Although the SEC has not reached a final decision to incorporate International Financial Reporting Standards (IFRS) into the U.S. financial reporting system, it has begun to explore possible incorporation approaches. One such approach, dubbed Condorsement, is discussed in a SEC Staff Paper published May 26, 2011 entitled Exploring a Possible Method of Incorporation and is part of the SEC's Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers.
Other jurisdictions have incorporated IFRS into their reporting systems by either full adoption of IFRS as issued by the IASB without intervention, or by applying a national incorporation process that considers existing laws and regulations and leads to adoption of IFRS, or a local variation of IFRS. National incorporation processes can generally be broken down into Convergence Approaches or Endorsement Approaches.
Countries that follow Convergence Approaches maintain their local standards, but make efforts to converge those standards to IFRS over time. The U.S. and China are currently following Convergence Approaches. Countries following an Endorsement Approach incorporate individual IFRS into their local standards, with varying degrees of modification. The European Union and Australia generally follow an Endorsement Approach.
The SEC Staff's potential framework is basically an Endorsement Approach with a longer, phased transition period following a Convergence Approach; thus Condorsement. Under the Staff's potential framework, the transition plan would begin with the Memorandum of Understanding projects that the FASB and IASB have jointly undertaken and committed to completing in 2011. These projects include financial instruments, revenue recognition, leases, other comprehensive income, fair value measurement, netting of derivatives and consolidation of investment companies.
The second phase would incorporate those standards currently on the IASB's standard-setting agenda. The FASB would participate in the standard-setting process, but current U.S. GAAP would remain in place until the new standards are issued. The third stage includes IASB Standards that are not slated for change in the near future, and would require further development of a transition plan.
The SEC Staff believes that following their potential Condorsement framework for incorporation would help U.S. constituents manage the transition, and would provide the FASB flexibility to meet constituent needs. Gradual implementation would potentially be less costly and permits coordination with on-going standard setting activity.
Another important benefit is that the possible SEC Staff method incorporates IFRS into U.S. GAAP, which preserves U.S. GAAP as the basis for financial reporting in the U.S. It also preserves the SEC's authority over U.S. accounting standard setting and maintains the FASB role in protecting U.S. constituent's interests in the development of high-quality standards. The FASB would provide input and support to the IASB, but would retain the ability to modify or supplement IFRS to protect U.S. interests.
The complete SEC Staff Paper is available here.
