Financial statement preparers, auditors, and users are pleased with the SEC’s decision to continue striving for adoption of IFRS 

However, they also note that time is running short for achieving a major condition for that adoption—substantial convergence of Financial Accounting Standards Board and International Accounting Standards Board rules.

Several practitioners said the June 30, 2011, "memorandum of understanding" (MOU) deadline for convergence is fast approaching with the standards setters still far apart—and in some cases growing farther apart—on several key projects.

However, the SEC in its Feb. 24 statement of support for a single set of global standards set completion of those projects as a major condition for adoption of IFRS. The SEC voted unanimously to direct its staff to execute a work plan for evaluating if IFRS is developed well enough for U.S. adoption, among other criteria.

Despite efforts to accelerate cooperation in furthering their convergence effort, the standard setters have shown signs of growing further apart on their highest priority project—accounting for financial instruments. They also have major issues on financial statement presentation and how to resolve net income within it, as well as issues over leasing and how to recognize revenue.

Could quality be harmed? With the MOU deadline fast approaching and the SEC emphasizing its achievement as a significant indicator of whether to adopt IFRS, some practitioners worry that quality of the standards might suffer as the standards setters strive to meet the dead-line, now the SEC statement has increased the stakes.

"There’s just a lot of change that could come out of that MOU, a lot of big projects," said Robert Laux, director of technical accounting and reporting at Microsoft Corp. "I think there is some worry that it is going too fast, worry about whether there will be adequate due process" for practitioners to evaluate the FASB and IASB work and comment on details before new or modified standards are adopted.

"I assume that it [substantial convergence] will be completed by June 30, 2011, but I am just worried that standards setters will rush through to meet that deadline," Laux said.

FASB Chairman Robert Herz in late February told the Financial Accounting Foundation that the two standard setters are "making pretty good progress on most projects," but were "requadrupling" their efforts to achieve convergence.

Laux noted that in the preparer community, "not all of us have the ability to requadruple our efforts" to keep pace with changing standards under the MOU deadline pressure, "give adequate feedback and do our regular jobs."

FASB and FAF, its parent group, acknowledged the SEC statement on convergence and IFRS and voiced their appreciation for the commission’s "leadership regarding its consideration of global accounting standards."

On the importance of meeting the timetable for completing the ambitious list of MOU standard-setting effort by mid-2011 and writing standards of high quality in that time frame, FASB and FAF said in a prepared statement that they expect 2010 "to be a pivotal year for progress."

FASB and FAF said they support the SEC’s further consideration of issues identified in the work plan in deciding whether and how to shift the current financial reporting system for U.S. issuers to a system that incorporates IFRS.

Those issues include "determining whether IFRS is sufficiently developed" and consistently applied; ensuring that accounting standards are set by an independent standard setter and for the benefit of investors; and investor education and education regarding IFRS, and how the IASB-written rules differ from U.S. generally accepted accounting standards.

Edward Nusbaum, global chief executive officer of Grant Thornton, said that the SEC statement "demonstrates the SEC continues to be committed to global accounting standards, and that’s a very positive step."

The SEC statement also shows "a couple of things" that concern the SEC—the independence of the IASB’s funding, its governance, and whether it is sufficiently insulated from undue political influence, Nusbaum said.

"The governance is important," Nusbaum said. "From our perspective, it is critical that investors and users of financial statements are the primary reason they are issuing the standards. That’s going to be the key going forward."

The move to IFRS was enthusiastically embraced by SEC Chairman Mary Schapiro’s predecessor, Christopher Cox. Schapiro’s remarks Feb. 24 that the SEC must "deliberate" whether adoption of international financial reporting standards is in the "best interests of U.S. investors and markets" is a difference in tone from the previous administration, but not necessarily a step back from ultimate adoption, Nusbaum said.

"This is a tone that appropriately says they need to operate in the best interests of investors," Nusbaum said. He noted that President Barack Obama "has been supporting global standards," and "it is very important that the world not perceive this as the U.S. backing off from commitment to global standards. Why is it important? Because you need to have the U.S. to continue to have a seat at the table, to have a standard-setting process on that basis. It is hard to imagine having global standards without the U.S."

Nusbaum said he was not surprised by the nature and tone of the SEC statement because of the "signals they have been sending" since Schapiro took office. He said that he believes the U.S. must be "completely committed" to global standards and make sure it also looks at them "from the perspective of the other side. You can’t take just a U.S.-centric view. You must look at it from the perspective of all investors" for a single set of standards to work.

The fact that the SEC would not begin adopting IFRS for the United States until after 2015 "is a little disappointing," Nusbaum said, but "considering the economic crisis, it is difficult to push companies to change their systems with all the costs involved."

Arnold Hanish, finance and chief accounting officer at Eli Lilly and Co., said he also was "a bit disappointed" the SEC did not set a "date certain" for committing to IFRS and moved back to 2015 possible adoption from the 2014 date proposed in the original SEC "road map" of 2008.

"We would have preferred [the SEC] to put a stake in the ground and to have a date certain—if we’re moving in that direction—and not have a contingency related to more criteria," Hanish said. "For those companies that have [accounting and information technology] systems and modifications in place and want to make those changes only once, [the SEC statement] delays all that."

At Deloitte & Touche, Robert Uhl, national director of accounting standards, suggested that the SEC’s action in February was not surprising, but nevertheless was significant.

"This is the first time we’ve heard this set of commissioners" say that they would favor incorporating IFRS into U.S. financial reporting for public companies, provided certain concerns and conditions were met, Uhl said. "That is a pretty significant statement."

Need for a date certain. A number of prominent accounting and rulemaking observers have pressed for the SEC to issue a "date certain" for when the agency would make the next benchmark decision to move more definitively toward IFRS. The 2011 time frame described by the commission in its Feb. 24 announcement fits with the general schedule that has been understood to be in place for some time.

For the people who wanted to move more quickly to IFRS, "they’re probably not that excited," as an SEC decision on adoption or incorporation appears "a bit farther off" than they would want, suggested Uhl, who said he spoke only for himself and not his firm. Those who want the SEC to not consider further such a shift also probably are not happy, he said.

Over the last five to 10 years, as IASB’s activities gained more saliency in financial and government capitals, leading accounting firms—those with worldwide operations, such as the Big Four and next-tier large firms—have beefed up staffing in foreign offices to prepare for the new line of auditing activity and financial statement preparation. They sought to boost their employees’ technical command, in the United States and abroad, over international standards, for example, as the European Union generally adopted IFRS for public companies in the middle of the previous decade.

Janice Patrisso, national IFRS leader for KPMG LLP, said in a statement that the firm supported the SEC statement and was encouraged the SEC would issue updates to allow public monitoring of the SEC progress on the work plan.

"We believe that IFRS is in the best interest of stakeholders, including investors both here and globally," said PricewaterhouseCoopers U.S. Chairman and Senior Partner Bob Moritz. "We are, therefore, encouraged by these statements from the SEC."

This article was originally published in IOMA's monthly newsletter, 'AOMAR', and is republished here with the express written permission of IOMA, Copyright(c) 2010. For more information, visit www.ioma.com or for copyright permissions please call 212-576-8747 or email content@ioma.com .