Long March to IFRS Adoption Begins

Financial reporting executives should settle in for a long debate about the wisdom of the United States adopting international accounting rules.

The Securities and Exchange Commission’s proposed roadmap to adopt IFRS, unveiled Nov. 14, generally follows the same timeline as the original idea floated by the Commission three months ago. The 165-page document also provides more detail on precisely how the SEC would phase in an IFRS requirement and seeks input on dozens of other questions.

Munter

The proposing release “is consistent with what the commissioners said at the open meeting,” says Paul Munter, an audit partner with KPMG. But as Munter noted during a Nov. 19 Webcast, Corporate America had pleaded for a fixed date to adopt IFRS, just so accounting departments can get on with the change whether they like it or not. The new roadmap, however, “doesn't do that.”

What’s more, the business world has changed dramatically since the SEC first voted to publish a timeline in August. The financial system has plunged into chaos, prompting lawmakers both here and in Europe to call for changes to fair-value accounting rules. That is precisely the sort of political pressure over accounting policy that alarms critics of IFRS adoption; they say U.S. Generally Accepted Accounting Rules, as complicated as they are, still are more insulated from political whim than the IFRS rules created in Europe.

The SEC says it will address such questions of independence by insisting that seven milestones be met before it approves any final adoption of IFRS. The roadmap specifically leaves that final determination until 2011. If the milestones are sufficiently met, the SEC would then proceed with rulemaking to require that U.S. issuers use IFRS as issued by the International Accounting Standards Board, probably by 2014 or so.

While observers are careful to note that the 2011 vote won’t be a rubber stamp, some say it’s unlikely the SEC would choose not to move forward with the transition.

Gannon

“I don’t think it’s realistic that we’ll turn the boat around at this point,” says D.J. Gannon, national leader of Deloitte’s IFRS Center of Excellence. “The question is how long the journey to implement IFRS is going to be.”

The proposing release, out for a 90-day comment period that ends Feb. 19, is expected to draw significant comment from all corners of the corporate reporting community. It seeks input on 70 questions, including the timing and staged phase-in of the proposal, the effect a move to IFRS would have on U.S. capital markets, the parameters of a proposal to allow early adoption by a limited group of companies, and the reporting requirements to be imposed on companies as they make the switch.

POINTS TO PONDER

Companies are encouraged to comment on the IFRS roadmap in regard to the following questions posed by the Securities and Exchange Commission:

1. Do commenters agree that U.S. investors, U.S. issuers and U.S. markets

would benefit from the development and use of a single set of globally

accepted accounting standards? Why or why not? What are commenters’

views on the potential for IFRS as issued by the IASB as the single set of

globally accepted accounting standards?

2. Do commenters agree that the milestones and considerations described in

Section III.A. of this release (“Milestones to be Achieved Leading to the

Use of IFRS by U.S. Issuers”) comprise a framework through which the

Commission can effectively evaluate whether IFRS financial statements

should be used by U.S. issuers in their filings with the Commission? Are

any of the proposed milestones not relevant to the Commission’s

evaluation? Are there any other milestones that the Commission should

consider?

3. Do commenters agree with the timing presented by the milestones? Why

or why not? In particular, do commenters agree that the Commission

should make a determination in 2011 whether to require use of IFRS by

U.S. issuers? Should the Commission make a determination earlier or

later than 2011? Are there any other timing considerations that the

Commission should take into account?

4. What are commenters’ views on the mandated use of IFRS by U.S. issuers

beginning in 2014, on an either staged-transition or non-staged transition

basis? Should the date for mandated use be earlier or later? If the

Commission requires the use of IFRS, should it do so on a staged or

sequenced basis? If a staged or sequenced basis would be appropriate,

what are commenters’ views on the types of U.S. issuers that should first

be subject to a requirement to file IFRS financial statements and those that

should come later in time? Should any sequenced transition be based on

the existing definitions of large accelerated filer and accelerated filer?

Should the time period between stages be longer than one year, such as

two or three years?

5. What do commenters believe would be the effect on convergence if the

Commission were to follow the proposed Roadmap or allow certain U.S.

issuers to use IFRS as proposed?

6. Is it appropriate to exclude investment companies and other regulated

entities filing or furnishing reports with the Commission from the scope of

this Roadmap? Should any Roadmap to move to IFRS include these

entities within its scope? Should these considerations be a part of the

Roadmap? Are there other classes of issuers that should be excluded from

present consideration and be addressed separately?

7. Do commenters agree that these matters would affect market participants

in the United States as described above? What other matters may affect

market participants? Are there other market participants that would be

affected by the use by U.S. issuers of IFRS in their Commission filings?

If so, who are they and how would they be affected?

8. Would a requirement that U.S. issuers file financial statements prepared in

accordance with IFRS have any affect on audit quality, the availability of

audit services, or concentration of market share among certain audit firms

(such as firms with existing international networks)? Would such a

requirement affect the competitive position of some audit firms? If the

competitiveness of some firms would be adversely affected, would these

effects be disproportionately felt by firms other than the largest firms?

9. What are commenters' views on the IASB’s and FASB’s joint work plan?

Does the work plan serve to promote a single set of high-quality globally

accepted accounting standards? Why or why not?

10. How will the Commission's expectation of progress on the IASB’s and

FASB’s joint work plan impact U.S. investors, U.S. issuers, and U.S.

markets? What steps should be taken to promote further progress by the

two standard setters?

11. The current phase of the IASB’s and FASB’s joint work plan is scheduled

to end in 2011. How should the Commission measure the IASB’s and

FASB’s progress on a going-forward basis? What factors should the

Commission evaluate in assessing the IASB’s and FASB’s work under

the joint work plan?

12. What are investors’, U.S. issuers’, and other market participants’ views on

the resolution of the IASB governance and funding issues identified in this

release?

13. What steps should the Commission and others take in order to determine

whether U.S. investors, U.S. issuers, and other market participants are

ready to transition to IFRS? How should the Commission measure the

progress of U.S. investors, U.S. issuers, and other market participants in

this area? What specific factors should the Commission consider?

14. Are there any other significant issues the Commission should evaluate in

assessing whether IFRS is sufficiently comprehensive?

15. Where a standard is absent under IFRS and management must develop and

apply an accounting policy (such as described in IAS 8, for example)

should the Commission require issuers to provide supplemental

disclosures of the accounting policies they have elected and applied, to the

extent such disclosures have not been included in the financial statements?

Source

SEC IFRS Roadmap (Nov. 15, 2008).

The switch would move U.S. regulators closer to their long-held goal of working from a single set of high-quality, globally accepted accounting standards. IFRS has gained traction as that standard in recent years as more countries outside of the United States have adopted the rules. Roughly 113 countries currently require or permit IFRS reporting for domestic, listed companies. The SEC in 2007 adopted amendments to allow foreign private issuers to file IFRS financial statements without reconciliation to U.S. GAAP, further fueling the IFRS debate in the United States.

“It’s all about getting to a single set of high-quality standards,” Danita Ostling, an IFRS technical leader for Ernst & Young, said during a Nov. 17 conference call with reporters. “Given the size, depth, and importance of the U.S. capital markets, we won’t achieve that objective unless the United States is a party.”

Making Moves

The proposed roadmap would require large accelerated U.S. filers to start reporting under IFRS for fiscal years ending on or after Dec. 15, 2014; accelerated filers would follow a year later, and non-accelerated filers, including smaller reporting companies, would follow in 2016. (The plan excludes registered investment companies and registered broker-dealers.)

The SEC also proposes to let a select number of large U.S. companies adopt IFRS on a voluntary basis as soon as 2010, if they meet proposed eligibility criteria—and observers expect lots of comment on what those criteria should be.

Right now, early adoption would only be allowed for U.S. companies that are among the 20 largest companies worldwide within their industry based on market capitalization, and where that group of 20 uses IFRS as the basis of financial reporting more than any other set of standards. Issuers would also need to get a no-objection letter from the SEC staff confirming that they’re eligible to early adopt.

Wright

Chris Wright, co-leader of global IFRS initiatives at consulting firm Protiviti, says the SEC has given “a very clear framework” for companies to determine their eligibility. “Most investor relations departments should be able to find the information the company needs to do the calculation so they can make an evaluation” of whether they’re eligible, he says.

Obtaining a no-objection letter from the SEC staff would not commit an issuer to using IFRS. Rather, the company could adopt IFRS at any time during the three years following receipt of the letter without the criteria being recalculated. John White, director of the SEC’s Division of Corporation Finance, said that is intended to give issuers certainty. “This freezes eligibility so even if your competitive group changes, you remain eligible,” White said at a financial reporting conference last week in New York.

The SEC estimates that at least 110 U.S. issuers in 34 “IFRS industries” would be eligible to early adopt under the proposed criteria. The SEC could also consider expanding eligibility for early adoption to more companies, prior to any mandatory transition date.

The Commission is also floating two alternative proposals under which eligible companies that elect to use IFRS early would disclose U.S. GAAP information. Observers expect those proposals to be a major source of comment, since the second option would require more effort and incur more cost.

Under Proposal A, early adopters would provide, in a footnote to their audited financial statements, a one-time reconciliation from certain U.S. GAAP financial statements to IFRS in accordance with IFRS 1, First-Time Adoption of IFRS. Under Proposal B, in addition to the reconciliation in accordance with IFRS, those issuers would also provide on an annual basis certain unaudited supplemental U.S. GAAP financial information covering a three-year period.

The SEC’s thinking is that the added disclosure will provide a return path to U.S. GAAP for early adopters, should the agency decide in 2011 to suspend or abandon its plans to require IFRS later that decade.

HOW TO COMMENT

Comments should be received on or before February 19, 2009.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments:

Use of the Commission’s Internet comment form http://www.sec.gov/rules/proposed.shtml or

Send an e-mail to rule-comments@sec.gov. Please include File Number S7-

27-08 on the subject line; or

Use the Federal Rulemaking ePortal, http://www.regulations.gov. Follow the

instructions for submitting comments.

Paper Comments:

Send paper comments in triplicate to:

Florence E. Harmon

Acting Secretary

Securities and Exchange Commission

100 F Street, NE

Washington, DC 20549-1090

Source

SEC IFRS Roadmap (Nov. 15, 2008).

White says that the additional information would also be helpful to investors. “It would give investors an opportunity to at least see, in a much more limited way, what it would’ve looked like in U.S. GAAP,” White told Compliance Week in an interview. “From an [investor] education standpoint, that’s not a bad thing.”

White

Some observers, however, question whether having the GAAP reconciliation is meaningful in today’s environment. Indeed, last year the SEC dropped the requirement that foreign issuers using IFRS reconcile their financial statements to GAAP—so if it’s not important for them, why would it be important the other way around?

“I’m not sure from a user perspective that there’s much incremental benefit,” Gannon says.

If the SEC ultimately does mandate IFRS for U.S. issuers, the Commission expects to continue the requirement that issuers provide three years of audited annual financial statements. Currently, U.S. issuers provide three years of audited U.S. GAAP financial statements in their filings with the SEC. The roadmap asks for comment on a potential option where a company would file three years of U.S. GAAP and two years of IFRS financial statements.

If the three-year requirement stays, companies will need to consider whether they want to run their books in both U.S. GAAP and IFRS, or retroactively adopt IFRS in the year of transition, Wright says.

Another aspect of the release sure to get much scrutiny from issuers: the SEC’s estimate of how much all this will cost. For eligible early adopters, the SEC figures the cost of IFRS adoption would be 0.125 percent of revenue under Proposal A and approximately 0.13 percent of revenue under Proposal B. The total estimated for the 110 issuers believed eligible for early adoption would be roughly $3.5 billion, mostly coming in the first year.

The SEC estimates assume that annual costs would then decline by 75 percent in the second year and by 90 percent in the third year.