Keeping Your Balance: SEC works toward global accounting standards

By Thomas L. Wolf
Posted: 5:46 pm Thu, January 12, 2012

In mid-November 2011, the Securities and Exchange Commission’s Office of the Chief Accountant issued two staff papers related to the Commission’s Work Plan towards convergence of global accounting standards. The work plan’s objective is to assist the commission in making a decision on whether, when, and how to incorporate International Financial Reporting Standards into the U.S. domestic reporting system.

One of the staff papers issued provides a comparison of U.S. GAAP to IFRS, while the second paper provides an analysis of IFRS in practice. The papers do not further address the timing of the commission’s final decision to incorporate IFRS, which was originally scheduled to be made by the end of 2011.

A comparison of U.S. GAAP and IFRS

The first area of focus in the work plan involves an assessment of whether there is sufficient development and application of IFRS for the U.S. domestic reporting system.

The first report focuses on the staff’s evaluation of financial reporting areas in which IFRS do not provide guidance or where it provides less guidance than U.S. GAAP.

The staff analyzed 29 U.S. GAAP Accounting Standards Codification topics and compared them with the corresponding guidance in the IFRS as issued by the IASB and focused on differences at the principles level. Any differences in the topics on the boards’ current joint standards-setting projects were not included in this analysis. The analysis did not consider any SEC rules and regulations or other staff guidance as it focused on the accounting principles recognized by the standard setters without additional regulatory interpretations.

The staff noted that while IFRS contain “broad principles to account for transactions across industries, with limited specific guidance and stated exceptions to the general guidance,” U.S. GAAP contains more detailed, specific requirements.

The staff noted a number of differences relating to industry or transaction specific guidance that exists in U.S. GAAP but not in IFRS. The abundance of specific guidance in U.S. GAAP may contribute to consistency in application across entities operating in a particular industry but does not always result in comparability across industries. In the absence of industry and transaction specific guidance, preparers of IFRS financial statements follow the general principles of IFRS, which may help to promote broader consistency across industries.

The staff also noted that there are fundamental differences that exist between the boards’ respective conceptual frameworks. Under IFRS, the conceptual framework is authoritative guidance, and the concepts are applied when there is no standard or interpretation that specifically applies.

Under U.S. GAAP, the concept statements were not included in the Accounting Standards Codification, and consequently are not authoritative guidance.

Also, under U.S. GAAP, the concepts statements define an asset or liability in terms of a probable future event. IFRS do not include the concept of probability in the definition of an asset or a liability. Rather it considers probability in its measurement requirements. The differences in the boards’ conceptual frameworks and asset/liability definitions can contribute to differences in the recognition and measurement guidance incorporated at the boards’ standards level.

An analysis of IFRS in practice

The second staff paper presents the staff’s observations regarding the application of IFRS in practice. The staff analyzed the most recent annual consolidated financial statements of 183 companies from 22 countries (both SEC registrants and nonregistrants), which prepare financial statements in accordance with IFRS.

The companies selected were from the 500 largest global companies ranked by revenues and the significant majority of such companies were from the European Union. Companies from the banking industry represented approximately 20 percent of the sample. The staff read each selected company’s financial statements and collected observations regarding transparency and clarity of disclosures, compliance with applicable accounting standards, and the comparability of financial statements.

Further, the staff focused on how the recognition and measurement requirements were applied in practice. The staff then compared these observations for all companies in the analysis to identify trends on an overall basis as well as by country and industry. The paper summarizes the staff’s observations by accounting topic including accounting principles, presentation of financial statements, and accounting for assets, liabilities, shareholders’ equity, revenue, expenses, broad transactions, and certain industry-specific matters.

The staff found that company financial statements generally appeared to comply with IFRS requirements. However, two themes were identified in the analysis:

Transparency and clarity — The staff found that companies could make improvements in this area. The staff noted that some companies did not provide accounting policy disclosures in areas that appeared to be relevant to them. The staff also observed that certain disclosures presented challenges to understanding the nature of a company’s transactions and how those transactions were reflected in the financial statements. In some cases, the disclosure raised questions as to whether the company’s accounting complied with IFRS.

Diversity — The staff noted that diversity in the application of IFRS presented challenges to the comparability of financial statements across countries and industries. In certain instances, the diversity resulted from options permitted by the IFRS standards. In other cases, the diversity appeared to be caused from noncompliance with IFRS.

 

Thomas L. Wolf, CPA, is the managing partner of Mengel, Metzger, Barr & Co. He may be contacted at twolf@mmb-co.com.