Wiley IFRS 2016: Interpretation and Application of International Financial Reporting Standards

Book Preface

This easing of US registration requirements for foreign companies seeking to enjoy the benefits of listing their equity or debt securities in the US led, quite naturally, to a call by domestic companies to permit them also to choose freely between financial reporting under US GAAP and IFRS. By late 2008 the SEC appeared to have begun the process of acquiescence, first for the largest companies in those industries having (worldwide) the preponderance of IFRS adopters, and later for all publicly held companies. However, a new SEC chair took office in 2009, expressing a concern that the move to IFRS, if it were to occur, should perhaps take place more slowly than had previously been indicated.

It had been highly probable that non-publicly held US entities would have remained bound to only US GAAP for the foreseeable future, both from habit and because no other set of standards would be viewed as being acceptable. However, the body that oversees the private-sector auditing profession’s standards in the US amended its rules in 2008 to fully recognize IASB as an accounting standard-setting body (giving it equal status with the FASB), meaning that auditors and other service providers in the US could now issue opinions (or provide other levels of assurance, as specified under pertinent guidelines) on IFRS-based financial statements. This change, coupled with the promulgation by IASB of a long-sought standard providing simplified financial reporting rules for privately held entities (described later in this chapter), has possibly increased the likelihood that a broad-based move to IFRS will occur in the US within the next several years.

The impetus for the convergence of historically disparate financial reporting standards has been, in the main, to facilitate the free flow of capital so that, for example, investors in the United States will become more willing to finance business in, say, China or the Czech Republic. Having access to financial statements that are written in the same “language” would eliminate what has historically been a major impediment to engendering investor confidence, which is sometimes referred to as “accounting risk,” which adds to the more tangible risks of making such cross-border investments. Additionally, the permission to list a company’s equity or debt securities on an exchange has generally been conditional on making filings with national regulatory authorities, which have historically insisted either on conformity with local GAAP or on a formal reconciliation to local GAAP. Since these procedures are tedious and time-consuming, and the human resources and technical knowledge to do so are not always widely available, many otherwise anxious would-be registrants forwent the opportunity to broaden their investor bases and potentially lower their costs of capital.

The historic 2002 Norwalk Agreement—between the US standard setter, FASB and the IASB—called for “convergence” of the respective sets of standards, and indeed a number of revisions of either US GAAP or IFRS have already taken place to implement this commitment. The aim of the Boards was to complete the milestone projects of the Memorandum of Understanding (MoU) by the end of June 2011.

Although the Boards were committed to complete the milestone projects by June 2011, certain projects such as financial instruments (impairment and hedge accounting), revenue recognition, leases, and insurance contracts were deferred due to the complexity of the projects and obtaining consensus views. The converged standard on revenue recognition was finally published inMay 2014, although FASB has subsequently proposed deferring its effective date and IASB is likely to do the same. Details of these and other projects of the standard setters are included in a separate section in each relevant chapter of this book.

Despite the progress towards convergence described above, the SEC dealt a blow to hopes of future alignment in its strategic plan published in February 2014. The document states that the SEC “will consider, among other things, whether a single set of high-quality global accounting standards is achievable,” which is a significant reduction in its previously expressed commitment to a single set of global standards. This leaves IFRS and US GAAP as the two comprehensive financial reporting frameworks in the world, with IFRS gaining more and more momentum.

The MoU with FASB (and with other international organizations and also jurisdictional authorities) has been replaced by a MoU with the Accounting Standards Advisory Forum (ASAF). The ASAF is an advisory group to the IASB consisting of national standard setters and regional bodies. FASB’s involvement with the IASB is now through ASAF. Following the end of the convergence projects, the IASB has started with a new agenda consultation process on the future work program of the IASB. The IASB has started working on its new conceptual framework and included rate-regulated activities as a major project.