Of what value is a common set of standards in financial accounting and reporting

International Financial Reporting Standards (IFRS) are a set of accounting standards that govern how particular types of transactions and events should be reported in financial statements. They were developed and are maintained by the International Accounting Standards Board (IASB). The IASB’s objective is that the standards be applied on a globally consistent basis to provide investors and other users of financial statements with the ability to compare the financial performance of publicly listed companies on a like-for-like basis with their international peers. IFRS are now used by more than 100 countries, including the European Union and by more than two-thirds of the G20. IFRS are sometimes confused with International Accounting Standards (IAS), which are older standards that IFRS replaced in 2000.

In November 2008, the U.S. Securities and Exchange Commission (SEC) issued a proposed “Roadmap” for a possible path to a single set of globally accepted accounting standards. The roadmap generated significant interest and comment from investors, issuers, accounting firms, regulators, and others regarding factors that the SEC should consider as it moved forward in its evaluation of whether and how to incorporate IFRS into the financial reporting system for U.S. issuers.

The SEC issued a statement in support of convergence and global accounting standards in February 2010. It said: “The Commission continues to believe that a single set of high-quality globally accepted accounting standards will benefit U.S. investors and that this goal is consistent with our mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. As a step toward this goal, we continue to encourage the convergence of U.S. GAAP [generally accepted accounting principles] and IFRS and expect that the differences will become fewer and narrower, over time, as a result of the convergence project.”

The SEC then sponsored a series of roundtables in the summer of 2011 to help determine whether incorporating IFRS into the U.S. financial reporting system was in the best interest of U.S. investors and markets. At that time, there was limited discussion about the possible methods of implementing any incorporation, i.e., through the wholesale adoption of IFRS as issued by the IASB, or by regional or national incorporation of IFRS through convergence or endorsement or some combination. The discussion centered mostly on matters regarding how investors use financial statements, investor education, and who should interpret the principles-based standards.   

There was, however, considerable discussion regarding the role that various stakeholders, such as regulators and public accounting firms, play in interpreting principles-based standards. And rather than leaving the interpretation of the standards to these stakeholders, perhaps the IASB should fund and support a more robust interpretation effort.

But the momentum of the issue slowed following the release of a 2012 SEC Final Staff Report (Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers) that questioned the funding of the IASB and the timeliness of responses to widespread accounting issues by the IFRS Interpretations Committee. The report also said adoption of IFRS would be costly for U.S. public companies.

The SEC emphasized in the report, however, that its publication did not imply that the SEC had made any policy decision as to whether IFRS should be incorporated into the financial reporting system for U.S. issuers, or how any such incorporation should be implemented. It added that additional analysis and consideration of the threshold policy question—the question of whether transitioning to IFRS is in the best interests of the U.S. securities markets generally and U.S. investors specifically—is necessary before any decision by the SEC can occur.

SEC noted that feedback it received as it formulated the Work Plan indicated a large majority of constituents opposed a requirement to adopt the standards of the IASB outright. However, the staff said there is substantial support for exploring other methods of incorporating IFRS into U.S. GAAP and focused its efforts accordingly.

One of CFA Institute’s central missions is the improvement of corporate financial reporting and disclosure standards. The increased globalization of the capital markets emphasizes the need for consistent and high-quality information. 

• In our effort to improve corporate financial reporting, we:
• Participate on regulatory committees and industry task forces on issues such as XBRL
• Provide investor education
• Present research reports, surveys, and guidelines

Our work on financial reporting is based on the Comprehensive Business Reporting Model, which provides a framework for developing financial reports and disclosures.

Although convergence efforts have stalled since the Financial Accounting Standards Board (FASB) and IASB completed projects that better align accounting rules in U.S. GAAP and IFRS in February 2013—including revenue recognition, leases, and credit losses on financial instruments—former SEC Chair Mary Jo White said in January 2017 just prior to her departure that collaboration between the two boards should continue. She called for renewed emphasis on global accounting standards that would best serve investors through collaboration between FASB and IASB.

Convergence towards a single set of high quality, understandable, and enforceable global accounting standards is in the best interests of investors and for global financial markets generally.

Rationale:

• The costs investors incur to harmonize the various standards so that cross-border comparisons of companies may be made are large
• Such costs are ultimately impounded in the costs of capital that investors demand for cross-border investments
• The magnitude of the costs is sufficiently large in some cases as to serve as an effective barrier to cross-border movements of capital
• Investors, companies, and markets will benefit from the complete harmonization on a global basis of the differing national and supra-national standards
• Harmonization should converge to the best possible standard, that is, the method that best reflects the underlying economics of transactions, rather than to any particular national standard
• Only one method should be permitted for reporting similar transactions. The reporting method should not differ depending on country, industry, size of company, or any other consideration, and managers should not be permitted choices of reporting methods for similar transactions
• Auditing is the examination of a company’s financial statements by outside experts. Auditors report to financial statement users on the accuracy and fairness of the statements
• High-quality audits are essential if the financial statements are to be regarded as reliable by investors and other users
• The quality of both audit standards and the resulting audits differs substantially worldwide
• It is essential that auditing standards be harmonized to the highest quality worldwide due to the critical importance of audits to the usefulness of financial statements

It is the position of CFA Institute that financial reports must be accurate and free from manipulation if they are to be useful to investors and the marketplace. Manipulation of the auditing process runs counter to the spirit and purpose of providing those who are the owners of the company with reliable and accurate information. Such information enables them to assess the performance of the board and management, and ultimately to make informed investment decisions.>

Prior to the release of the SEC’s February 2010 Work Plan, we issued a commentary indicating that before the SEC makes a decision, it should address four concerns: (1) the quality of IFRS, (2), the infrastructure and independence supporting IFRS development, (3) how endorsement of standards would be accomplished, and (4) how enforcement of standards would be achieved.

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