifies a target date for completion along with interim milestones. The blueprint refers to a two-pronged “improve-and-adopt” process that first focuses on improving areas where neither U.S. GAAP nor IFRS is considered to be of sufficiently high quality (e.g., leases, financial statement presentation, revenue recognition, insurance, extractive industries). Other issues that should be addressed by the blueprint include the future role of the FASB after complete transition to IFRS as well as whether private companies and not-for-profit entities should apply IFRS for small and medium sized entities.
3. Secure the IASB as the independent global body to set international standards. A global consortium, possibly led by the SEC and IOSCO [International Organization of Securities Commissions], would establish funding that provides adequate resources while protecting the IASB’s independence. Additionally, international agreement is needed to use IFRS, as issued by the IASB, and to eliminate processes that lead to local variants of IFRS.
4. Tie the removal of the reconciliation for foreign issuers to the completion of the blueprint and the commitment of international parties to undertake steps necessary to sustain the IASB.

• The letters of the top U.S. accounting firms also support a comprehensive plan toward mandatory adoption of IFRS as issued by the IASB. The firms support early or voluntary adoption in the interim. Other issues addressed include:

• o        IASB funding and process

• Ernst & Young letter recommended:  "To achieve the objective of a single set of high quality global accounting standards, the SEC and other regulatory bodies throughout the world need to provide input on, and then accept, the process followed by the IASB to adopt IFRS, rather than the current regime of endorsements.

• o        Education, infrastructure;

  o        Amendments/additions to existing auditing standards

  §         Three firms said there would be minimal amendments or additions to audit reporting standards, specifically AU 534 Reporting on Financial Statements Prepared for Use in Other Countries;

• Grant Thornton (GT) letter said that “No changes are necessary to current auditing standards.”

• §         Two firms promoted global convergence of auditing standards

  o        Time and costs of converting to IFRS;

  §         PwC letter states costs may be significant, but are one-time in nature

  §         Deloitte letter notes that based on its experience, a number of companies concluded that in the long term, the benefits of conversion exceed the additional costs incurred through greater reporting consistency, more efficient use of resources, improved controls, and better cash management

  §         Grant Thornton (GT) letter notes that larger audit firms will “have an advantage over smaller firms, at least at the outset. Also, in a voluntary program it is likely that issuer demand for IFRS services would come from larger, perhaps multinational clients.” However, GT letter states that there will be sufficient demand for its services.

• Principles-based IFRS requires more professional judgment versus more detailed U.S. GAAP.
• KPMG letter says that “Users and regulators must be prepared to accept reasonable judgments in the application of the standards, including in situations that may lead to differing outcomes in what appear to be similar circumstances, as long as sufficient transparency for users is achieved through appropriate disclosures.”
• The PwC letter notes that “U.S. constituents will need to adjust to a standard-setting process that considers a world-wide set of interests, and as a result they may have less influence over the process.”
• KPMG also addressed XBRL recommending that evaluation of IFRS XBRL taxonomy be incorporated in any new SEC roadmap for use of IFRS by domestic issuers.

·   Finally, a letter filed by professors from Duke and Oxford Universities on the SEC concept release provided preliminary findings from a survey of 84 financial executives on IFRS and U.S. GAAP. (For further information and to participate in the survey, see below.) Conducted in conjunction with FEI and Financial Executives Research Foundation (FERF), the survey noted that:

o        More than 90 percent expect that financial reporting standards “will be increasingly developed at the international level;"

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o        Only 37 percent agree that international standards are largely identical to U.S. GAAP, whereas 43 percent do not think so.  However, the overwhelming majority of survey respondents so far expect increasing convergence between IFRS and GAAP.

o        A clear majority of U.S. firms support SEC acceptance of IFRS-based accounts. 

Duke, Oxford Universities Seek Survey Responses to IFRS Survey
As noted above, Duke and Oxford Universities, in conjuction with FEI and the Financial Executives Research Foundation (FERF), are conducting a survey on IFRS. The survey is available at: www.standardssurvey.com

Updated Nov. 19, 2007 by Cheryl Graziano, Vice President, Research and Operations, Financial Executives Research Foundation (FERF). This summary does not represent FEI or FERF opinion unless specifically stated above.