"Condorsement" – New Path to IFRS

How close is close enough? And does one size fit all?

At a recent speech before the 2010 AICPA National Conference on Current SEC and PCAOB Developments in December 2010, Securities and Exchange Commission (SEC) Deputy Chief Accountant, Paul Beswick, introduced the phrase “Condoresement” when sharing his views on a reasonable approach to adopting International Financial Reporting Standards (IFRS) in the US. The term describes what he sees as an approach somewhere between convergence and endorsement.

Prior to the financial crisis of 2008, proponents of convergence in the US had a rosier picture in mind. It was in that climate that in August 2008, Christopher Cox, the former SEC chairman, announced a tentative IFRS US GAAP convergence roadmap. Cox’s roadmap envisioned all US companies switching to IFRS by 2014. More than two years later, in an environment highly focused on cutting costs and eliminating uncertainty in the market place, the story of adopting uniform global accounting standards seems to have taken a different turn and Cox’s roadmap still has not been finalized.

Current SEC chair Mary Schapiro has broadly supported convergence, though is more skeptical, claiming that IFRS standards lack the detail of US standards, leave much to interpretation, impose high transition costs, and rob the SEC of its oversight of accounting standards. On top of all this, while the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) still agree that harmonization is an eventual target, the process of convergence remains slow. This speaks not only to the complexity of actually implementing a uniform standard, but also to latent concerns, if not skepticism, on whether a single, international standard is even desirable.

In 2010 the FASB and IASB announced modifications to their IFRS timetable, as well asprioritization of standards being developed under those boards’ joint agenda. The modified strategy retains the target completion date of June 2011 for many of the projects identified by the original plan, including those projects where a converged solution is urgently required. As recent as December 2010, the target completion dates for a few projects have extended into the second half of 2011. The two boards have been working to converge their divergent financial instruments rules, but have so far failed to find common ground on key concepts. It’s unclear how these changes to the original timetable will affect US adoption plans. The SEC is currently investigating what impact the adoption of international accounting rules would have on US companies. The SEC has said that it will make a final decision on US adoption by June 2011, coinciding with the FASB’s and the IASB’s original convergence deadline.

Amidst this uncertainty and continuous delays, other alternatives have recently emerged. Countries have recently decided to adopt IFRS as a sole authoritative source or to incorporate some level of modification. Varying approaches have largely reflected existing legal requirements, responses to capital markets, and maintaining levels of national sovereignty. Mr. Beswick of the SEC noted that “India is set to move to IFRS in 2011. However, they describe their approach as a convergence approach to IFRS and have indicated that they may not fully adopt IFRS if they believe an exception is warranted. This approach appears to be shared by other jurisdictions and leads to a number of thoughtful questions for the U.S. to consider for its method of incorporation”. These remarks were part of his recent speech before the 2010 AICPA National Conference.

Recent discussions of US convergence have similarly followed suit and have centered on a bridging code; a way to translate US accounting standards into an international shape, even if there is no agreement on key issues. Many in the industry likened these discussions to a Plan B – not quite convergence, a compromise. For his part, Sir David Tweedie, head of the IASB told members that he is striving to complete full convergence of international standards with the US but short of this, the board may have to produce comparative guidance to help users understand the differences between the two.

The jury is still out on whether the SEC should require IFRS and what would be the best approach for making the switch if it does. In his speech, Mr. Beswick added “…the majority of jurisdictions are following either a convergence or an endorsement approach. In my opinion, if the U.S. were to move to IFRS, somewhere in between could be the right approach. I will call it a “Condorsement” approach”.

Under this method, U.S. GAAP would continue to exist and the IASB and FASB would continue to work on their convergence projects. Additionally, FASB would work to converge existing GAAP to IFRS over a period of time for standards that are not on the current convergence agenda. This would help to ensure existing standards are appropriate for U.S. companies on a standard-by-standard basis, according to Beswick. When the IASB issues new standards, FASB would decide whether to incorporate or endorse [but not require] them.

At the 2010 AICPA National Conference, members of the SEC focused on the Commission’s intention to consider ways to lessen the burden of converting to IFRS while at the same time protecting the interests of investors. Mr. Beswick’s speech, as well as more recent remarks byChairman Schapiro, has focused on the timing and costs and benefits of the convergence process, especially for small public companies and private companies. Mr. Beswick noted that If the change is gradual, starting with larger companies, smaller companies can learn from larger companies and the cost of incorporating a global set of standards should be decreased.

The main tension in adopting uniform accounting standards rests on the capital allocation benefit of imposing uniform accounting standards on all companies against the cost of forcing less sophisticated smaller companies to adhere to the same standards under a similar adoption timeline. A uniform standard allows investors to compare more easily investment opportunities across the economy, since all financial reports would be expressed in the same “language.” This draws investors into the marketplace, thereby, increasing the supply of capital in the economy and lowering the cost of capital for all firms. Policymakers have often discussed the greater transparency and investor confidence as benefits of a single international accounting standard. However, a single standard is costly for firms because it fails to take advantage of the variations in size, location, and complexity among them when imposing adoption procedures and deadlines. While sharing the “Condorsement” approach, the SEC Deputy Chief Accountant also pointed out some potential pitfalls if the efforts focus on meeting deadlines as opposed to producing high-quality accounting standards that address the needs and concerns of US investors and are meaningful for our capital markets. Mr. Beswick referred to another potential pitfall as “scare tactics” by larger firms in the accounting industry. This involves advertisements by larger firms focused on their ability to help with the IFRS transition, which may give US companies the impression that the process will be challenging and painful. Ms. Schapiro warned that because the last few years have seen the high costs of SOX and 404, and the economic crisis was in part blamed on fair value accounting and therefore by association, US GAAP, the SEC needs to ensure that all issues regarding IFRS are resolved beforehand, so it will not result in anynegative press for the accounting profession after adoption.

On March 8, 2011, Tommaso Padoa-Schioppa, newly appointed chairman of the IASB trustee group stated “The aspiration of having global standards depends very much on the adoption of global standards by the United States and this is highly uncertain…”

It will be left to the SEC to decide when or if US companies take on the international standards. The SEC continues to deliberate on an adoption roadmap, leaving US and international standard setters with no firm plan indicating how or when international standards will be adopted in the US. At the December conference, the SEC Chairman stated that the Commission will allow public companies a minimum of four years to adjust if it decides to mandate the use of IFRS. According to Ms. Schapiro, the SEC still plans to decide in 2011 on whether to require the use of IFRS. The SEC unanimously approved a new timeline that envisions 2015 as the earliest possible date for the required use of IFRS by U.S. public companies only if it decides to move ahead with a mandate. The final decision, according to the SEC, will come down to the outcome of an investigation on the impacts of international accounting rules for the US economy and whether the IASB the FASB can arrive at a set of converged standards in 2011.