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USA - IFRS Condorsement Explained

Sunday 1 July 2012

While many governments around the world have (or are planning to) switch from their respective country-specific accounting rules to International Financial Reporting Standards (IFRS), the United States has not yet decided to transition from Generally Accepted Accounting Principles (U.S. GAAP).

There are fundamental technical and philosophical differences between IFRS and U.S. GAAP, and these are being addressed by the U.S. Financial Accounting Standards Board (the body responsible for overseeing U.S. GAAP), and the International Accounting Standards Board (IASB), which is responsible for the development of IFRS. The FASB and IASB are working together to "converge" the two sets of standards under an arrangement known as the "Norwalk Agreement".

While IASB/FASB alignment efforts are underway, the U.S. Securities and Exchange Commission (SEC) has recognized the importance of a single set of global financial reporting standards, and is currently evaluating the merits of adopting IFRS in the United States. Note that Foreign Private Issuers may already use IFRS when reporting to the U.S. capital markets. The SEC has been consulting with the various U.S. constituents as well as evaluating the IASB and the technical content of IFRS, and is yet to announce its position on the possible move from U.S. GAAP to IFRS. 

In June 2011, SEC Commissioner Kathleen L. Casey made a presentation at which she made the following statement: "The Commission is slated to make a decision ...this year, and we can no longer kick the can down the road. I believe the choice is clear — the Commission must decide to incorporate IFRS for U.S. issuers. In addition to the benefits of IFRS that I have already mentioned, the risks of not moving forward with IFRS for U.S. issuers are simply too great.....While I believe that the United States must provide for reporting under IFRS by U.S. issuers, I believe that we can and should give some issuers the option to continue to report under U.S. GAAP...... in light of the global nature of our capital markets, investors, public accountants and other market participants already need to know both U.S. GAAP and IFRS."

Until recently, there were three schools of thought, or options, for moving to IFRS:

  • Adoption / Conversion - a switch from local standards to IFRS, without converging them first.
  • Convergence - migration of local standards to being closely aligned with IFRS.
  • Endorsement - formal endorsement of new or amended IFRS before they become legally binding.

On December 6, 2010, SEC Deputy Chief Accountant Paul Beswick came up with a fourth option during his keynote speech to the AICPA National Conference on Current SEC and PCAOB Developments. He coined the term "condoresement", or "condorsement" as quoted by many.

Mr. Beswick stated, "So what would be a reasonable approach for the U.S.? In our October (2010) update we highlighted that 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 'condoresement' approach. Yes, I admit I just made up a word. And by the way, the patent is pending as we speak."

Further, Mr. Beswick said, "So how would this approach work? Well, to begin, U.S. GAAP would continue to exist. The IASB and the FASB would finish the major projects in their MOU. The FASB would not begin work on any major new projects in the normal course. Rather, a new set of priorities would be established where the FASB would work to converge existing U.S. GAAP to IFRS over a period of time for standards that are not on the IASB's agenda. This is not meant to be an MOU2 but rather would entail making sure that, on a standard by standard basis, existing IFRS standards are suitable for our capital markets."

Some of the key reasons Mr. Beswick cited for considering the Condoresement approach include:

  1. depth of the U.S. markets
  2. the quality of U.S. GAAP
  3. the existing consistency at the objectives level between many areas in U.S. GAAP and IFRS

The approach suggested by Mr. Beswick is far from being an agreed methodology for IFRS in the United States, and it remains to be seen just how well the idea will be received by the financial markets and others. Some of these are concerned that the U.S. is being sidelined as its major trading partners (including its immediate neighbors Canada and Mexico, plus other major territories such as Europe, India, Brazil etc.) have already adopted IFRS, or will do so imminently. 

Regardless of how and when U.S. accounting standards will ultimately incorporate IFRS, there is little doubt of the driving need for a single set of global financial reporting standards which will benefit investors and the flow of international capital.

Familiarity with International Financial Reporting Standards (IFRS) is increasingly important to the work of all preparers and users of published financial information, and there is no better place to receive the broadest and deepest range of IFRS training options than with IASeminars, the global leader in IFRS training.

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