" Paul A. Beswick Deputy Chief Accountant U.S. Securities and Exchange Commission Washington, D.C. December 5, 2011 The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect those of the Commission or of the author’s colleagues upon the staff of the Commission.. Introduction I would like to thank the AICPA for providing me with the opportunity to speak at the AICPA National Conference on Current SEC and PCAOB Developments.
Today I would like to spend time talking about two topics, one of which you are probably all expecting and the other that might be a bit of a surprise. IFRS Work Plan Let me first start with IFRS. When thinking about what to say in regards to IFRS, I stuck to one overall guiding principle, no new models or new words. The staff has nearly completed our efforts on the Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers (“2010 Work Plan”). As Jim mentioned earlier this morning, the staff published two reports on November 16, 2011 on the comparison of U.S. GAAP to IFRS and an analysis of IFRS in practice. In terms of existing open items, one of the items the Commission discussed in its Statement in Support of Convergence and Global Accounting (“2010 Statement”) regarding readiness for a determination regarding incorporating IFRS into the financial reporting system for U.S. issuers, and which was mentioned earlier, was the satisfactory completion of the convergence projects between the FASB and the IASB. In addition, the staff is continuing to evaluate with respect to the second area of the 2010 Work Plan the governance of the IASB. As noted in the staff’s 2010 Progress Report on the Work Plan, the Monitoring Board and the Trustees are in the final stages of separate but complementary reviews of governance and strategy for the Foundation.
Enhancements under the two reviews should provide for a clarified and enhanced governance structure supporting the IASB as an independent yet accountable standard-setting body. The Monitoring Board and the Trustees intend to publish their package of governance enhancements during December. These are two very important initiatives yet to be completed that the staff expects to inform our thinking around this area of the Work Plan. We are in the process of drafting a final report that summarizes all of our efforts to complete the 2010 Work Plan. The staff is drafting the report to provide our insights on what we have learned during the last almost two years of work. I would hope that the staff could get the final report out as soon as practicable in 2012. 2011 May Staff Paper Earlier, Jim Kroeker noted the feedback received on the May staff paper, Exploring a Possible Method of Incorporation (May Staff Paper). The goal of publishing the May Staff Paper was to foster greater discussion about what may be practicable from the staff’s perspective in terms of incorporating IFRS into the U.S. However, the staff thinking continues to evolve based on the very helpful feedback we were provided, and I thought I would spend some time discussing what we learned from the May Staff Paper and from some of our other outreach. Today I intend to focus on some of the more significant points, but note that the staff intends to include a more comprehensive discussion in the final staff report. The staff received a lot of well thought out and helpful feedback to the May Staff Paper from a wide range of interested parties. While it is impossible to say we received unanimous thinking in the comment letters, there were three themes that I think are important to highlight. However, what I say here could not begin to capture the rich discussion in the letters. They are all on our website. I encourage you to review them yourself. First, and most basic, was strong support for the objective of a single set of high-quality globally accepted accounting standards. The second was support for the general premise of an endorsement mechanism that was described in the May Staff Paper. Third, further progress should be made on the Boards’ joint standard setting projects before IFRS is incorporated into the U.S. In elaborating on an endorsement mechanism, a major theme I took away from the comments is the notion that the FASB has an important role to play and should act as the “endorser” of newly issued IFRS standards on a standard-by-standard basis. An often-provided rationale was that the FASB is best positioned to act in the interest of U.S. investors and the U.S. capital markets. Commenters felt that the FASB’s expertise and long track record of producing high-quality accounting standards would be a positive influence on the quality of IFRS. Some of the additional comments for maintaining a strong FASB included: Help preserve regulatory authority of the Commission and address issues with U.S. GAAP being embedded in thousands of pages of U.S. laws and regulatory text; Ability of the FASB to provide technical assistance to the IASB; Help ensure a robust due process by the IASB; and Assist the U.S. capital markets in the implementation and interpretations of IASB standards. An area where there was a spectrum of views was what threshold the FASB might use when considering whether to endorse an IASB standard. At the risk of using a general characterization, the feedback in this area to me had a little bit of a “Goldilocks” feel to it. Some felt there should be a “higher” threshold than that posited in the paper (that is, that the FASB should have less discretion in considering whether to endorse a standard). Some felt there should be a “lower” threshold, and some felt it was just right. Many of those who supported a “lower” threshold argued that the FASB should be given the tools to modify an IASB standard to the U.S. regulatory environment. Those in the “just right” or “higher” threshold camp noted that the greatest benefit to incorporating IFRS would be muted if the FASB frequently didn’t endorse an IASB standard. There was also a fair amount of comment that it would be important for the Commission to articulate its expectations in this area. So far I have discussed the themes related to those that supported taking a next step towards the objective of a single set of globally accepted accounting standards. This is not to say that the commenters were unanimous on this issue. There certainly were strong voices of those who were not in favor, stating among other things: that the case has not been made for mandatory incorporation, that the cost of incorporation is expected to be significant with no commensurate benefit, either to an individual company and or the U.S. markets, and concerns about the quality of existing IFRS standards. I think these will be important issues the staff will need to consider. Final Thoughts Before turning to my next subject I thought I would leave you with two final thoughts regarding the Work Plan. First, one of the questions we frequently are asked relates to our ability to apply IFRS standards. Having worked in OCA for the last four years, I can tell you that we are frequently asked our views on the application of IFRS in individual fact patterns. I believe we have been able to manage these application questions, including determining what should be the appropriate accounting under IFRS. I also believe that the U.S. involvement in the application of IFRS, as noted by the Chairman of the IASB in a recent speech, would provide a positive impact on the consistent implementation of IFRS globally. One final point I would like to make relates to the objective of a single set of globally accepted accounting standards. Commenters and others have posed the question: If the FASB and the Commission, or for that matter any jurisdiction, retains the ability to deviate from an IASB standard, can we ever truly achieve a single set of high-quality global accounting standards? I first must note as we have in many of our reports under the Work Plan, jurisdictional approaches to IFRS already are diverse, and rarely are direct to IFRS without an incorporation mechanism. As to the U.S., we know there are going to be challenging issues to resolve under any incorporation decision. The issues of LIFO and contingencies immediately come to mind. But even with all of this, I would offer up one final thought for your consideration: Would it better to be 90% converged and understand the differences, or should the objective be abandoned? Stay tuned. We will have a lot more to say on this subject in coming months. Valuation Profession Now after that light topic, let me spend a couple minutes discussing my views on the current state of the valuation profession in the U.S. Last year, you heard Jim Kroeker speak to the importance of and the tenets to building and maintaining public trust in the accounting profession. Today, I am here to advocate for the building of public trust in a profession that is increasingly intertwined with our own; that is the valuation profession. Recent events and developments, chief among them, the broadening application of fair value and fair value-based measures in US GAAP in recent years and the 2008 financial crisis, have cast the spotlight on valuation professionals. The financial reporting process is a collaborative process that relies on many participants with important roles and responsibilities. For valuation professionals, this means the analyses should be based on methodologies that have strong conceptual merit, supported by consistent and supportable assumptions, and are in conformity with the requirements of the relevant accounting standards. These objectives should be central to any analysis, regardless of the role of the valuator. Valuation professionals wear two primary hats within the financial reporting process. They can be management’s specialist where they assist the company in the estimation of values. Or they could be the auditor’s specialist in the evaluation of management’s models, assumptions, and/or value conclusions. As a regulator, we have reviewed analyses under both roles. In many instances, we’ve seen analyses meet the objectives I’ve described, but we’ve also seen our share of those that do not measure up. Valuation professionals stand apart from other significant contributors in the financial reporting process for another reason, their lack of a unified identity. We accountants, for example, have a clearly defined professional identity. At last count, valuation professionals in the US can choose among five business valuation credentials available from four different organizations,i each with its own set of criteria for attainment, yet none of which is actually required to count oneself amongst the ranks of the profession. There are also non-credentialing organizations that seek to advance the interests of the valuation profession.ii While the multiplicity of credentials in the profession is not a problem in and of itself, risks may exist. Risks created by the differences in valuation credentials that exist today range from the seemingly innocuous concerns of market confusion and an identity void for the profession to the more overt concerns of objectivity of the valuator and analytical inconsistency. The fragmented nature of the profession creates an environment where expectation gaps can exist between valuators, management, and auditors, as well as standard setters and regulators. While much of this may be addressed during a particular engagement, this case-by-case approach has the potential to be an inefficient and costly solution to establish a baseline level of understanding of the analyses. Sometimes, expectation gaps can have broader consequences than just within an engagement, as we have seen in the use of third party pricing sources to measure the fair value of certain financial instruments. You will hear more about this from others at this conference. I think one potential solution to consider is whether there should be, similar to other professions, a single set of qualifications with respect to education level and work experience, a continuing education curriculum, standards of practice and ethics, and a code of conduct. One could also contemplate whether a comprehensive inspection program and a fair disciplinary mechanism should be established to encourage proper behavior and enforce the rules of the profession in the public interest. Closing Once again thank you for the opportunity to speak this morning. We will have time for questions later in the day and I hope you enjoy the rest of the conference. i AICPA grants the Accredited in Business Valuation (ABV) credential; American Society of Appraisers confers the Accredited Senior Appraiser (ASA); Institute of Business Appraisers issues the Certified Business Appraiser (CBA); and National Association of Certified Valuation Analysts awards the Certified Valuation Analyst (CVA) and Accredited Valuation Analyst (AVA). ii For example, The Appraisal Foundation, a non-profit organization established by a number of US valuation organizations in 1987, issues the Uniform Standards of Professional Appraisal Practice (USPAP), set qualification criteria for state licensing, certification, and recertification of real property appraisers, and issues guidance on selected technical topics. The enforcement of the requirements promulgated by The Appraisal Foundation is relegated to the various state boards.”
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