SEC.gov | A U.S. Imperative: High-Quality, Globally Accepted Accounting Standards
The strength of the U.S. capital markets depends on investors knowing that they can rely on the financial information that is available to them when they make investment decisions. High-quality accounting standards are the foundation upon which this reliance is built. The Commission has an important responsibility to investors and our markets to ensure that the accounting standards reliably produce the information our markets demand.
U.S. Generally Accepted Accounting Principles (GAAP) are the accounting standards forming the bedrock of the U.S. financial reporting system. They are established and maintained by an independent standard-setter, the Financial Accounting Standards Board (FASB). Although U.S. GAAP continues to serve well the interests of investors and others stakeholders, it does not diminish the need – in the United States and abroad – to continue to work hard to support the development of high-quality, globally accepted accounting standards.
We all, particularly U.S. investors and companies, have a very strong interest in such standards. Global standards facilitate decision making about cross-border investments, transactions, and acquisition opportunities. Standard setters and the Commission also have a strong interest in building and maintaining high-quality standards that can be applied comparably across borders to better inform and protect investors.
The Commission has long promoted high-quality, globally accepted accounting standards, formally advocating them for almost 30 years,[1] including in 2010, when the Commission last reaffirmed the importance of pursuing such standards to further our mission.[2] While there has been no formal action by the Commission since, I have strongly urged engagement on this issue by the Commission, including on whether to further incorporate International Financial Reporting Standards (IFRS) into the U.S. financial reporting system – an issue identified for further consideration in 2010.
Early in my tenure as Chair, I directed our Office of the Chief Accountant (OCA) to review the Commission’s views on these issues and engage in broad outreach with investors, preparers, auditors, standard setters, and others. OCA has spent considerable time reviewing the extensive prior work on globally accepted standards, considering the experience with the FASB and IASB convergence projects and the application of IFRS by foreign private issuers.[3] As I approach the end of my tenure, I remain firmly convinced of the importance for U.S. investors of high-quality, globally accepted accounting standards, and I believe that the Commission must continue to pursue such standards as one of its highest priorities. I urge the next Chair, working together with a full Commission, to speak again on this issue and agree on a path forward to most effectively advance this critical objective.[4] It is imperative for the protection of U.S. investors and companies and the strength of our markets.
The U.S. Interest in High-Quality, Globally Accepted Standards
Today, U.S. investors make many investment decisions using financial statements of foreign companies that apply IFRS issued by the IASB,[5] investing directly in the securities of many foreign private issuers that apply IFRS in filings with the Commission. As of September 2016, these companies alone represented a worldwide market capitalization in excess of $7 trillion across more than 500 companies.[6] U.S. investors also routinely invest in companies based outside the United States and registered in non-U.S. jurisdictions; U.S. investors have, for example, invested $4 trillion in U.S. mutual funds that hold debt and equity securities[7] issued by companies based outside the United States, many of which operate in the jurisdictions that have incorporated IFRS into their reporting regimes.[8]
The strong U.S. interest in high-quality, globally accepted accounting standards is not limited to market investing. While U.S. companies apply and use U.S. GAAP, it is not to the exclusion of IFRS. U.S. companies, for example, make acquisitions and enter into joint ventures relying on IFRS financial information. U.S. companies also rely on IFRS financial statements when entering into transactions with non-U.S. companies and other parties that apply IFRS. Still other U.S. companies look to IFRS when preparing financial information for management and boards of directors. U.S. multinational companies with subsidiaries outside the United States are also often permitted – or required – by other countries to use IFRS for statutory financial reporting requirements for those subsidiaries.
In light of these global realities, fully understanding IFRS, including similarities and differences between U.S. GAAP and IFRS, is of central importance to U.S. investors and companies. So, too, is ensuring that these standards, as well as U.S. GAAP, are of the highest quality. U.S. constituents recognize the importance of this objective, and our recent outreach has affirmed strong support among U.S. preparers and users of financial reports for continued efforts to ensure high-quality, globally accepted accounting standards.
Building High-Quality, Globally Accepted Standards
Central to this support must be strong engagement by U.S. constituents in the ongoing efforts to produce high-quality, globally accepted standards. While U.S. constituents have advised us that they do not support a move to, or an option to use, IFRS for financial reporting by U.S. companies at this time, this does not lessen the importance of their engagement on IFRS or in the broader work to further enhance globally accepted standards. Given the increasing reliance on IFRS in the United States and around the world, focused and active efforts by the Commission[9] and the FASB (and others in the United States),[10] to further advance the work of the IASB on IFRS is an imperative if investors are to continue to receive clear and reliable financial information as business transactions and investor needs continue to evolve globally.
Building high-quality, globally accepted accounting standards requires that the Commission support further efforts by the FASB and IASB on convergence between their accounting standards to enhance the quality and comparability of financial reporting – both domestically and across borders. The next SEC Chair, working closely with the agency’s Chief Accountant, should continue to be an active member of the Monitoring Board of the IFRS Foundation, FASB should make full use of its membership on the IASB’s Accounting Standards Advisory Forum, and the IASB should be welcoming and responsive to those inputs.
Although the FASB and IASB have completed their agreed-upon, priority convergence projects,[11] this milestone must not mark the end of the intense collaboration that has occurred between the two Boards over the last few years. These efforts have greatly enhanced the quality of accounting standards in a number of important areas, including recently narrowing many differences in the accounting standards for revenue recognition,[12] leases,[13] credit losses on financial instruments,[14] and recognition and measurement of financial assets and liabilities.[15]
This progress is very important, but it must continue. I strongly encourage the FASB and the IASB, along with their respective oversight bodies, to continue their productive collaboration, including further work on convergence. Both Boards are committed to adopting high-quality accounting standards that provide decision-useful information for investors, and both Boards, as well as investors, will benefit greatly from their sustained engagement.
Continued engagement will facilitate the development of standards that recognize and address the differences across jurisdictions without sacrificing financial reporting quality. Legal systems and laws, regulatory environments, market structures, and corporate governance differ and they are important factors that shape financial reporting.[16] Countries also differ in the state of the development of their capital markets and in their national institutions. These complexities inform the FASB’s and the IASB’s appreciation that different words, phrases, translations, and levels of guidance may be required to achieve the level of comparability that investors need in financial reporting across different reporting jurisdictions.
Continued engagement also opens the door to further work on what is sometimes called a “sequential” approach to convergence. On occasion, FASB or the IASB has considered an accounting topic before their counterpart, rather than both Boards working in tandem on the same topic. This sequential approach, which has resulted in further convergence over time,[17] enables both Boards to evaluate each other’s final standards with the benefit of feedback and an assessment of issues already addressed by the other Board during its standard-setting process. After standards are implemented, the Boards also benefit from constituents’ experience in applying, auditing, and enforcing the standards and the investor reaction to the reporting results from such standards. Each Board can then incorporate the other’s standards it deems to be an improvement on its own existing standards. This approach has advantages, even though the process results in differences in standards for an accounting topic for some period of time as experience develops.[18]
Building high-quality, globally accepted accounting standards also requires the continued commitment of the Commission, both in its public support and in its efforts to facilitate the development of strong standards by both the FASB and the IASB. In particular, the Commission, in addition to its strong support of these efforts generally, should be particularly sensitive to monitoring how the needs and interests of investors and issuers may change in the future and seek opportunities to guide and accelerate the development of high-quality, globally accepted accounting standards. This objective continues to be central to the SEC’s mission to protect investors.
Conclusion
While it is now clear that U.S. GAAP and IFRS will continue to coexist in our public capital markets for the foreseeable future, it is just as clear that the efforts to enhance the respective standards and to reduce differences between them should continue. The United States cannot afford to be myopic about this issue in light of the benefits of these efforts for all stakeholders. Strong support of both the FASB and the IASB by U.S. investors, companies, auditors, and others, including the Commission, is essential. Indeed, it should be self-evident that the pursuit of high-quality globally accepted accounting standards is part of the SEC’s continuing responsibility to encourage, facilitate and direct efforts to enhance the quality of all financial reporting that directly impacts the protection of investors and the strength of our markets. I strongly urge the next Chair and Commission to build on our past efforts and give the goal of high quality globally accepted accounting standards the focus and support this critical issue deserves.
[1] See, e.g., Regulation of the International Securities Markets, Release No. 33-6807 (Nov. 14, 1988); SEC Concept Release, International Accounting Standards, Release No. 33-7801 (Feb. 16, 2000), available at http://www.sec.gov/rules/concept/34-42430.htm; Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards without Reconciliation to U.S. GAAP, Release No. 33-8818 (July 2, 2007), available at http://www.sec.gov/rules/proposed/2007/33-8818.pdf; Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards, Release No. 33-8831 (Aug. 7, 2007), available at https://www.sec.gov/rules/concept/2007/33-8831.pdf; and Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers, Release No. 33-8982 (Nov. 14, 2008), available at https://www.sec.gov/rules/proposed/2008/33-8982.pdf.
[2] See Commission Statement in Support of Convergence and Global Accounting, SEC Release No. 33-9109 (Feb. 24, 2010), available at http://www.sec.gov/rules/other/2010/33-9109.pdf.
[3] The FASB and the IASB have completed agreed-upon, priority convergence projects in a number of important areas, including among others narrowing many differences in the accounting for business combinations, revenue recognition, leases, credit losses on financial instruments, and financial instruments recognition and measurement. See Completing the February 2006 Memorandum of Understanding: A progress report and timetable for completion (Sept. 2008), available at http://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1175801856967 and The Norwalk Agreement, available at http://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1218220086560 (collectively, “Convergence Project Statements”).
[4] The Commission currently has only three members and has not been a full Commission since October 2, 2015.
[5] In 2007, reflecting its judgment on the quality of international standards, the Commission acted to permit foreign private issuers to report in IFRS as issued by the IASB, without reconciliation to U.S. GAAP, while continuing to consider further use of IFRS by U.S. domestic issuers. See Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards Without Reconciliation to U.S. GAAP, Release No. 33-8879 (Dec. 21, 2007), available at https://www.sec.gov/rules/final/2007/33-8879.pdf.
[6] These numbers are approximates as of September 2016, and are based on the SEC staff’s analysis of filings and market information. A foreign company determines its eligibility as a foreign private issuer (FPI) under Rule 405 of the Securities Act of 1933 and Rule 3b-4 of the Securities Exchange Act of 1934.
[7] See Report on U.S. Portfolio Holdings of Foreign Securities as of December 31, 2015, U.S. Department of the Treasury (Oct. 2016), p. 25, available at http://ticdata.treasury.gov/Publish/shca2015_report.pdf.
[8] See Report on U.S. Portfolio Holdings of Foreign Securities, U.S. Department of Treasury (Oct. 31, 2016), available at https://www.treasury.gov/press-center/press-releases/Pages/jl0598.aspx.
[9] The Commission continues to be actively engaged in the work related to global accounting standards, including but not limited to, participation on the Monitoring Board of the IFRS Foundation and the Commission staff review of filings made by FPIs. In addition, the Commission staff is supportive of the commitment the IFRS Foundation has shown to maintain U.S. participation both at the IFRS Foundation level and on the IASB in order to further the goal of a strong IASB comprised of highly qualified and objective Board members. The Commission is also an active participant in the International Organization of Securities Commissions (IOSCO), which for many years has cooperated with the IFRS Foundation and the IASB in the development and implementation of IFRS. See Committee on Issuer Accounting, Audit and Disclosure, IOSCO, available at http://www.iosco.org/about/?subsection=display_committee&cmtid=12; Monitoring Board of the International Financial Reporting Standards Foundation, IOSCO, available at http://www.iosco.org/about/?subsection=monitoring_board; and IOSCO Board, IOSCO Website, available at http://www.iosco.org/about/?subsection=display_committee&cmtid=11.
[10] The FASB contributes to the development of IFRS by sharing views based on its past experience or developed through the FASB’s due process, stakeholder outreach, analysis, and deliberations. Among other ways of sharing those views, the FASB provides input on IASB projects through the IASB’s Accounting Standards Advisory Forum. See Accounting Standards Advisory Forum, available at http://www.ifrs.org/About-us/IASB/Advisory-bodies/ASAF/Pages/History-of-the-ASAF.aspx.
[11] See Convergence Project Statements, supra note 3.
[12] In May 2014, the FASB and IASB issued a converged standard on revenue recognition, Revenue from Contracts with Customers. See FASB Accounting Standards Update (ASU) No. 2014-09 and IASB IFRS 15. Transition to the new guidance is permitted in annual periods beginning after December 15, 2016, and, for public entities, is required in annual periods beginning after December 15, 2017. The standard is expected to significantly impact revenue recognition under both U.S. GAAP and IFRS, and will eliminate many of the existing differences in accounting for revenue between the two frameworks. Until the new revenue standard is effective for all entities, existing differences between the two frameworks remain.
[13] See ASU No. 2016-02, Leases (Topic 842).
[14] See ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
[15] See ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.
[16] See R. Ball, S. P. Kothari; & A. Robin, “The Effect of International Institutional Factors on Properties of Accounting Earnings.” Journal of Accounting & Economics 29 (2000): 1–51.
[17] For example, the FASB and IASB have both been working on projects to address the recognition and measurement of financial instruments. In July 2014, the IASB issued its guidance in IFRS 9, Financial Instruments. The FASB, in turn, considered the IASB’s perspective in developing updated guidance for U.S. GAAP. The FASB subsequently completed its project on classification and measurement of financial assets and achieved convergence in many, though not all, areas of the classification and measurement of financial instruments. See, e.g., U.S. GAAP ASU 2016-01 and IFRS 9.
[18] The SEC staff has observed that differences between standards have narrowed over time, and the overall quality of the standards have improved. For example, while the Boards conducted separate projects on share-based payments, with the IASB working toward a final standard when the FASB first added a similar project to its agenda, both Boards considered it appropriate to cooperate in considering the issues, resulting in further convergence of accounting standards on share-based payments. See Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment, paragraph B258. Another example of this sequential approach is the FASB’s project on the reporting of discontinued operations, which resulted in guidance issued in 2014 that enhanced convergence with IFRS. See ASU No. 2014-08, Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity.
