15 November 2011

FASB: FAF commented on the SEC staff paper, 'Exploring a Possible Method of Incorporation'

Consistent with the support, the Trustees are recommending a number of modifications to the IFRS incorporation approach (colloquially referred to as Condorsement).

The Trustees’ views reflect: (1) the valuable and substantial progress made in recent years on converging IFRS and US GAAP; (2) the level of adoption/incorporation of IFRS in other countries; (3) the SEC Work Plan, including the Staff Paper; (4) discussions with stakeholders and review of comment letters filed with the SEC; and (5) ongoing discussions with the SEC.

Fundamental Incorporation Concepts:

(a) Demonstrates US commitment to continued development of global accounting standards.

(b) Retains US GAAP as the statutory basis for US financial reporting, thereby mitigating the costs and complexity of introducing a new set of standards under US laws, regulatory regimes, and contractual documents under which compliance with US GAAP is often specifically required.

(c) Retains US sovereignty over standards applicable in the US capital markets. The Condorsement approach provides for a US endorsement mechanism for incorporation of IFRS.

(d) Recognises that, even as progress is being made towards a global financial reporting system, jurisdictional and cultural differences are likely to continue. As a result, a practical interim goal may be to achieve highly comparable, high-quality accounting standards that are based on a common set of financial reporting standards.

(e) Provides for a gradual transition of US GAAP to a common platform of international standards based on IFRS.

The FAF’s Recommended Approach to Incorporation

The Trustees are recommending an IFRS incorporation approach that embraces the concepts of the SEC staff’s Condorsement framework while addressing concerns raised by various US stakeholders. The recommended approach is premised on the belief that although the pursuit of a single set of global accounting standards is a worthy objective, a more practical goal for the foreseeable future is to achieve highly comparable (but not necessarily identical) financial reporting standards among the most developed capital markets that are based on a common set of international standards.

US Incorporation Commitment: The recommended approach is a model for incorporating into US GAAP independently-developed and investor-focused international standards that improve financial reporting in the US or that maintain the quality of financial reporting under US GAAP but also advance global comparability of standards. Under this recommended approach, the US would retain sovereign authority over financial reporting and standard-setting for US capital markets, with influential roles for the SEC and FASB that recognise the benefit of the global harmonisation of financial reporting standards based on the common platform of IFRS. The FASB and the IASB would continue to work together to complete the projects under joint development on their memorandum of understanding (MoU). The FASB would refrain from separately engaging in standard-setting on new technical projects added to the IASB’s agenda. The US would look to the IASB to set those new standards with active involvement by the FASB. In addition, the FASB would develop a process to address substantial differences that remain between US GAAP and IFRS. The Trustees view this approach as a significant but measured change in the way the FASB participates in the global accounting standard-setting process.

Evaluation Criteria: Under the recommended approach, the FASB would seek broad agreement on the appropriate criteria for its good faith evaluation of international standards and the IASB’s standard-setting process in determining whether to incorporate an international standard into US GAAP. A new major international standard should be incorporated into US GAAP if that standard improves the quality of financial reporting already in place in the US. This notion of improvement has been a guiding principle of the FASB’s standard-setting activities. Other international standards would be incorporated that maintain the quality of financial reporting in the US but that also advance global comparability of financial reporting.

The recommended approach complements the SEC’s primary responsibility of facilitating investor protection in the US capital markets and reinforces the US standard-setter’s mission of setting standards that provide necessary financial information to investors in the US capital markets. Importantly, Trustees believe that the approach recommended in this comment letter achieves the objectives of the Condorsement framework and represents an appropriately measured step forward in the ongoing US commitment to the development of global standards.

Full paper

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