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To understand what led to the Jan. 28 news of an unusual, $3 million donation to global accounting standard-setters by the parent group of the Financial Accounting Standards Board (10 APPR 161, 2/14/14), it’s useful to delve into the history of the debate about funding of the International Accounting Standards Board.
Even a quick study shows that the issue of U.S. funding for IASB’s operations seems to amount to a fence separating the United States and the London-based board. A fence in a tangle of vines. Thorny vines.
In years-long discussions by the trustees of IASB’s parent, the IFRS Foundation, and associated panels, as well as in formal papers that make points and counterpoints, the exchanges reveal polite discord.
The 2012 Staff Reports.
Most relevant are two documents: first, the July 2012 final SEC staff report on the work plan for incorporating international financial reporting standards, or IFRS, into the financial reporting system for U.S. public companies (available at http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final-report.pdf ; see pages 52-58 especially); and second, the October 2012 report by IFRS Foundation staff, responding to the SEC staff’s findings (at http://www.ifrs.org/Alerts/PressRelease/Pages/IFRS-Foundation-Staff-Analysis-of-SEC-Final-Staff-Report-on-IFRS.aspx ; see pages 23-25).
The two staffs devote significant ink to the issues of IASB funding, the how and the exact whence of the money, and challenges to setting up a structure enabling stable, independent financing. The SEC has pointed out the pitfalls of having an accounting standard-setter depend significantly on money given by those who have to follow the standards issued by the setter (FASB’s situation until the Sarbanes-Oxley law of 2002, which set up a system of registrant-paid accounting support fees).
That is IASB’s situation today, despite great strides in obtaining regular levies or some form of publicly-supported financing, as it has from the European Union. A sizeable chunk of the IFRS Foundation’s money – about 25% of 2012 collections, the SEC staff wrote – has come from the world’s leading accounting firms, for example.
The agency’s staff sounded cautionary signals on the contributions from the big accounting houses. “[T]he continued reliance by the IFRS Foundation on funding from the largest accounting firms will continue to cause concerns as to the adequacy and independence of the IASB’s funding model,” according to the SEC staff final report.
The IFRS Foundation staff took issue with that view on risks suggested by reliance on money from the Big Four and other leaders in auditing. “We believe that the governance structure of the Foundation ensures that the IASB’s independence is not compromised by any such contributions,” according to the October 2012 report.
The IFRS Foundation staff added that the foundation “is working to secure stable funding in order to reduce or eliminate this perceived dependency.” An important part of “removing this dependence is to address the ongoing funding challenges in the U.S,” the staff at IASB’s parent wrote.
SEC’s Seat on the IFRS Monitoring Board.
Reporting by Bloomberg BNA earlier this month pointed to a substantial role played by senior SEC officials in helping effect the $3 million FAF-to-IFRSF funding arrangement announced Jan. 28. The conventional wisdom among those who closely follow global rulemaking in accounting is that a significant – if not a main -- reason for the SEC playing such a role was to keep a seat at the table of securities regulators who are the key members of the IFRS Monitoring Board.
Of course, U.S. securities regulators want to have a voice, along with their counterparts in Europe, Japan and elsewhere, in continued discussions on seeking a single, high-quality set of accounting standards suitable for global use, the aim of IFRS, and on planning for consistent application of such standards.
The SEC staff, in its final report on the IFRS incorporation work plan, pointed to the commission’s ability to maintain a chair at the IFRS Monitoring Board table and tied that to the raising of money for the IASB in the U.S. The commission’s Office of the Chief Accountant, author of the report, identified a monitoring board membership criterion based on “financial contributions by the jurisdiction to the setting” of standards by IASB.
“Therefore,” the SEC staff accountants wrote, “continued membership of the SEC on the Monitoring Board would be in part based on the [IFRS Foundation] trustees’ success in fundraising from U.S. constituents.”
That “results in an interesting dynamic” in the U.S., the SEC staff wrote. “Neither the Commission nor the Staff could act as a fundraiser for a private organization, and it is questionable under existing law whether the Commission could use its own funds to contribute to a private organization.
“In addition, the Commission may be limited from directly funding the IFRS Foundation without an appropriate request of Congress,” the OCA accountants added. “As a result, the Commission’s membership on the Monitoring Board is dependent in part on the efforts of others in the United States to fund the IFRS Foundation.”
For its part, the IFRS Foundation staff quoted a phrase in the SEC staff’s final report that “the [IFRS Foundation] Trustees have not been successful in raising funding in the U.S. to meet the U.S. funding objectives.” Those goals, the IFRSF’s staff suggested, would be commensurate with U.S. gross domestic product, or 20 percent of the total IFRS Foundation contributions, for a share equal to about $7 million. However, at the time of the staff reports’ writings in 2012 – and in succeeding years, it appears – the amount collected from U.S. sources was on track to fall far short of that.
“Ultimately, the lack of public funding” for the IFRS Foundation “in the U.S. can only be resolved by the U.S. authorities themselves directly or indirectly,” wrote the staff of IASB’s parent group.
That sentence in the report followed one that was quoted almost verbatim by IASB Chairman Hans Hoogervorst in November 2013 in response to a question I asked him at a news conference in New York.
The point reinforced by Hoogervorst followed the reasoning set down in the sentence on page 25 of IFRS Foundation staff report of a year before: “We note that, while around 20-25 percent of the total seats in the Foundation’s different bodies are currently held by the U.S., the U.S. contributions amount to less than 10 percent of the total country-based contributions to the Foundation’s budget.”
Other points of disagreement cropped up in the reports of the two staffs. Some axes of discord are complex and nuanced, such as the issue of how the number of countries making contributions to the IFRS Foundation should be toted up. The SEC staff suggests that number of countries is not as many as IASB argues for.
The trustees of the Financial Accounting Foundation, FASB’s parent group, are scheduled to hold their quarterly meeting Feb. 25 in Norwalk Conn. It is likely that the recently announced FAF grant of $3 million to IASB’s parent, and the SEC’s role in that, will be discussed – if not in the relatively brief open portion of the meeting, at least during the several hours of closed session.
By Steve Burkholder, Staff Correspondent
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