At Last! SEC Adopts IFRS Timeline

Get ready to get serious about International Financial Reporting Standards: The Securities and Exchange Commission has proposed a plan that could let a select group of large U.S. companies start using the standards little more than one year from now, and require all domestic public companies to file statements using IFRS by 2016.

“The world should make no mistake: The SEC is serious about moving to IFRS,” Commissioner Elisse Walter declared.

While only a proposal, the roadmap delivers the clear signal about SEC thinking that the financial reporting community has wanted since last year. Even under the best of circumstances, shifting from U.S. Generally Accepted Accounting Principles to IFRS will be a massive undertaking, and companies would need to start preparing their statements in IFRS well before any hard deadline arrives. Supporters and critics of IFRS alike have said the SEC should therefore just get on with it, and set an adoption deadline.

“We heard from many parties that if the United States is to move to IFRS, we need to work toward a certain date,” SEC Chief Accountant Conrad Hewitt said. The proposed roadmap “provides such a date.”

Under the proposal, the SEC would decide in 2011 whether to mandate adoption of IFRS for all U.S. companies based on the achievement of several milestones. Among them: improvements in IFRS accounting standards; stronger accountability and funding for the International Accounting Standards Committee Foundation; education and training for investors, auditors, and others; and better use of interactive data for IFRS reporting.

A text of the SEC’s proposing release was not available last week. Public comments on the idea will be due 60 days after publication in the Federal Register.

The roadmap comes little more than a year after the SEC published a concept release asking about the wisdom of U.S. issuers adopting IFRS; it also follows a 2007 SEC rule change to allow foreign issuers to file in IFRS without reconciliation to U.S. GAAP. The Commission has held several public forums to hear views about the idea as well, but gave no clear sign of its intentions until last week.

SEC Chairman Christopher Cox said that increasing worldwide acceptance of IFRS reporting and increasing U.S. ownership of companies that file in IFRS, “make it plain that if we do nothing … comparability and transparency will decrease for U.S. investors.”

More than 100 countries, including Canada and most of Europe, now require or allow IFRS reporting. Roughly 85 of them mandate IFRS for all domestic publicly traded companies.

Greer

Amy Greer of the law firm Reed Smith says the roadmap makes the Commission “a real stakeholder in the process” of developing IFRS. “It’s having skin in the game in a way they didn’t before.”

Danita Ostling, Ernst & Young’s Americas technical leader for IFRS, applauded the proposal as well. A single set of high-quality standards used by companies around the world “is good for investors, the capital markets, and companies themselves,” Ostling told reporters in a conference call after the meeting.

“All companies will be affected, and all companies need to begin to plan for how they’re going to approach conversion.”

— Danita Ostling,

Technical Leader for IFRS,

Ernst & Young’s Americas

How Do We Do This?

Observers say 2014 is a reasonable timeframe. “The timing and discussion of optionality is consistent with what we’ve been hearing,” says D.J. Gannon, head the U.S. IFRS practice at Deloitte.

Walter, however, called for caution, citing “significant hurdles to overcome” for the SEC to adopt IFRS. She warned companies “to prepare for the alternative” that the SEC won’t adopt or permit the use of IFRS for U.S. issuers, should any of several milestones fail to be met. For example, she said, the SEC could reverse course if the IASC Foundation fails to secure a stable source of funding for the International Accounting Standards Board.

Ostling, however, says she sees no difficulty in meeting the milestones laid out in the roadmap, since standard setters and others are “already making progress” on many of them. Hewitt, for instance, cited significant advances in creating an oversight body and independent source of funding for IASB. Also, the Financial Accounting Standards Board and IASB are poised to unveil a new blueprint to converge U.S. and global accounting standards “that will take them into 2011 on the major standards that need be promulgated,” including the always-perilous territory of revenue recognition.

Under the proposal, issuers would continue to present three years of audited financial statements in the first year of IFRS reporting, whether they elect or are required to switch. The release also proposes to permit certain issuers to use IFRS before it is mandatory.

A U.S. issuer would qualify for early IFRS adoption if it is among the 20 largest public companies in its industry worldwide, and IFRS is used as the basis for financial reporting among those 20 largest companies more than any other accounting system. Companies would also have to get a letter of no objection from the SEC Division of Corporation Finance. Should the U.S. company meet those qualifications, it could start filing statements in IFRS for fiscal years ending on or after Dec. 15, 2009 (that is, their annual reports appearing in 2010).

White

The SEC estimates that at least 110 U.S. companies in 34 industries would be eligible to early adopt. (John White, head of the Division of Corporation Finance, added that if the SEC does decide to mandate IFRS in 2011, it could also broaden the group of eligible companies.)

The Commission also wants comment on two proposals for early adopters to provide U.S. GAAP-based information. “Alternative A” would require compliance with IFRS 1, First-Time Adoption of IFRS, which requires a one-time reconciliation from GAAP to IFRS covering the year of transition, provided as a note to the audited financial statements. “Alternative B” would require an issuer to provide an ongoing unaudited reconciliation from IFRS to GAAP in its Form 10-K, covering the three years of IFRS financial statements.

SUMMARY

Key dates proposed by the SEC for implementation of IFRS:

2009: A limited group of large U.S. companies would be permitted to use IFRS on an optional basis for fiscal periods ending on or after Dec. 15, 2009.

2011: SEC would evaluate the achievement of roadmap milestones and decide whether to adopt a mandatory requirement for IFRS, including any phase-in schedule.

2014: As proposed: Large accelerated filers would begin filing in IFRS.

2015: Proposed start date for accelerated filers to use IFRS.

2016: Proposed date for non-accelerated filers to use IFRS.

Source

Securities and Exchange Commission.

Both Walter and fellow commissioner Luis Aguilar favor the latter approach. Walter said Alternative B is “critical” because it “gives early adopters of IFRS a way back to U.S. GAAP” if the SEC doesn’t adopt IFRS. Hewitt said early adopters are likely to keep two sets of records at least for the first year under IFRS anyway, to provide analysts information on material differences.

The Stumbling Blocks

Hewitt

Hewitt acknowledged one potential barrier to adoption raised by companies: use of the LIFO, or Last-In-First-Out method of inventory costing, which is commonplace in the United States but prohibited under IFRS. The federal tax code requires that companies using LIFO for inventory costing also report that number on their financial statements, so a LIFO-less world could complicate tax reporting. That challenge “can be overcome,” Hewitt said, if the Internal Revenue Service accepts footnote disclosure of LIFO inventory. “They're working on it, but it is a significant barrier,” he said.

Gannon, meanwhile, expects a “fair amount” of companies eligible for early adoption will do so, since they are likely to be businesses that already “deal with IFRS in some way, shape, or form outside of the U.S.,” such as those with foreign subsidiaries that report in IFRS or those whose competitors already use IFRS.

Gannon

Gannon and Ostling both say the biggest challenge in transitioning to IFRS isn’t necessarily the accounting; it will be “the follow-on effects.” For example, companies have to consider how a switch to IFRS will affect their financial accounting IT systems, tax positions and planning, internal controls, and contracts—all of which are based on a U.S. GAAP environment.

Ostling says the consequences of a switch will depend upon a company’s facts and circumstances, including where its operations are located and its business activities.

“All companies will be affected, and all companies need to begin to plan for how they’re going to approach conversion,” she says. Still, some industries may be affected more than others. For instance, financial services companies may have a tougher time, because fair-value disclosures under IFRS differ from those required under GAAP.

Gannon expects the proposal to spur the various camps to begin preparing for a transition. “Everyone’s got their marching orders, now I think we’ll see people willing to roll sleeves up and get to work,” he says.