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BoardMatters Quarterly, April 2011 - The future of accounting change: Convergence? Conversion? Condorsement? - EY - United States

BoardMatters Quarterly, April 2011The future of accounting change: Convergence? Conversion? Condorsement?

Questions for the audit committee to consider

  • When did the audit committee and company management last review the prospective scope of the proposed new accounting changes?
  • At what point should management complete an evaluation of the potential accounting and business effects?
  • What planned or ongoing IT system initiatives could be affected by the changes?
  • Does the parent company have control over the roll-out of IFRS for statutory reporting at foreign subsidiary locations?
  • Is the audit committee and finance function actively participating in the standard-setting process and providing comments to the FASB and IASB?

Whatever form it takes, change is upon us. Insightful companies will be ready.

Convergence update

In November 2010, the road toward converging US GAAP and International Financial Reporting Standards (IFRS) took another turn. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) together issued a progress report on their joint convergence projects, announcing that they had amended their plans for certain projects.

The two Boards prioritized certain projects to complete by June 2011, including financial instruments, leasing and revenue recognition. They also deferred substantive deliberations on four other joint projects until after June 2011, including financial statement presentation, which promises to be costly for companies to implement.

The Boards have received thousands of comment letters on these projects and have held roundtable meetings with constituents to obtain additional feedback, and now are deliberating key aspects of their proposals.

The Boards also are soliciting recommendations on the transition to the new guidance and what the effective dates for certain joint projects should be.

In particular, the FASB wants to know if companies prefer that certain new standards have effective dates that are staggered or become effective on the same date (referred to as a “big bang” transition). A common effective date could minimize confusion in the marketplace and make for a more efficient transition for preparers.

Conversion or condorsement?

The U.S. Securities and Exchange Commission (SEC) remains committed to the goal of a single set of high-quality global accounting standards. Sometime in 2011, the SEC expects to decide whether IFRS will be incorporated into the US financial reporting system, and if so, when and how.

In the meantime, SEC Deputy Chief Accountant Paul Beswick floated a “trial balloon” that a possible alternative to both IFRS convergence and US endorsement of IFRS is a combination of the approaches that he called “condorsement.”

Under condorsement, IFRS would be incorporated into the US financial reporting system gradually, on a standard-by-standard basis. The FASB would continue to exist to work closely with the IASB in the promulgation of new IFRS standards, to endorse new IFRS standards as they are promulgated, and to review existing US GAAP and determine if the respective IFRS standards should be applied in their place.

In providing justification for this concept, Beswick noted that “it is clear to me that this is in fact a method of incorporating a single set of standards into the US market. But it also acknowledges our responsibility to the US capital markets and provides mechanisms to ensure that the standards must be high-quality prior to their incorporation.

If new standards of sufficiently high-quality were incorporated into US GAAP, the process of creating new differences would stop. Further differences would be eliminated one by one as new high-quality global solutions are achieved.”

This suggested approach is by no means a final proposal and many questions remain to be answered. However, it certainly indicates that the SEC staff is giving considerable thought to the question of possible IFRS endorsement, and further supports the need for interested parties to follow closely the developments in this area over the next several months.

 Questions for the audit committee to consider

Questions for the audit committee to consider

  • When did the audit committee and company management last review the prospective scope of the proposed new accounting changes?
  • At what point should management complete an evaluation of the potential accounting and business effects?
  • What planned or ongoing IT system initiatives could be affected by the changes?
  • Does the parent company have control over the roll-out of IFRS for statutory reporting at foreign subsidiary locations?
  • Is the audit committee and finance function actively participating in the standard-setting process and providing comments to the FASB and IASB?

Nothing is final, but companies should have a plan

The future direction of accounting change remains uncertain, but clearly, change is happening and more is coming. The Boards may modify their proposals on financial instruments, leases or revenue recognition, but the resulting standards will differ significantly from today’s guidance.

Adopting new accounting standards — whether changes to US GAAP contemplated by the modified convergence agenda or a wholesale conversion to IFRS — will be costly for all companies that issue financial reports.

The changes will require internal and external resources and updated IT systems, internal controls and other processes. Required adoptions also carry the risk that the entity will not implement the change on a timely and sustainable basis.

The scope of potential change suggests planning for the new standards now. Certain actions taken today could minimize costs in the long run.

Fortunately, there is enough certainty about the impending changes to US GAAP for organizations, with the input and oversight of their audit committees, to consider the following steps:

  • Review the exposure drafts and related materials to understand the proposed changes
  • Assess the effect of the changes on strategic decisions and planned transactions
  • Assess the processes for data collection, internal controls and IT systems
  • Analyze what tax effects could arise based on the proposed guidance
  • Understand what international locations may be adopting IFRS for their statutory reporting, to minimize future differences in accounting policy elections
  • Learn how other companies in the industry are approaching the proposals, including what problems they see and what solutions they are considering

Private companies aren’t left out

Though the SEC’s consideration of IFRS in the US financial reporting system primarily affects publicly listed companies, in January 2011, the Blue-Ribbon Panel on Standard Setting for Private Companies issued its report, which could change the future landscape of accounting principles for private companies.

Recommendations included forming a separate standard setting Board to consider exceptions from and modifications to US GAAP for private companies.

The Panel also recommended developing criteria to justify deviations from US GAAP and urged the FASB to address private company reporting needs in the interim. Any significant potential changes to the standard-setting process will likely be subject to exposure for public comment. Additionally, in January 2011, the FASB appointed a new board member with private company experience in financial reporting, planning and analysis to provide insight into the needs of private company preparers and users of financial statements.

What’s next?

Whether you represent private or public companies or both, change is on the way. Companies and audit committees should closely monitor the status of these accounting changes and the potential effect on the company.

Planning early allows companies the opportunity to reduce overall implementation costs and be better prepared for the uncertainties that lie ahead.


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