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New SEC International Finance Reporting Standards

We know a little more about what criteria will be used to help the SEC decide about the role of International Finance Reporting Standards (IFRS) into the financial reporting system in 2011, thanks to a recent report that outlined progress toward establishing global accounting standards.

The progress report sheds light on the role of the national standard setter in various jurisdictions, noting that some have mandated the use if IFRS, and many are now using IFRS with their national accounting standards.

Not all jurisdictions are using a private sector standard setter, opting for a securities regulator or ministry of finance. In some cases, they are using an alternative government agency to establish accounting standards. Incorporating IFRS into overall practices has enabled the International Accounting Standards Board (IASB) to better communicate with jurisdictions.

There are still some questions as to whether or not IFRS are sufficient, as well as the enforcement and auditing factors involved when applied across jurisdictions. The report also noted that there are some inadequacies in how funding is secured for IASB, as it varies from country to country. To this end, both the IFRS Foundation and the IASB lack the guidelines set forth by U.S. law around structural and funding independence.

The SEC also included questions regarding the potential adoption of U.S. regulatory regimes by the IFRS, noting that incorporating IFRS directly into U.S. GAAP would delineate a number of concerns, including:

  • The significant costs to modify internal processes and systems
  • The perceived diminished ability to influence the standard-setting process
  • The general absence of industry-specific guidance in IFRS

So what does it mean to investors? The SEC is still looking into current knowledge among U.S. investors concerning IFRS. The August 2010 request for this information returned information regarding investor knowledge, but the SEC is still reviewing the results, but it appears as if investors are educating themselves about IFRS.

For issuers, the SEC’s main concerns involve the effects of IFRS on contractual arrangements and compliance with government standards. Public information on both subjects is currently being analyzed by the SEC.

This is just the first step, as the SEC will continue to investigate best practices around IFRS throughout 2011. Since the main concerns stem from education, the best course of action in the meantime is to educate yourself!