As announced on Oct 29, 2010, the SEC released its first progress report on the Work Plan which will lead up to the Commission’s decision in 2011 on whether and how to incorporate IFRS into the US financial reporting system.

Much of the progress report is dedicated to explaining what the SEC staff is doing to complete the Work Plan. Of course, the really interesting material is not so much in what they are doing or plan to do, but rather what they have or will conclude based on their findings. To that end, this progress report does not disappoint. I’ve had a chance to read through the progress report, and it has some interesting content. You should, of course, read it for yourself, but here are some of the highlights for me.

  • The report highlights several recent events, including the FASB and IASB adjustments to the MoU timetable, the FAF decision to move to seven board members on the FASB, and the retirement of FASB Chairman Bob Herz, and notes that the Commission believes it will still be able to make a decision in 2011 as originally anticipated.
  • In Section I, “Sufficient Development and Application of IFRS for the U.S. Domestic Reporting System”, Subsection C.2 provides an interesting summary of the various methods for incorporating IFRS into a domestic financial reporting system. The Staff’s research indicates that very few large jurisdictions adopt IFRS as is without having a mechanism in place to potentially change those standards. Instead, most jurisdictions have a form of national incorporation. Some countries, such as China, use a “Convergence Approach”, but the “vast majority” of the countries the Staff examined use an “Endorsement Approach”, including the European Union.
  • In my opinion, the analysis of the EU version of endorsement is particularly telling, as it details how “with each step, there is an opportunity to consider and potentially modify the standard issued by the IASB.” This version of endorsement can be contrasted with the Australian model, which “has kept pace with the final standards issued by the IASB, with each new standard being issued with the same application date as set by the IASB.”
  • Section I.C.3 identifies the many roles that national standard setters have continued to play around the world, and notes that “the majority of…jurisdictions [that had previously made use of a private sector standard setter] retain their national standard setter subsequent to incorporating IFRS into their financial reporting systems.”
  • In Section II, “Independent Standard Setting for the Benefit of Investors”, the progress report notes that the IFRS Foundation has “no authority to impose funding requirements…[that] the effort to achieve long-term mandatory funding commitments for the IFRS Foundation is not complete…[and that] three out of four countries reported by the IFRS Foundation as permitting or requiring some form of IFRS provide no monetary funding.” In fact, the report identifies that “the two national jurisdictions with the largest contributions in 2009 were the United States…and Japan…neither of which have formally incorporated IFRS into the financial reporting system for their domestic reporting issuers.” The report goes on to note that the “amount of contributions from the United States, relative to those from other jurisdictions, would be even higher if ‘contributed services’ from the FASB through the FASB’s convergence efforts with the IASB were included.”

The report did not offer much in the way of preliminary observations on the following topics, noting that there was still more work to be done under the Work Plan in these areas:

  • Investor Understanding and Education Regarding IFRS (Section III)
  • Regulatory Environment (Section IV)
  • Impact on Issuers (Section V)
  • Human Capital Readiness (Section VI)

The one area in Section IV that I thought the report did comment on was the initial feedback to the Commission from industry regulators who expressed “broad support for a single set of high-quality global accounting standards that provide for transparent and comparable financial reporting” tempered by concerns in three areas: significant costs to modify internal processes and systems in support of full convergence, the potential for diminished ability to influence the standard-setting process, and a general absence of industry-specific guidance in IFRS.

Those were the major takeaways that I had. Stay tuned as the SEC plans to provide regular progress reports during the lead up to its decision in 2011 on whether and how to incorporate IFRS into the US financial reporting system.