Roadmap to Thinking About IFRS Adoption

The Securities and Exchange Commission has not yet decided whether to let U.S. companies file their financial statements using International Financial Reporting Standards. Regardless, the message from regulators is increasingly clear: You should start thinking about it anyway.

Speaking last week at a conference of the American Institute of Certified Public Accountants, SEC Deputy Chief Accountant Julie Erhardt minced no words: “There is a point outside the U.S. toward which financial reporting is gravitating,” she said. “It would be time well spent to get into it, regardless of when it will happen.”

Speaking at the same conference, SEC Commissioner Kathleen Casey acknowledged the complexity of ending reconciliation and moving U.S. issuers to IFRS, but said America can’t afford to remain on the sidelines as IFRS catches on globally.

Casey

“The incontrovertible fact is that IFRS is gaining worldwide acceptance at a rapid pace,” she said. “As IFRS continues to expand worldwide, it is critical that the Commission be involved in decision making for the future. I do not believe that the Commission would serve the interests of U.S. issuers or investors were we to remain isolated from the process of shaping future developments in IFRS.”

The Commission has held two roundtables in the last week to discuss what might have seemed like a preposterous idea only a few years ago: allowing U.S. companies to file financial statements prepared under IFRS, as written by the International Accounting Standards Board. The debate follows the SEC’s landmark decision to allow foreign companies using IFRS to file financial statements with the SEC without reconciling to U.S. Generally Accepted Accounting Principles.

Erhardt said U.S. companies might want to shift to IFRS for any number of reasons, such as to purchase or merge with businesses overseas. At the least, companies should simply ponder how such a change might affect them. “The night before wouldn’t be a great time, regardless of the U.S. situation,” she quipped.

Casey said the SEC’s deliberations about whether to allow IFRS filings for domestic companies “will be determined in part by the feedback we receive.” Casey said she doesn’t believe U.S. companies are up to speed on IFRS, but public comment on the idea so far is intense and diverse. “I would emphasize that, as with any important policy decision, our consideration has just begun, and I would expect that we will proceed deliberately and thoughtfully on this issue,” she said.

Erhardt said the 80 comment letters the SEC has received so far show surprising amounts of agreement about how U.S. capital markets are drifting toward IFRS.

Erhardt

“Commenters were very much in favor of global accounting standards and participation of the U.S. investor community in that move,” she said. “In some respects this is amazing. If the Commission had floated the prospect of IFRS for U.S. issuers even in the not-too-distant past, I suspect constituents might have analogized to physics and labeled it a fifth dimension: a hypothetical dimension beyond the usual dimensions of space and time.”

The comments reflected a wide range of readiness for IFRS by both public companies and investors, Erhardt said. She wondered aloud whether that pattern might suggest different “tracks” of IFRS adoption. “These so-called tracks would be the natural result, I think, of providing an option but not a requirement for IFRS reporting by U.S. issuers,” she said.

Such an approach might be an appealing way to move from U.S. GAAP to IFRS since it would allow different groups to move at their own speed, but it could add complexity, Erhardt added. She also wondered how the standards-setting process would work under a tracked approach rather than the usual one-rule-for-all routine.

SPEECH

Below is an excerpt of SEC Commissioner Kathleen Casey’s remarks at the AICPA annual conference.

The incontrovertible fact is that IFRS is gaining worldwide acceptance at a rapid pace. Over 100 countries have or are in the process of adopting IFRS, including the 27 members of the EU and much of the rest of the non-U.S. capital markets. As IFRS continues to expand worldwide, it is critical that the Commission be involved in decision making for the future. I do not believe that the Commission would serve the interests of U.S. issuers or investors were we to remain isolated from the process of shaping future developments in IFRS.

Closely following on the heels of our proposal to eliminate the reconciliation requirement to U.S. GAAP, the Commission also put forward a concept release querying whether U.S. issuers should have the choice of filing in IFRS, and if so, how such a choice would be implemented. The comment period has recently ended, and we have begun the process of analyzing the comments received. We will hold two roundtable sessions in mid-December to gather information on the degree of interest that U.S. investors and issuers have in IFRS and explore the policy and practical issues associated with such a proposition for the U.S. markets and U.S. investors. How we proceed will be determined in part by the feedback we receive.

Interestingly, many of the comments I have reviewed so far reflect the same difference of views that we saw in comments on eliminating the reconciliation requirement. No one questions the benefits of convergence or of a single set of global standards. People differ, however, and differ strongly, on the best plan for getting there.

It is my impression that most U.S. issuers are not yet fully engaged with the concept of IFRS. This is not at all surprising. Based on the current lack of familiarity with the costs and benefits of such a choice, U.S. companies that do not have international operations or international competitors may have little incentive to change their accounting systems. I would expect, however, that as IFRS continues to gain acceptance worldwide, U.S. interest will naturally increase. And just as IFRS has not fully registered with some U.S. companies, so too is it only now appearing on the radar screen for many U.S. market participants and investors.

Reading through many of the comments, I have been struck by the intensity and diversity of opinions on the issue, but I would emphasize that as with any important policy discussion, our consideration has just begun and I would expect that we will proceed deliberately and thoughtfully on the issue …

The global move to international standards will require us to find creative and innovative ways to communicate financial information to investors, for this is no less important than the preparation and auditing of financial information. Beyond its other benefits, moving to a single set of accounting standards has the potential to make financial information easier for investors to use to compare a wider range of companies.

Source

Securities and Exchange Commission (Dec. 10, 2007).

Robert Herz, chairman of the Financial Accounting Standards Board, told the AICPA crowd he would prefer to see a national blueprint established to improve accounting standards and then move to IFRS “in an effective and orderly manner.” He said the United States needs to be more engaged in assuring the International Accounting Standards Board is strengthened with stable funding and adequate staffing to develop IFRS.

Herz also said the United States should help stamp out nation-specific adaptations of IFRS (Australia, for example, has added numerous rules of its own to IFRS for its thriving mining industry) and assure a consistent, faithful application of IFRS before the United States throws its full weight behind the system.

Herz hinted that he might have preferred more convergence of U.S. and international accounting standards before the SEC dropped reconciliation—he said the convergence process is only one-third to half complete—but he acknowledged pressure on the SEC to move into the global arena after a long tradition of holding a tight grip on its reconciliation requirements.

Herz

Yet, Herz continued, there is a distinction between dropping reconciliation for foreign filers and allowing U.S. companies to report under IFRS. Ending reconciliation opens the door for “100 or so companies” to report under IFRS in U.S. capital markets; allowing U.S. companies to use IFRS would be a much larger and more complex change.

Katrina Kimpel, professional accounting fellow at the SEC, said SEC staff is already reviewing IFRS financial statements to foster consistent application of the standards. The SEC staff has published observations based on their review of IFRS financial statements, and the SEC’s Division of Corporation Finance has published a discussion of international reporting and disclosure issues, she said.

The SEC is aware, for example, of concerns that IFRS does not provide accounting guidance for every type of transaction to the extent that U.S. GAAP does. That has led U.S. accountants to ask what they would be expected to do where no guidance exists, Kimpel said.

She noted that IFRS calls for fair presentation, and then provides a roadmap for where accountants can look within IFRS for guidance if they’re stumped. As a last resort, filers can refer to U.S. GAAP, but should not bypass IFRS guidance before doing so, she said.

Kimpel acknowledged that consistent, faithful application of IFRS could lead to different accounting conclusions, so long as it’s clearly disclosed. “Similar transactions should be evaluated using consistent IFRS literature,” she said. “To the extent the literature provides alternatives, the resulting accounting and presentation of the transactions may differ. Adequate disclosure is important in situations where alternative accounting treatments are acceptable.

Jim Leisinring, a member of the International Accounting Standards Board, cautioned companies against jumping quickly into IFRS, advising them to look carefully at numerous accounting differences that still remain before determining they’d prefer a quick switch.