SEC Top Accountant Considers Supplemental, IFRS-Based Reporting

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By Steve Burkholder

Dec. 8 — The staff of the Securities and Exchange Commission is studying the idea of possibly allowing U.S. public companies to present financial statements prepared under international accounting rules as a supplement to their required filings under U.S. generally accepted accounting principles.

James Schnurr, the agency's top accountant, described that scenario at a Washington conference Dec. 8 as one possible alternative to an unpopular full adoption of international financial reporting standards for the SEC's financial reporting system.

The “steam” for full IFRS adoption for use by U.S. filers domestically has evaporated since the momentum for it was first felt five years ago, said a member of the SEC, who also said he is “thrilled” by Schnurr's possible “different path forward” on the international accounting front.

“We understand that some domestic issuers may, now or in the near future, prepare IFRS-based financial information in addition to the U.S. GAAP based information that they use for purposes of SEC filings,” Schnurr said at the American Institute of CPAs' annual Conference on SEC and PCAOB Developments.

“However, regulatory constraints may dissuade some issuers from providing this information, as current SEC rules would consider IFRS-based information to be a ‘non-GAAP' financial measure for a domestic issuer,” said the chief accountant, who spoke for himself.

Schnurr stressed that the IFRS-as-supplemental-reporting approach would be simply one alternative to full adoption of the standards issued by the International Accounting Standards Board.

Full Adoption Not Ruled Out

Schnurr has not ruled out any avenue, including full adoption of IFRS, he told reporters after his conference speech.

The chief accountant, a former long-time Deloitte & Touche LLP partner, talked about “alternatives that might or should be explored regarding any further incorporation of, or alignment with, IFRS for domestic issuers.”

Under the notion of having IFRS-based financial statements as a supplement to GAAP-based filings, “issuers that do not believe IFRS-based information would be beneficial to investors would not be forced to undertake what we understand to be, in some cases, significant implementation costs.”

Weak U.S. Support for Full IFRS

Earlier in his Dec. 8 speech, Schnurr said, “Based on what we have heard to date, it appears that U.S. constituents generally are not supportive of full adoption for a variety of reasons, including legal issues and general cost-benefit concerns, among others.”

“Those concerns will certainly be considered in my analysis,” he said, describing a hope that he and his staff would start discussions on IFRS with the commission in a few months.

Schnurr spoke of the need—in a view shared by SEC Chairman Mary Jo White—of cutting the “uncertainty” with regard to IFRS's future in the U.S. felt by “investors around the globe.”

As he has suggested since early November, Schurr said that “it is a priority of mine to bring a recommendation to the Commission in the near future with the hope of resolving, or at least lessening, this uncertainty.” Any rulemaking proposal would go through the SEC's normal notice and comment process, he said.

Regarding concerns raised about costs and benefits and other topics relating to use of IFRS by companies, he said that “U.S. constituents have also raised similar issues with a broad-based option,” Schnurr said. “These issues include legal impediments, practical challenges, and an impact on comparability that does not currently exist in the domestic reporting environment.”

Looking for Options Other Than Full IFRS

The optional use of IFRS also came up in Schnurr's comments to reporters after his speech. In response to a question from Bloomberg BNA, the chief accountant said it was correct to conclude that he was leaning more toward exploring other options besides full adoption of IFRS.

That would include an “optional use” on which he would like to create a dialogue. That would center on a situation in which “U.S. issuers would, voluntarily, be able to provide supplemental IFRS financial information,” said Schnurr. “And that could be anything from a full-blown set of IFRS financial statements with notes to selective financial data to making just a reconciliation [to IFRS] if they wanted to.”

That scenario around optional use of IFRS differs from the notion of optional use common in long-time discussions in accounting rulemaking circles. In the latter, companies would be able to choose whether to compile financial statements under local GAAP or IFRS, as is the case in Japan.

That would not be the case under the alternative that Schnurr outlined.

Questions Already Being Asked

In conversations with long-time observers of and participants in accounting standards-setting, two questions quickly arose after Schnurr made his comments on the possible future of IFRS in the U.S.

One pertains to what companies would want to take the IFRS-supplemental reporting route, with the suggestion that few would do so.

The other question is whether the IFRS-based information filed with the SEC would have to be audited.

SEC's Gallagher: ‘Brilliant Idea.'

Daniel Gallagher, the member of the SEC who also spoke at the AICPA conference reacted positively to the IFRS-related course described as one alternative by the commission's chief accountant. He called it “a brilliant idea.”

Gallagher—who worked for Christopher Cox, when Cox, an IFRS booster at the time, was SEC chairman—framed his comments against a historical backdrop of the momentum toward full adoption that seemed to be prevalent late in the first decade after 2000.

That momentum stemmed, in large part, from “pressure from the industry, from issuers,” he said. “This was where they wanted to go.”

The situation changed. Today, “issuers aren't asking for this so much anymore,” Gallagher said. “Almost never.” Of the possible move in the U.S. toward IFRS and away from GAAP, he said, “I think the steam, in many ways, has come out of it.”

Reasons for diminished enthusiasm include the work that has been done to bring U.S. accounting standards and IFRS “closer together” in recent year, Gallagher suggested. He also cited “very good” arguments being made “for retaining the primacy of GAAP accounting” and the Financial Accounting Standards Board.

Gallagher said he was “really thrilled” to hear about Schnurr's IFRS-supplemental reporting idea. He called it “a market-based” approach. If the SEC allowed “not for an option in a technical sense” for issuers to put out IFRS information, “we could see if people want it.” If they wanted it, he said, “we can think deeper thoughts.”

Political or Diplomatic Benefits

Gallagher also identified political or diplomatic benefits of the proposal floated by Schnurr.

At the same time, “we retain the primacy of GAAP, FASB's role, and we showed the IASB, ‘Look, we're not just trying to sit here and wait this out.’ ”

For some four to five years, IASB chairmen have urged the SEC to act on the future of the international standards in the U.S. They suggested a course of an optional use of IFRS, akin to Japan's.

FASB's Responds to Schnurr's Remarks

A spokesman for FASB responded to Schnurr's comments Dec. 8, including those on the SEC's support for independent standard-setting in accounting, as pledged by the chief accountant.

“We agree with Chief Accountant Schnurr that U.S. investors are best served by an independent standard-setter that is first focused on the interests of those who participate in U.S. capital markets,” Robert Stewart said in an e-mail statement.

“We also believe it makes sense to explore whether there are ways to remove barriers that might exist for companies that voluntarily choose to offer investors a second set of financial statements prepared in accordance with International Financial Reporting Standards (IFRS),” wrote Stewart, who also speaks for FASB's parent, the Financial Accounting Foundation.

“We believe that voluntarily providing IFRS information on a supplemental basis, subject to audit, SEC review and other regulatory scrutiny, could be an important tool in fostering further convergence of Generally Accepted Accounting Principles (GAAP) and IFRS,” he wrote.

Schnurr on Leases, PCAOB's Process

In his speech and in comments to reporters, Schnurr also lamented continuing divergence of FASB and IASB in their high-priority joint project on leases, specifically, on differing approaches to recognizing lease-related income. Final rules are expected in 2015.

Schnurr suggested that lack of alignment would represent a missed opportunity to improve accounting globally. He said he had spoken to FASB about that concern.

The SEC chief accountant also faulted what he views as the overly slow standard-setting process of the Public Company Accounting Oversight Board. He suggested, based on discussions with PCAOB Chairman James Doty, that he is optimistic that that process could be quickened and improved .

To contact the reporter on this story: Steve Burkholder, reporting from Washington, at

To contact the editor responsible for this story: Steven Marcy at

The text of Schnurr's Dec. 8 speech is available at



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