In executing the Work Plan, the Staff analyzed possible approaches for financial reporting requirements for broker-dealers and investment companies, should the Commission determine in the future to incorporate IFRS by:
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Assessing the effects of such incorporation on broker-dealers, investment companies, and investors, including whether IFRS includes sufficient standards, and the extent of, logistics for, and estimated time necessary to undertake any changes, should broker-dealers and investment companies be included in the scope of any potential Commission decision.
Evaluating the effect on investors of excluding broker-dealers and investment companies from the scope of any potential Commission decision.441
The Staff discussed with the ICI the implications for investment companies if the Commission were to incorporate IFRS. In addition, the ICI commented on the 2011 May Staff Paper. This outreach suggested that the benefits of a transition to IFRS may not be realized for investment companies and, in fact, could result in potentially significant costs to and issues for investors. Specifically, the ICI commented that:
The typical investor benefits associated with a transition to a single set of
accounting standards, (e.g., comparable financial information for U.S. and foreign issuers) do not apply to investment companies as issuers of financial statements. This is because U.S. securities laws strongly limit or discourage investment by U.S. persons in foreign funds and U.S. tax rules discourage foreign investment in U.S. investment companies. . . . Further, even absent these impediments, the typical investor benefits would be limited because few European countries apply IFRS to open-end funds.442
In addition to the lack of a clear investor benefit, the Staff outreach highlighted other potential challenges. U.S. GAAP and the SEC’s regulations, when assessed in combination, represent a custom set of accounting guidance for investment companies. U.S. GAAP has specific standards for financial information to be provided by investment companies—both registered and unregistered funds (e.g., schedule of investments and financial highlights). These requirements would be eliminated or removed if IFRS were applied. In addition, shares issued by investment companies (e.g., open-end funds, such as mutual funds) are treated as equity under U.S. GAAP, which enables a calculation of the fund’s net asset value per share (“NAV/share”)— a figure which is fundamental to the regulatory environment for investment companies and which is required to be disclosed on an investment company’s statement of financial position.443 IFRS would require the shares issued by certain investment companies (e.g., multiple-class open- end funds) to be classified as liabilities. This classification would result in these investment companies not having any equity and therefore, no NAV/share. These changes, according to the Staff’s outreach, would result in less meaningful and less transparent reporting for investment companies at a significant cost to investors. In addition to any transition and conversion costs, ongoing costs would be attributable to a decrease in relevant information provided in the
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See Work Plan.
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Comment letter of ICI on the 2011 May Staff Paper.
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financial statements and an increase in the amount of record keeping surrounding increased book/tax differences that would be borne by the investor.
The Staff also conducted outreach to FINRA and SIFMA regarding the potential implications of IFRS incorporation on broker-dealers. Broker-dealers apply specific industry guidance contained in U.S. GAAP that does not exist within IFRS. Similar to investment companies’ concerns, concerns were raised related to the relevance of broker-dealers’ financial reporting absent any industry- or activity-specific guidance. In addition, and as discussed previously, a change in the underlying accounting may necessitate a change in regulation or cause the entity to maintain two sets of accounting records (e.g., one for SEC reporting and another for industry regulatory purposes). For example, the net capital computation is an important metric for regulators of broker-dealers. This computation is based on U.S. GAAP but adjusted for certain items such as non-allowable assets deductions and “haircuts” on proprietary positions. After any incorporation of IFRS, broker-dealers would need to maintain records under U.S. GAAP in order to calculate net capital, absent a modification to the underlying calculation by regulators.
One potential solution for retaining the existing accounting standards for investment companies and broker-dealers would be to exclude both types of entities from the scope of any IFRS incorporation. While this solution would be preferred by the ICI (at least with respect to investment companies),444 some constituents outside of the investment company and broker- dealer industries have expressed that no issuer should be exempt from a transition to IFRS, and that all filings with the SEC should be based on IFRS.445
Absent a full exclusion of investment companies and broker-dealers from a potential incorporation of IFRS, a mechanism of incorporation that could preserve current accounting and disclosure requirements, at least until comparable standards exist under IFRS, would be
important for the affected entities and their investors. The Staff outreach indicated that an approach such as the approach outlined in the 2011 May Staff Paper would better serve investment companies and their investors than alternative approaches (i.e., those that
immediately eliminate industry-specific guidance). Such an approach would retain the industry guidance contained in U.S. GAAP until such time that affected transactions can be addressed by future IASB standard setting.