ALI-ABA Course of Study Accountants' Liability: Litigation and Issues in the Wake of the Financial Crisis September 15-16, 2011 Washington, D.C.

Transcription

1 251 ALI-ABA Course of Study Accountants' Liability: Litigation and Issues in the Wake of the Financial Crisis September 15-16, 2011 Washington, D.C. GAAP v. IFRS; Public v. Private Company Accounting; PCAOB AS and GAAS v. ISA By Vincent J. Love Finance Scholars Group New York, New York John H. Eickemeyer Vedder Price P.C. New York, New York

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3 253 GAAP v. IFRS Public v. Private Company Accounting PCAOB AS and GAAS v. ISA Vincent J. Love, CPA John H. Eickemeyer, Esq. GAAP IFRS: How Did We Get Here? Generally Accepted Accounting Principles in the United States The Financial Accounting Standards Board (FASB) The Committee on Accounting Procedure (CAP) was the first private sector organization in the United States to set accounting standards. Established in 1936, it was a committee of the American Institute of Accountants, a predecessor of the American Institute of Certified Public Accountants (AICPA). After the Securities and Exchange Commission (SEC) in 1938 issued Accounting Series Release (ASR) 4 which established accounting standard setting in the private sector, but with SEC oversight, CAP began to issue accounting standards. CAP was an early effort at gaining acceptance of the reporting of business performance through reliable financial statements. It issued Accounting Research Bulletins (ARB) 1 through 51, most now superseded or incorporated into newer standards. This committee set the stage for the future acceptability of standards. The Accounting Principles Board (APB) of the AICPA formed in 1959 was the successor to CAP, followed in 1973 by the FASB, an organization separate from, and independent of, the AICPA. Thirty-one opinions and four statements were issued by the APB, some of which are still a part of U.S. Generally Accepted Accounting Principles (GAAP, or U.S.GAAP). Two years ago, the FASB compiled all of its previous pronouncements (the Codification) placing the accounting for a particular issue in one location rather than in various statements, interpretations and guidance. This Codification is easier to use and helps the researcher find all of the GAAP provisions relevant to a particular economic event (accounting, display on the financial statements and disclosure in the notes), in one document, in one place. There were 168 Statements of Financial Accounting Standards (SFAS), not including revisions prior to the Codification, 48 interpretations and many other pronouncements and guidance of varying degrees of authority. The Codification is updated, as needed, by Accounting 1

4 254 Standards Updates (ASU) issued by the FASB. Each update is designated by the year and order in the year in which the update was issued (i.e., ASU ). International Accounting Standards The International Accounting Standards Board (IASB) The International Accounting Standards Committee (IASC) was founded in 1973 and was the predecessor of the IASB. The IASC issued forty-one International Accounting Standards (IAS) during the time it was in existence. The Standing Interpretations Committee (SIC) was the IASC interpretive committee and it issued thirty-three interpretations. Various IAS standards and interpretations were superseded or withdrawn, and several others have been modified by the IASB, which came into existence in The International Financial Reporting Interpretations Committee (IFRIC) was established to interpret the standards issued by the IASB. Through the end of July 2011, the IASB issued nine standards called International Financial Reporting Standards (IFRS) and 19 new interpretations. The IFRS replaced or modified a number of the IAS and SIC interpretations. Many of the IAS and SIC interpretations (29 of the 41 IAS and 10 of 32 SIC interpretations at the end of July 2011) remain in existence unmodified or modified. The IASB also worked on converging the accounting standards found in many of the countries around the world. The IASB s philosophy is to establish general principles to be used to determine the proper accounting for an economic event rather than to establish rules specific to certain fact patterns. However, this concept of principles-based rather than rulesbased accounting standards will be challenged as economic activity continues to increase in its complexity, volume and velocity with the expected development of more sophisticated computer and data processing technology, with far greater operating capability and storage capacity, as well as the increasing use of artificial intelligence, which itself is likely to increase in sophistication. Where Are We Now? At the end of June 2011, approximately 120 countries have adopted or allow the use of IFRS. To date the United States has not adopted IFRS, but allows its use in financial statements filed with the Securities and Exchange Commission (SEC) by foreign Registrants. It also is used by U.S. domiciled subsidiaries of foreign enterprises and many foreign subsidiaries of U.S. enterprises. 2

5 255 IFRS Current Use in the United States Foreign filers, including any of their consolidated US enterprises US subsidiaries of foreign enterprises Foreign subsidiaries of U.S. Enterprises Where Are We Going? On May 26, 2011, The SEC staff issued a report, Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System of U.S. Issuers Exploring a Possible Method of Incorporation (the Framework) included as Appendix A hereto. Under the SEC s previously issued work plan (SEC Release No , dated February 24, 2010, Commission Statement in Support of Convergence and Global Accounting Standards) included as Appendix B hereto, the SEC laid out a possible framework to consider factors relevant to the SEC making a determination on when and how to change its financial statement requirement for the use of GAAP to the use of some form of IFRS. The SEC reaffirmed its commitment to work towards accepting a single set of high-quality global accounting standards and expressed its support for the convergence of GAAP and IFRS. That support of the change, in concept, has not changed. At that time the SEC staff was assigned to address the specific issues and concerns highlighted in the comment letters the SEC received relating to its proposed Road Map. Six areas were identified for the staff s consideration in its work plan: Sufficiency of IFRS for U.S. domestic reporting purposes Independence in the standard setting process for the benefit of investors Investor education in and understanding of IFRS Examination of the U.S. regulatory environment requirements Impact of the scope and timing on U.S. issuers, including the ability to comply with governance disclosures Human capital readiness Appendix B contains explanatory information on each of the six areas of concern. The recently issued Framework explores the transition further and seeks comments from interested parties on the methodology to be used to migrate from the use of U.S. GAAP to IFRS, or some form of IFRS, for financial reporting by SEC Registrants. The Framework makes it clear that the SEC has not yet made a determination as to whether to incorporate 3

6 256 IFRS into the financial reporting requirements for Registrants, and if so, just how this will be accomplished. The Framework is an exploratory paper focused on the possible method for achieving a change of accounting standards, possibly resulting in a different standard setting structure for establishing those changed standards. There is no extensive consideration in the Framework of any timeline for incorporation of any changes in the standards used by SEC Registrants. The paper discusses and describes a possible framework to be used for the incorporation of IFRS, or some form thereof, into reporting by SEC Registrants. In discussing the environment in which the any methodology would be used, the Framework states: The framework explored in this Staff Paper is predicated on several principles. First, U.S. GAAP would be retained, but the Financial Accounting Standards Board ( FASB ) would incorporate IFRS into U.S. GAAP over a defined period of time, with a focus on minimizing transition costs, particularly for smaller issuers. The FASB would incorporate newly issued or amended IFRSs into U.S. GAAP pursuant to an established endorsement protocol. This would require a change to how the FASB currently operates. Similar to other jurisdictions, the endorsement protocol would provide the Commission and the FASB the ability to modify or supplement IFRS when in the public interest and necessary for the protection of investors. Such framework would share many key features of other major jurisdictions processes for incorporating IFRSs into their respective national financial reporting frameworks. However, whereas many countries chose to align existing accounting standards with IFRS through a first-time adoption of IFRS and thereafter keep pace with new or amended IFRSs through endorsement procedures, the framework explored in this Staff Paper would include a transitional period during which existing differences between IFRS and U.S. GAAP would be eliminated through ongoing FASB standard-setting efforts. (Footnote reference omitted.) Two approaches to incorporation of IFRS used in other jurisdictions around the world were explained. They are: Full use of IFRS with the IASB as the standard setter. Use of IFRS after some form of incorporation process that leads to the full use of IFRS or some local variation. The approach used in different jurisdictions to incorporate IFRS also were analyzed and placed into two broad processes as follows: Incorporation of IFRS into the local standards without a firm commitment to fully incorporate IFRS strictly as promulgated by the IASB, termed the Convergence Approach. Incorporation by jurisdictions of individual IFRS into their local standards. The amount of deviation from IASB promulgated standards vary under this approach, termed the Endorsement Approach. 4