Convergence at Meeack Corp.: On December 31, 2015, Ms. Levine CPA, your manager and the treasurer of the U.S. division of the pharmaceutical company Meeack Corp. had just finished acquiring the United Kingdom drug company Zulu LLP, and, after utilizing her knowledge of the IFRS, realized the FASB and IASB designed a roadmap for convergence by 2015. She would like to know the reasons why the U.S. is not going to be converting to the IFRS by 2015. Required: Using the SEC staff report issued in July 2012, take a position and then argue and support for your manager at least three reasons why you believe, or do not believe, that the SEC is correct in its position to delay convergence. Your well-written paper must be 2-3 pages, in addition to title and reference pages. The paper should be formatted according to APA Requirements. Cite at least two peer-reviewed sources.

July 13, 2012 Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers Final Staff Report OFFICE OF THE CHIEF ACCOUNTANT UNITED STATES SECURITIES AND EXCHANGE COMMISSION This is a paper by the Staff of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings, or conclusions contained herein. Introductory Note The following report was prepared by the staff of the U.S. Securities and Exchange Commission to summarize the observations and analyses of the staff regarding six key areas identified for study in the Work Plan for global accounting standards. The Commission directed the staff to develop and execute the Work Plan in February 2010. At that time, the Commission issued a statement indicating that the information obtained through the Work Plan, among other considerations, would aid the Commission in evaluating the implications of incorporating International Financial Reporting Standards into the financial reporting system for U.S. issuers. The Commission believes it is important to make clear that publication of the Staff Report at this time does not implyand should not be construed to implythat the Commission has made any policy decision as to whether International Financial Reporting Standards should be incorporated into the financial reporting system for U.S. issuers, or how any such incorporation, if it were to occur, should be implemented. Although the Staff Report is constructive and an important contribution, the Work Plan did not set out to answer the fundamental question of whether transitioning to IFRS is in the best interests of the U.S. securities markets generally and U.S. investors specifically. Additional analysis and consideration of this threshold policy question is necessary before any decision by the Commission concerning the incorporation of IFRS into the financial reporting system for U.S. issuers can occur. The Staff Report has not been approved by Commission action and does not necessarily reflect the views of the Commission or any Commissioner. Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers Final Staff Report July 13, 2012 OFFICE OF THE CHIEF ACCOUNTANT UNITED STATES SECURITIES AND EXCHANGE COMMISSION This is a paper by the Staff of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings, or conclusions contained herein. Table of Contents I. II. Executive Summary ............................................................................................................ 1 A. Methodology ........................................................................................................... 2 B. Focus of the Staff's Work ....................................................................................... 2 C. Summary Findings .................................................................................................. 4 Development of IFRS ................................................................................. 4 2. Interpretive Process..................................................................................... 4 3. IASB's Use of National Standard Setters ................................................... 5 4. Global Application and Enforcement ......................................................... 5 5. Governance of the IASB............................................................................. 5 6. Status of Funding ........................................................................................ 6 7. Investor Understanding............................................................................... 6 Sufficient Development and Application of IFRS for the U.S. Domestic Reporting System................................................................................................................................. 7 A. Summary Observations ........................................................................................... 7 B. Comprehensiveness of IFRS ................................................................................... 8 C. D. III. 1. 1. The Boards' MoU and Other Joint Projects.............................................. 10 2. Standards with a Similar Objective, that Are Substantially Converged, or Both ...................................................................................................... 13 3. Fundamental Differences .......................................................................... 14 4. Industry Guidance..................................................................................... 17 Comparability Within and Across Jurisdictions ................................................... 21 1. Staff Analysis of IFRS in Practice ............................................................ 22 2. Formal Interpretative Process ................................................................... 25 Auditability and Enforceability............................................................................. 25 1. Principles versus Rules ............................................................................. 27 2. Effect of Audit Firm Structure on Comparability ..................................... 28 3. Enforcement and Compliance ................................................................... 29 4. International and Other Regulatory Bodies .............................................. 32 Independent Standard Setting for the Benefit of Investors ............................................... 34 A. Summary Observations ......................................................................................... 35 B. Overview of the IASB's Governance Structure.................................................... 36 C. Background on IFRS Foundation Trustee and Monitoring Board Reviews ......... 37 1. Trustees' Strategy Review ........................................................................ 37 i 2. D. E. F. G. IV. Monitoring Board's Governance Review ................................................. 38 Oversight of the IFRS Foundation ........................................................................ 39 1. Current State of Governance Structure ..................................................... 39 2. Composition of the Monitoring Board...................................................... 40 3. Monitoring Board Observers .................................................................... 40 4. Role of Application of IFRS and Funding in Monitoring Board Membership .............................................................................................. 41 5. Role of the Monitoring Board in Selection of Trustees ............................ 42 6. Role of the Monitoring Board in the IASB's Standard-Setting Process... 44 Composition of the IFRS Foundation and the IASB ............................................ 45 1. IFRS Foundation Trustee Composition and Duties .................................. 45 2. IFRS Foundation Trustee Selection Process ............................................. 47 3. Trustee Involvement in the Standard-Setting Process .............................. 47 4. Composition of the IASB.......................................................................... 50 Funding of the IFRS Foundation .......................................................................... 52 1. Four Characteristics of a Funding Approach ............................................ 52 2. Funding of the FASB ................................................................................ 54 3. Monitoring Board Role in Funding........................................................... 55 4. Approaches in Other Jurisdictions to Contribute to the IFRS Foundation ................................................................................................ 56 5. Contributions by the Large Accounting Firms ......................................... 57 6. Funding from the United States ................................................................ 58 IASB Standard-Setting Process ............................................................................ 58 1. Focus of the Staff's Review...................................................................... 58 2. IASB's Standard-Setting Process ............................................................. 59 3. Pre-eminence of Investors IASB's Interaction with Investors ............ 61 4. Timeliness ................................................................................................. 63 5. Objectivity................................................................................................. 66 6. Observations on IASB's Standard-Setting Process .................................. 68 Investor Understanding and Education Regarding IFRS .................................................. 71 A. Summary Observations ......................................................................................... 72 B. Current Awareness and Knowledge of IFRS........................................................ 74 C. Investor Education Regarding Accounting Standards and Changes in Accounting Standards ........................................................................................... 75 D. Investor Preparedness for Incorporation of IFRS ................................................. 76 ii E. V. Current Preparedness ................................................................................ 76 2. Necessary Time and Activities Needed by Investors in Order to Transition Successfully to IFRS ............................................................... 77 3. Investor Preferences with Regard to Transition........................................ 78 Other Investor Views ............................................................................................ 79 1. Global Accounting Standards ................................................................... 79 2. Ongoing Role of the FASB....................................................................... 80 Regulatory Environment ................................................................................................... 82 A. Summary Observations ......................................................................................... 83 B. Manner in which the SEC Fulfills its Mission...................................................... 84 C. VI. 1. 1. Ongoing Role of the FASB....................................................................... 84 2. Analysis of Changes to the Commission's Rules and Guidance .............. 88 3. Analysis of Changes to Commission's Ability to Issue, Interpret, or Enforce Accounting Standards ................................................................. 89 Industry Regulators............................................................................................... 89 1. Regulators Currently Tend to Use U.S. GAAP ........................................ 90 2. Commission Incorporation of IFRS Would Impact Regulators ............... 90 3. Regulators' Impressions of IFRS .............................................................. 92 D. Federal and State Tax Impacts.............................................................................. 93 E. Statutory Dividend and Stock Repurchase Restrictions ....................................... 95 F. Audit Regulation and Standard Setting................................................................. 96 G. Broker-Dealer and Investment Company Reporting ............................................ 97 H. Public versus Private Companies.......................................................................... 99 Impact on Issuers ............................................................................................................ 103 A. Summary Observations ....................................................................................... 104 B. Accounting Systems, Controls, and Procedures ................................................. 104 C. D. E. 1. Systems, Controls, and Procedures ......................................................... 106 2. Stable Platform........................................................................................ 108 Contractual Arrangements .................................................................................. 109 1. Types and Pervasiveness......................................................................... 109 2. Effects on Issuers .................................................................................... 110 Corporate Governance and Other Regulatory Compliance ................................ 113 1. Corporate Governance ............................................................................ 113 2. Other Effects ........................................................................................... 115 Accounting for Litigation Contingencies............................................................ 116 iii F. VII. Smaller Issuers versus Larger Issuers ................................................................. 118 Human Capital Readiness ............................................................................................... 121 A. Summary Observations ....................................................................................... 121 B. Education and Training....................................................................................... 122 C. Auditor Capacity................................................................................................. 123 Appendix A, Exhibits A - I ........................................................................................................ 127 iv I. Executive Summary In the Commission Statement in Support of Convergence and Global Accounting Standards,1 the U.S. Securities and Exchange Commission (\"SEC\" or \"Commission\") directed the staff of the Office of the Chief Accountant of the SEC, with appropriate consultation with other Divisions and Offices of the Commission (collectively, the \"Staff\"), to develop and execute a work plan (\"Work Plan\").2 The Staff published the Work Plan in February 2010.3 The purpose of the Work Plan is to consider specific areas and factors relevant to a Commission determination as to whether, when, and how the current financial reporting system for U.S. issuers should be transitioned to a system incorporating International Financial Reporting Standards (\"IFRS\").4 Since February 2010, the Staff has dedicated significant resources to executing the Work Plan. Throughout this process, the Staff's understanding of the potential impact and the related costs and benefits of transitioning to a financial reporting system incorporating IFRS for domestic issuers has grown significantly. However, this understanding actually began a number of years ago and has continued in many forms.5 This final Staff paper (\"Final Staff Report\") represents a summary of what the Staff has learned in the areas covered by the Work Plan regarding the potential impact of any incorporation of IFRS into the financial reporting system for U.S. issuers. The Final Staff Report, together with such other matters as the Commission may consider, will inform any Commission determination on whether to incorporate IFRS and provide transparency to the public related to the Staff's findings and observations pursuant to the Work Plan. Regardless of the outcome of the Commission decision on whether to incorporate IFRS, the Staff expects that the SEC and other U.S. constituents will continue to be involved with the development or application of IFRS, or both. This involvement may take many different forms including the Staff's review of filings of foreign private issuers that prepare their financial statements in accordance with IFRS, participation in International Organization of Securities Commissions (\"IOSCO\"), interactions with other securities regulators on accounting matters, and review and commentary on the International Accounting Standards Board's (\"IASB\") standards. 1 See SEC Release No. 33-9109 (Feb. 24, 2010), Commission Statement of Support of Convergence and Global Accounting Standards [75 FR 9494 (Mar. 2, 2010)] (\"2010 Statement\"). 2 See SEC Office of the Chief Accountant, Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers (\"Work Plan\"). 3 The Work Plan was attached to the 2010 Statement. See 2010 Statement at Appendix A. 4 As used in this Final Staff Report, the term \"IFRS\" refers to \"IFRS as issued by the IASB,\" unless otherwise noted. Further, the term \"IFRS\" refers to the authoritative text of IFRS, which, according to the IFRS Foundation's Constitution, is published in English. See \"International Financial Reporting Standards (IFRSs) as issued at 1 January 2010, Preface to International Financial Reporting Standards.\" \"IFRSs\" refers to more than one International Financial Reporting Standard. Throughout this document, the Staff uses the term \"incorporation of IFRS\" and similar phrases. Unless otherwise noted, these phrases refer to the incorporation of IFRS into the financial reporting system for U.S. issuers. 5 See, e.g., SEC Release No. 33-7801 (Feb. 16, 2000), SEC Concept Release: International Accounting Standards [65 FR 8896 (Feb. 23, 2000)]. 1 A. Methodology In executing the Work Plan, the Staff gathered information using a variety of methods, including, but not limited to: performing research; seeking comment from market place participants; considering academic research; and researching the experiences both of other jurisdictions that have incorporated or have committed to incorporate IFRS into their financial reporting systems and of foreign private issuers that currently report under IFRS. In the Staff's outreach to constituents, the Staff worked to solicit views from constituents with diverse characteristics.6 For example, in response to the Staff's comment solicitations, it received input from a number of large issuers, but there was less feedback from investors and smaller issuers. To supplement the Staff's outreach in this area, the Staff held a roundtable focused on the concerns of investors and small issuers.7 The Staff has also periodically issued documents updating the public on the Staff's progress in executing the Work Plan.8 B. Focus of the Staff's Work In execution of the Work Plan, the Staff considered a wide spectrum of options on whether and, if so, how to incorporate IFRS. The spectrum spanned from no action, to incorporating IFRS, to pursuing the designation of the standards of the IASB as \"generally accepted\" for purposes of U.S. issuers' financial statements. However, early in the Staff's research, it became apparent to the Staff that pursuing the designation of the standards of the IASB as authoritative was, among other things, not supported by the vast majority of participants in the U.S. capital markets and did not appear to be consistent with the methods of incorporation employed by the other major capital markets around the world. Accordingly, the Staff focused 6 The Staff, in August 2010, issued two requests for comment. One was directed towards issuers: Release No. 33-9134 (Aug. 12, 2010), Notice of Solicitation of Public Comment on Consideration of Incorporating IFRS into the Financial Reporting System for U.S. Issuers [75 FR 51148 (Aug. 18, 2010)] (\"Issuer Comment Request\"). The other was directed towards investors: Release No. 33-9133 (Aug. 12, 2010), Notice of Solicitation of Public Comment on Consideration of Incorporating IFRS into the Financial Reporting System for U.S. Issuers [75 FR 51150 (Aug. 18, 2010)] (\"Investor Comment Request\"). The Staff also issued for comment a staff paper on one possible mechanism for incorporating IFRS. See SEC Office of the Chief Accountant, Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: Exploring a Possible Method of Incorporation: A Securities and Exchange Commission Staff Paper (May 26, 2011) (\"2011 May Staff Paper\"). 7 See Roundtable on International Financial Reporting Standards (Jul. 7, 2011) (\"SEC IFRS Roundtable\"). The SEC IFRS Roundtable was composed of three panels on different topics: (1) investor understanding and knowledge of IFRS; (2) smaller public companies; and (3) regulatory environment. See Agenda for Roundtable on International Financial Reporting Standards, July 7, 2011 (available at: http://www.sec.gov/spotlight/ifrsroadmap/ifrsroundtable070711-agenda.htm). See also Transcript, July Roundtable (\"SEC IFRS Roundtable transcript\") (available at: http://www.sec.gov/spotlight/ifrsroadmap/ifrsroundtable070711-transcript.pdf). 8 Attached to this Final Staff Report as appendices are copies of the documents that the Staff has previously issued in connection with the Work Plan. See SEC Office of the Chief Accountant, Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: Progress Report (Oct. 29, 2010) (\"2010 Progress Report\"). The Staff also issued two staff papers: one compared U.S. GAAP to IFRS; and the other analyzed the application of IFRS in practice. See infra notes 21 and 69, respectively. 2 on other methods of potential incorporation, such as an endorsement mechanism or continued convergence of accounting standards issued by the Financial Accounting Standards Board (\"FASB\") and the IASB. The basis of the Staff's decision to expand the focus of its efforts to methods beyond the idea of a potential designation of the standards of the IASB as authoritative principally considered the following three factors: Influence on Standard Setting. As noted in the 2010 Progress Report, very few jurisdictions provide for the use of standards issued by the IASB without measures to ensure the suitability of those standards. Rather, most jurisdictions generally rely on some mechanism to incorporate IFRS into their domestic reporting system. Mechanisms range from converging a jurisdiction's standards to IFRS without necessarily incorporating IFRS fully into its national framework, to various forms of endorsement approaches whereby IFRSs are incorporated into the national framework on a standard-by-standard basis, if the newly issued IFRS standard passes some prescribed threshold. There may be a number of reasons why a jurisdiction has adopted a specific approach. The reasons can be more technical in nature (e.g., to comply with an existing regulatory environment) and, in other instances, stem from the jurisdiction's desire to maintain some level of control over accounting standard setting for the jurisdiction. In addition, an endorsement process may allow a jurisdiction to exert more influence over the standard-setting process because the threat of a potential rejection of a proposed accounting standard may influence the IASB decision on the scope of the accounting standard, how to account for a particular transaction, or the timing of the completion of an accounting standard-setting project. Burden of Conversion. In executing the Work Plan, the Staff received feedback from issuers on the implications of moving directly to IFRS. The majority of the issuers expressed concern that moving directly to IFRS had the potential to result in significant expense to the company and confusion for investors. Many of the issuers indicated that the costs of full IFRS adoption easily could be among the most significant costs ever required from an accounting perspective and questioned whether the corresponding direct benefits would justify such a fullscale transition. Issuers frequently cited the level of effort of moving directly to IFRS, including reconsidering and updating existing accounting policies and procedures, investing in updates to or new information systems, redesigning internal controls, educating existing accounting staff, and educating investors about the changes to their accounting policies. The Staff recognizes that any incorporation of IFRS could not occur without some amount of cost and effort expended; however, the Staff further recognizes that methods of incorporation other than direct incorporation could lessen the total costs required while extending any timeframe for incorporation. Reference to U.S. GAAP. The Staff's outreach to the industry regulators, the legal profession, and others confirmed its understanding that U.S. GAAP is embedded throughout laws and regulations and in a significant number of private contracts. The effort that would be required to change the references from U.S. 3 GAAP to IFRS as issued by the IASB would be significant, if not nearly impossible, at least in any near-term time horizon. For these reasons, there appears to be relatively less support within the U.S. financial reporting community for the designation of the standards of the IASB as authoritative for use by U.S. issuers for domestic reporting purposes. However, the Staff found there to be substantial support for exploring other methods of incorporating IFRS that demonstrate the U.S. commitment to the objective of a single set of high-quality, globally accepted accounting standards while addressing some of the aforementioned concerns. Therefore, the Staff focused its efforts on other potential incorporation methods of IFRS. C. Summary Findings The remainder of this Final Staff Report focuses on the results of the Staff's work and observations from the Staff. Some of the more significant themes that emerged from the Staff's analysis are summarized below. 1. Development of IFRS Since its inception, the IASB has made significant progress in developing a comprehensive set of accounting standards. The progress includes recent efforts by the IASB, in concert with the FASB, to improve the standards related to the convergence projects, including revenue recognition and lease accounting. The standards that are issued by the IASB are generally perceived to be high quality by the global financial reporting community. However, there continue to be areas that are underdeveloped (e.g., the accounting for extractive industries, insurance, and rate-regulated industries). By comparison, U.S. GAAP also contains areas for which guidance is in need of continued development (e.g., push-down accounting and government grants), but the perception among U.S. constituents is that the \"gap\" in IFRS is greater. 2. Interpretive Process One of the important roles of any standard setter is the adequate maintenance of its standards. The IFRS Interpretations Committee (\"IFRS IC\") is the interpretative body of the IASB.9 The mandate of the IFRS IC is to review, on a timely basis, widespread accounting issues that have arisen within the context of current IFRSs and to provide authoritative guidance on those issues. However, the Staff's outreach both domestically and internationally indicates that the IFRS IC should do more to address issues on a timely basis. The IFRS Foundation, the governing body of the IASB, has recently implemented changes that may assist in addressing this concern, but the changes were only recently implemented, and it is unknown at this point whether they will be effective. 9 The IFRS IC is responsible for interpreting the application of IFRSs and providing timely guidance on financial reporting issues not specifically addressed in IFRSs. Draft and final Interpretations developed by the IFRS IC are ratified by the IASB before publication. 4 3. IASB's Use of National Standard Setters In order to develop accounting standards that could be incorporated in multiple jurisdictions, the IASB needs to understand the intricacies of a number of distinct domestic reporting and regulatory systems. This challenge can be difficult in the best of circumstances. The IASB has a set of procedures for interacting with national standard setters on individual projects. In addition, a significant number of national standard setters meet with members of the IASB periodically to discuss accounting issues and current IASB projects. However, the IASB should consider greater reliance on national standard setters. The national standard setters could assist with individual projects for which they have expertise, perform outreach for individual projects to the national standard setter's home country investors, identify areas in which there is a need to narrow diversity in practice or issue interpretive guidance, and assist with postimplementation reviews. 4. Global Application and Enforcement One of the perceived benefits of a single set of high-quality, globally accepted accounting standards is that investors can read a set of financial statements of any company, understand the financial results, and make comparisons to the results of other companies. However, in order to derive many of the key benefits of a single set of accounting standards, it is critical that those standards are applied and enforced on a consistent basis. The Staff conducted a review of financial statements prepared in accordance with IFRS to assess the consistency in application.10 The results of the Staff's review were consistent with its expectations and confirmed that, while the financial statements reviewed generally appeared to comply with IFRS, global application of IFRS could be improved to narrow diversity. Since IFRS is being incorporated into an increasing number of countries that will have perspectives about the application of IFRS, a greater emphasis will be placed on the Staff to work more cooperatively with regulators in other jurisdictions if IFRS is incorporated into the financial reporting system for U.S. issuers. An increased level of cooperation is important to allow regulators to share views on application and enforcement and, thus, foster global consistency. The Staff believes that the financial reporting community, including the SEC, can be a constructive influence on the consistent application and enforcement of IFRS. 5. Governance of the IASB According to the Staff's assessment, the overall design of the governance structure of the IFRS Foundation appears to strike a reasonable balance of providing oversight of the IASB while simultaneously recognizing and supporting the IASB's independence. As is typical with a global organization, the IASB does not have a mandate to consider the establishment of standards with the focus of any single capital market. As it relates to considering the needs of U.S. investors and the U.S. capital markets, the Staff believes that it may be necessary to put in place mechanisms specifically to consider and to protect the U.S. capital marketsfor example, maintaining an active FASB to endorse IFRSs. 10 The Staff published a paper documenting the results of its review. See infra note 69. 5 6. Status of Funding The IFRS Foundation has made progress in developing a funding mechanism that is broad-based, compelling, open-ended, and country-specific. However, the IFRS Foundation is a private not-for-profit organization and ultimately has no ability to require or compel funding. Further, while the IFRS Foundation indicates that IFRS is used on some basis in more than 100 countries around the world, currently funding is provided to the IFRS Foundation by businesses, not-for-profits, and governments in fewer than 30 countries. Currently, the IFRS Foundation Trustees have been unsuccessful in obtaining the funding for the portion of the IASB budget allocated to the United States.11 In theory, this shortfall should be somewhat offset by the services contributed to the IASB by U.S. sources, such as the FASB staff efforts on U.S. GAAP IFRS convergence projects. The Financial Accounting Foundation (\"FAF\") is committed to participating in discussions on the issue of funding from U.S. sources.12 Notwithstanding the above observations, the Staff's most significant concern about the funding approach is the continued reliance on the large public accounting firms to provide funds to the IASB. 7. Investor Understanding The Staff has received helpful input from investors regarding how they participate in the standard-setting process. In the course of this outreach, the Staff observed that investor education on accounting issues and changes in the accounting standards is not uniform. The Staff understands that investors tend to rely generally on issuers, the large public accounting firms, and publications to understand recent changes to accounting standards. Regardless of the ultimate determination by the Commission as to whether to incorporate IFRS, the Staff will consider how investor engagement and education related to the development and use of accounting standards could be improved. 11 See section III. for a discussion of the IASB governance structure, including the role of the IFRS Foundation and its Trustees, in general terms, and as it relates to funding responsibilities. 12 See comment letter of the FAF on the 2011 May Staff Paper. The FAF is the parent organization of the FASB. (Commenters on the 2011 May Staff Paper cited throughout this document are identified in Appendix A: List of Commenters to the Summary of Comments on the 2011 May Staff Paper, which is attached as Exhibit E hereto (\"Summary of Comments on the 2011 May Staff Paper\").) 6 II. Sufficient Development and Application of IFRS for the U.S. Domestic Reporting System The 2010 Statement highlighted that the sufficient development and application of IFRS for the U.S. domestic reporting system was an important consideration in determining whether to incorporate IFRS.13 As noted in the Work Plan, the Staff believes that an evaluation of whether IFRS is sufficiently developed and applied to be the single set of high-quality, globally accepted accounting standards for U.S. issuers requires consideration of the following areas: The comprehensiveness of IFRS; The comparability of IFRS financial statements within and across jurisdictions; and The auditability and enforceability of IFRS.14 Based on its work to evaluate these three areas, the Staff has developed the observations described below. A. Summary Observations The IASB has made significant progress in improving the comprehensiveness of IFRS. The IASB has made improvements to IFRS through independent standard setting and through convergence efforts working with the FASB (together with the IASB, \"Boards\"). When the Commission issued the 2010 Statement, it was expected that the Boards would complete all of the joint projects on their Memorandum of Understanding (\"MoU\") agenda.15 To date, the Boards have completed, either wholly or partially, a number of their joint projects, and they are continuing to work toward completion of certain of the remaining projects. However, there are several projects that both Boards acknowledge are in need of improvement, but the Boards are not currently devoting resources toward completion of those projects (e.g., financial instruments with the characteristics of equity). Further, IFRS is not comprehensive with respect to certain industries or types of common transactions (e.g., utilities). The absence of guidance may be problematic for issuers in certain U.S. industries for which financial reporting under existing U.S. GAAP standards provides users with more relevant information. The increased incorporation of IFRS around the world appears to promote general comparability, particularly in relation to the alternative of comparing financial reports based upon local country accounting standards. Although the Staff found that financial statements it reviewed in executing the Work Plan generally appeared to comply with IFRS requirements, the Staff observed that the quality of preparers' application of IFRS could be improved. In 13 See 2010 Statement. 14 See Work Plan. 15 See Boards, A Roadmap for Convergence between IFRSs and U.S. GAAP2006-2008: Memorandum of Understanding between the FASB and IASB (Feb. 27, 2006) (available at: http://www.ifrs.org/NR/rdonlyres/874B63FB-56DB-4B78-B7AF-49BBA18C98D9/0/MoU.pdf). 7 particular, the Staff noted two themes in its evaluation of the application of IFRS: (1) the transparency and clarity of IFRS financial statements could be enhanced, and (2) diversity in application continues to be a challenge to comparability. Further, while global comparability appears to be increased, it is much less clear whether, in the absence of local interpretative guidance, comparability is increased or diminished within a jurisdiction. However, these themes may not necessarily be presumed to indicate that IFRS is not a sufficiently comprehensive body of accounting standards. To improve the quality of application of IFRS, improvements could be made to the IFRS IC's approach to issuing application guidance. Specifically, an increase in the IFRS IC's activity could promote more consistent application, thereby potentially increasing comparability. Further, in the absence of or as a means to supplement the IASB interpretative process, there may be a need for continuing guidance (interpretative or other) within the United States to foster further comparability among issuers filing in the U.S. capital markets. The Staff will continue to monitor the progress of the IFRS IC. In addition, regulators are working to improve consistency in the application of IFRS and to reduce jurisdictional variations of IFRS. IOSCO and other regional bodies (e.g., the European Securities and Markets Authority (\"ESMA\")16) are contributing to consistency in application through greater international coordination.17 The Staff is committed to working with the IASB, other securities regulators around the world, and the accounting profession to improve consistency in the application and enforcement of IFRS on a global basis. B. Comprehensiveness of IFRS In the 2008 proposed \"roadmap\" for the potential incorporation of IFRS into the U.S. financial reporting system, the Commission stated that \"IFRS is not as developed as U.S. GAAP in certain areas.\"18 The Work Plan stated further: The Commission and commenters have noted limited IFRS guidance in two respects. First, IFRS lacks broad guidance for: (1) certain topical areas, such as accounting for certain common control transactions, recapitalization transactions, reorganizations, acquisitions of minority shares not resulting in a change of control and similar transactions, and the push down of a new accounting basis in an entity's separate financial statements; (2) certain industries, such as those related to utilities, insurance, extractive activities, and investment companies; and 16 ESMA succeeded the Committee of European Securities Regulators (\"CESR\") on January 1, 2011 as a result of Regulation (EU) No 1095/2010 of the European Parliament of the Council (Nov. 24, 2010) (available at: http://www.esma.europa.eu/system/files/Reg_716_2010_ESMA.pdf). 17 See, e.g., ESMA, Public Statement, Sovereign Debt in IFRS Financial Statements (Nov. 25, 2011) (available at: http://www.esma.europa.eu/system/files/2011_397.pdf). 18 See SEC Release No. 33-8982 (Nov. 14, 2008), Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers [73 FR 70816 (Nov. 21, 2008)] (\"2008 Roadmap\"). 8 (3) disclosures in order to provide better transparency regarding the application of accounting principles. Second, where IFRS provides broad guidance, the IASB, as a matter of operating practice, has elected to make guidance less detailed and prescriptive than U.S. GAAP.19 To assess the comprehensiveness of IFRS, the Staff compared the written standards of IFRS to the text of U.S. GAAP and identified differences between the requirements of the two sets of standards. The differences identified by the Staff represent the more notable differences between IFRS and U.S. GAAP, based on the Staff's observations, and do not comprise a comprehensive list of differences.20 The results of the Staff's comparison were documented in a staff paper released in November 2011.21 The GAAP Comparison Paper also highlights those areas for which IFRS does not provide guidance, including the prevalence of industry-specific guidance that is contained within U.S. GAAP. The Staff used a comparative approach in assessing the comprehensiveness of IFRS to provide a context in which to frame its evaluation of IFRS, rather than to establish a minimum threshold of development that must be met for any incorporation of IFRS into the financial reporting system for U.S. issuers. The Staff used U.S. GAAP specifically as its reference point because: (1) it is the body of standards that currently applies to U.S. issuers and from which investors would be required to adjust their analyses of U.S. issuers' financial statements; and (2) it enables the Staff to minimize its consideration of areas in which IFRS currently has the same or similar accounting requirements as U.S. GAAP, as those IFRS requirements are presumably of sufficiently high quality. As a result, the Staff's review was focused on identifying areas in which the requirements of IFRS and U.S. GAAP differ. This review did not include an analysis of the impact that those differences, individually or collectively, may have on the quality of IFRS, but rather evaluated the assertion by some commenters that IFRS is not sufficiently comprehensive to be suitable for the U.S. capital markets.22 Further, the Staff reviewed, but generally did not analyze, the U.S. GAAP and IFRS requirements that are subject to the joint standard-setting efforts of the IASB and the FASB. 19 Work Plan (internal citations omitted). 20 There are many readily available, comprehensive comparisons of IFRS and U.S. GAAP prepared by private sector entities. Rather than duplicating that work, the Staff focused on the areas it considered to be more significant. 21 See SEC Office of the Chief Accountant, Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers: A Comparison of U.S. GAAP and IFRS: A Securities and Exchange Commission Staff Paper (Nov. 16, 2011) (\"GAAP Comparison Paper\"). 22 Cf. Donna L. Street, Criteria for an Independent Accounting Standard Setter: How Does the IASB Rate (Jun. 2011) (study commissioned by Council of Institutional Investors (\"CII\") and attached to the comment letter of CII on the 2011 May Staff Paper) (\"CII Study\"). The CII Study's first criterion notes some \"key areas\" where it asserts that \"fundamental deficiencies\" exist. 9 The Staff focused on the differences between U.S. GAAP and IFRS at the principle level, in part to understand whether the nature of the information communicated to investors was significantly different if one set of standards was applied as opposed to the other. In comparing U.S. GAAP to IFRS in this manner, the Staff identified numerous instances that could result in the accounting for and disclosure of similar transactions differing. However, the differences may not necessarily be presumed to have a direct or consistent correlation to the quality of IFRS. Further, the differences between U.S. GAAP and IFRS are not meant to be determinative that their elimination would be necessary before any Commission consideration of the incorporation of IFRS. However, the existence of differences indicates a need for the Staff to consider specifically such differences to determine whether investors and other users of the financial statements would be losing or gaining significant informational content and to determine the effect on transitional considerations if IFRS were to be incorporated. The differences identified in the GAAP Comparison Paper can be grouped into several broad categories. For example, certain differences may exist but the objectives of the guidance are similar, the standards have been substantially converged, or both. Other differences exist that are more fundamental in nature and could significantly impact information provided to investors. The following categories of differences are discussed further below: The Boards' MoU and Other Joint Projects; Standards with a Similar Objective, that Are Substantially Converged, or Both; Fundamental Differences; and Industry Guidance. 1. The Boards' MoU and Other Joint Projects The Boards have long supported the development of high-quality, globally accepted accounting standards. Since committing to the \"Norwalk Agreement\" after their joint meeting in September 2002, the Boards have been working toward that goal jointly.23 In the Norwalk Agreement, the Boards: acknowledged their commitment to the development of high-quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. At that meeting, both the FASB and IASB pledged to use their best efforts to (a) make their existing financial reporting standards fully compatible as soon as is practicable and (b) to coordinate their future work programs to ensure that once achieved, compatibility is maintained.24 23 See Boards, Memorandum of Understanding: \"The Norwalk Agreement\" (Sept. 18, 2002) (\"Norwalk Agreement\") (available at: http://www.fasb.orgews/memorandum.pdf). The Norwalk Agreement represents the first formal agreement between the Boards to work together on high-quality accounting standards and outlines the objectives for their work together towards the international convergence of accounting standards. 24 Id. 10 In February 2006, the Boards issued the MoU.25 In the MoU, eleven areas of focus (\"Major Joint Projects\") were identified by the Boards as joint projects comprising accounting topics that warranted improvement.26 The Boards also identified areas where differences between U.S. GAAP and IFRS could be eliminated through short-term standard-setting projects by either the FASB or the IASB, or on a joint basis (\"Short-term Convergence Projects\").27 The MoU also outlined the progress the Boards expected to achieve by 2008. In September 2008, the Boards provided an update to the MoU.28 The Boards highlighted that, when they established the MoU in 2006, they agreed on priorities and set milestones only through 2008, while expecting that all of the Major Joint Projects would not be completed by 2008. The Boards also updated their 2008 timetable for the Major Joint Projects to set milestones for completion to be achieved by June 2011. In June 2010, the Boards modified the milestones outlined in prior statements on the MoU progress.29 These changes gave priority to Major Joint Projects that the Boards perceived were in most need of improvement and allowed for more effective stakeholder outreach to increase the quality of those standards (\"priority Major Joint Projects\").30 To enable this increased focus on the priority Major Joint Projects, the Boards elected to reduce focus on the remaining Major Joint Projects.31 Further, in a progress report released in April 2012, the Boards 25 See supra note 15. 26 The Major Joint Projects included: business combinations; consolidations; fair value measurement; financial instruments with characteristics equity; financial statement presentation (including other comprehensive income and discontinued operations); post-retirement benefits (including pensions); revenue recognition; derecognition; financial instruments; intangible assets; and leases. 27 The Short-term Convergence Projects included: fair value option, investment properties, research and development, and subsequent events (FASB); income taxes and impairment (joint); and borrowing costs, government grants, joint ventures, and segment reporting (IASB). 28 See Boards, Update to the February 2006 Memorandum of Understanding: A progress report and timetable for completion (Sept. 2008) (available at: http://www.fasb.org/intl/MOU_09-11-08.pdf). A similar statement was issued in November 2009. See Boards, FASB and IASB Reaffirm Commitment to Memorandum of Understanding (Nov. 5, 2009) (available at: http://www.ifrs.org/News/Press+Releases/IASB+and+FASB+Reaffirm+Commitment+to+Memorandum+of+U nderstanding.htm). 29 See Boards, Joint Statement by the IASB and the FASB on their Convergence Work (Jun. 2, 2010) (available at: http://www.ifrs.org/News/Announcements+and+Speeches/IASB+and+FASB+issue+statement+on+their+conve rgence+work.htm). See also Boards, Progress Report on Commitment to Convergence of Accounting Standards and a Single Set of High Quality Global Accounting Standards (Jun. 24, 2010) (available at: http://www.iasb.org/NR/rdonlyres/A8B4D5B7-E776-4D80-BA54 17563F1E2297/0/MOU_Status_Update_24June_2010_FINAL.pdf). 30 The priority Major Joint Projects included: financial instruments; revenue recognition; leases; presentation of other comprehensive income; fair value measurement; insurance contracts; and converging disclosures on derecognition and consolidation. 31 The remaining non-prioritized Major Joint Projects included: financial statement presentation (including discontinued operations); financial instruments with characteristics of equity; consolidations; and derecognition. 11 announced that they had extended their timetable for the remaining priority Major Joint Projects to mid-2013.32 To date, the Boards have made progress on some of the priority Major Joint Projects and, for that, the Boards should be commended. However, work on these projects continues.33 The Boards have, at times, struggled to reach converged conclusions in some areas, which has contributed to delays in project timing and, for several projects, to total suspension of efforts. The Boards' efforts have been further complicated by a number of challenges during the last several years, including a financial crisis and shifting priorities of investors and regulators. In an effort to minimize divergence caused by a variety of influences, the Boards have been deliberate in working together more closely, including increasing the frequency of the in-person joint Board meetings. There have been obvious and tangible benefits to the Boards working together to share ideas and deliberate issues together. However, through its outreach, the Staff has noted that the continued effectiveness of the Boards working jointly under the current structure is often cited as an area of concern.34 The Staff has assessed, and will continue to assess, the Boards' progress and conclusions reached on the Major Joint Projects separate from its efforts on the Work Plan. Therefore, any analysis of the developing or completed standards related to the Major Joint Projects is separate from the Staff's efforts on the comparison analysis that were summarized in the GAAP Comparison Paper. The Staff's ongoing assessment of the Major Joint Projects includes monitoring the Boards' deliberations, reviewing exposure documents, and considering constituent comment letters, among other activities. The status of the Major Joint Projects and conclusions reached thereon remain factors, among many others, for the Commission to evaluate in its consideration of whether to incorporate IFRS into the financial reporting system for U.S. issuers. Although the Boards have made significant progress related to a number of the Major Joint Projects, the extent of differences between U.S. GAAP and IFRS that exists today is greater than the Staff would have expected in 2010 when the Commission directed the Staff to embark upon the Work Plan. This has not led the Staff to conclude that consideration of incorporation of IFRS should be abandoned. Although not supporting abandonment, some commenters to the 2011 May Staff Paper expressed that the MoU should be completed before any decision is made by the Commission.35 The Staff believes that due consideration should be given as to whether, in the absence of more fully converged standards, there are unique issues that should be considered to the extent that differences remain and whether there are any significant impediments to 32 See Boards, Joint Update Note from the IASB and FASB on Accounting Convergence, Note from IASB on Governance Enhancements (Apr. 5, 2012) (available at: http://www.financialstabilityboard.org/publications/r_120420d.pdf). 33 A detailed description of the status of the Major Joint Projects can be found on the FASB and IASB websites. See FASB, FASB Technical Plan and Project Updates (available at: http://www.fasb.org). See also IASB, IASB Work Plan (available at: http://www.ifrs.org). 34 See, e.g., SEC IFRS Roundtable transcript (comments of Gregory Jonas, Managing Director, Morgan Stanley). 35 See, e.g., comment letters of Chevron; CSX; Dell; Emerson; and Intel on the 2011 May Staff Paper. 12 incorporation (including, but not limited to, (1) whether investors lose informational content and transparency in such non-converged areas, and (2) the impact on preparers from having to consider the additional remaining differences). The consideration of the unique issues could be accomplished in a number of ways, including through an endorsement mechanism whereby the FASB considers such differences, particularly when a more fundamental difference exists between the two sets of standards. 2. Standards with a Similar Objective, that Are Substantially Converged, or Both In the GAAP Comparison Paper, the Staff noted a number of areas in U.S. GAAP and IFRS for which the standards have a similar objective, are substantially converged, or both. Some of these standards are converged as a result of the efforts of the Boards on MoU-related projects. Despite the similarities between the text of IFRS and U.S. GAAP, the Staff is not implying that the application of both standards would result in the same amounts or financial statement disclosures being reported to investors. Rather, the Staff would expect a change from U.S. GAAP to similar IFRS requirements to result in reported amounts and disclosures that are similar in nature to the information reported under U.S. GAAP. The following examples represent some of the more significant areas of similarity between IFRS and U.S. GAAP that were noted by the Staff. Business Combinations U.S. GAAP and IFRS contain similar principles and requirements for accounting for business combinations because of the collaborative efforts of the Boards in developing the current standards. However, certain differences continue to exist that could impact the recognition and measurement of certain transactions, including with respect to noncontrolling interests, contingent consideration, and common control transactions.36 Debt U.S. GAAP and IFRS have generally similar requirements for accounting for debt. Both standards require most financial liabilities to be measured at amortized cost on the balance sheet, with a fair value option available for qualifying instruments. The differences between the standards primarily relate to U.S. GAAP's provision of more arrangement- and industry-specific guidance than IFRS.37 Share-Based Compensation The guidance for share-based compensation transactions has largely been converged because of the Boards' collaboration. The overall objectives of both sets of standards are the same. However, the scoping of the standards is different, and there is an increased level of illustrative and application guidance under U.S. GAAP. These differences could give rise to 36 For more information, see Section III.X of the GAAP Comparison Paper. 37 For more information, see Section III.R of the GAAP Comparison Paper. 13 differences in classification, measurement dates, and expense recognition for transactions accounted for under IFRS as compared to U.S. GAAP.38 Compensation - Excluding Share-Based Payments U.S. GAAP and IFRS contain requirements for the accounting for and reporting of various compensation arrangements. The principle-level objectives of the standards are generally similar, with differences arising in some of the detailed requirements of the relevant standards.39 Earnings Per Share U.S. GAAP and IFRS contain similar requirements for calculating earnings per share. There are differences in the detailed requirements, which could result in differences in the amounts reported under U.S. GAAP and IFRS.40 3. Fundamental Differences In the GAAP Comparison Paper, the Staff noted the existence of some more fundamental differences between U.S. GAAP and IFRS. These differences exist for various reasons. First, in some cases, the Boards had different objectives in developing the standardseither because the Boards reached different conclusions about how best to communicate the economics of a transaction to investors or because the standards were developed at different times when the objectives of standard setting in general were different. Second, in some cases, standard setting that has occurred by one Board or the other in response to market or regulatory structures has resulted in differences in the standards (e.g., accounting for certain nonfinancial liabilities and last-in, first-out (\"LIFO\") inventory costing). Third, in some instances, the differences were the result of anti-abuse protections developed in the United States (e.g., the accounting provisions for sales of real estate, as currently codified in Accounting Standards Codification (\"ASC\") Subtopic 360-20). Finally, in some cases, although the standards' objectives may appear to be similar, the underlying guidance diverges, resulting in differences that are more fundamental in nature. The following represents some of the more significant areas that were noted by the Staff. In some cases, the resolution of these differences will be individually challenging (e.g., removal of, or any change to, LIFO), and any attempt by the SEC or others to resolve these differences in a time period even as long as five to seven years may prove to be difficult. Impairment The impairment models for property, plant, and equipment (\"PP&E\"), inventory, and intangible assets are summarized in the GAAP Comparison Paper. For each of these topics, the impairment methodology for recognizing and measuring an impairment loss differs between U.S. 38 For more information, see Section III.T of the GAAP Comparison Paper. 39 For more information, see Section III.S of the GAAP Comparison Paper. 40 For more information, see Section III.B of the GAAP Comparison Paper. 14 GAAP and IFRS. The IFRS models allow for reversals of impairments up to a certain amount if there is an indication that an impairment loss has decreased; whereas, the U.S. GAAP models preclude reversals of impairments. This distinction could result in differences in the timing and extent of recognized impairment losses. U.S. issuers could experience greater income statement volatility if the IFRS models were incorporated (flowing from recoveries of values previously written down).41 Certain Nonfinancial Liabilities The recognition of certain nonfinancial liabilities (e.g., contingencies and environmental liabilities) is governed by the probability that a liability has been incurred under both U.S. GAAP and IFRS. However, U.S. GAAP and IFRS differ in their definitions of what is \"probable.\" For example, for contingencies, IFRS defines probable as \"more likely than not to occur.\" By contrast, U.S. GAAP defines it as \"the future event or events are likely to occur.\" \"Likely\" is considered to be a higher threshold than \"more likely than not,\" meaning U.S. GAAP has a higher recognition threshold than does IFRS. The effect of this difference is that, under IFRS, a liability often will be recognized earlier than under U.S. GAAP. In addition, under U.S. GAAP, an obligation for a cost associated with exit or disposal activities generally is recognized in the period in which the liability is incurred. By contrast, costs may be accrued under IFRS at an earlier datefor example, when a restructuring is announced or commences. The lower threshold under IFRS for certain nonfinancial liabilities could lead companies to record provisions earlier under IFRS than they would have under U.S. GAAP.42 Measurement of Certain Asset Classes Under IFRS, certain assets (e.g., capitalized acquired intangibles and PP&E) are initially recognized at cost. For subsequent measurement, entities must make an accounting policy election by asset class to continue with a cost model or to revalue the assets within each class to fair market value (less any subsequent accumulated amortization or depreciation). U.S. GAAP precludes use of a revaluation model. Under IFRS, an entity can also make an election to adopt either the fair value model or the cost model to account for investment properties.43 U.S. GAAP generally only allows for the 41 For more information, see Sections III.K (PP&E), III.H (inventory), and III.J (intangible assets) of the GAAP Comparison Paper. 42 For more information, see Section III.P of the GAAP Comparison Paper. 43 The FASB currently has a standard-setting project that was initiated to obtain convergence in this area. However, if the FASB's project were finalized consistent with deliberations to date, differences would remain between IFRS and U.S. GAAP. See FASB, Exposure Draft, Proposed Accounting Standards Update - Real EstateInvestment Property Entities (Topic 973) (Oct. 21, 2011) (\"IPE Exposure Draft\") (available at: http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176157086783). 15 cost model, unless the entity meets certain criteria.44 The optionality permitted under IFRS could result in significant differences in the carrying value of assets as compared to U.S. GAAP.45 Inventory IFRS does not allow for the use of the LIFO costing methodology for inventory, which is permitted under U.S. GAAP. The Staff's research indicates that this difference could have a significant impact on the operating results and income taxes payable of certain U.S. issuers. With respect to income taxes, the Internal Revenue Service (\"IRS\") has conformity provisions such that certain methods of accounting are allowed for tax purposes only if the entity also uses that method for financial reporting purposesLIFO is one such method subject to conformity provisions. Thus, absent a change in IRS rules, eliminating LIFO from U.S. GAAP would, in effect, eliminate its use for tax purposes as well. Several stakeholders have commented on this difference and the potential significant tax impact that eliminating LIFO would have on U.S. issuers.46 The Staff believes that this difference is more of an issue of tax policy rather than of financial reporting, but the effect remains an element of the Staff's overall consideration of the incorporation of IFRS.47 Research and Development Costs for research and development activities are generally expensed as incurred under U.S. GAAP. Costs for research activities are expensed as incurred under IFRS, but costs for development activities that meet certain criteria are capitalized. This difference in expense recognition could potentially impact U.S. issuers and result in a change in the timing of recognition (e.g., capitalization of certain costs upon development and subsequent amortization of that asset over its useful life).48 Income Taxes U.S. GAAP and IFRS require income taxes to be accounted for using an asset and liability approach that recognizes both the current tax effects and the expected future tax consequences of events that have been recognized for financial or tax reporting (i.e., deferred 44 Investment properties are recorded at fair value under U.S. GAAP in the following instances: (1) the entity determined that it is an investment company in accordance with ASC Topic 946; (2) the entity is controlled by a pension plan that is required to measure its investments at fair value; or (3) the entity follows industry practices that have developed over time allowing fair value measurement for real estate investments without regard to investment company attributes or pension plan ownership. These instances of fair value measurement were noted by the FASB staff in the IPE Exposure Draft. 45 For more information, see Sections III.J and III.K of the GA