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Remi Forgeas

SEC Roadmap to IFRS Forces Companies to Act Now

Here’s why.

September 22, 2008
by Remi Forgeas, CPA

In late August, the U.S. Securities and Exchange Commission (SEC) announced its proposal on the roadmap that could lead to requiring public companies to issue their financial statements under IFRS in 2014. While the proposal has yet to be posted for a 60-day comment period, the roadmap presents a clear path for transitioning from U.S Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS) as issued by International Accounting Standards Board (IASB) with a final determination by the SEC in 2011.

SEC Identifies Four Milestones

In order to make its final determination on the adoption of IFRS, the SEC has made it clear that it must not only receive assurance on several issues, but that sufficient progress on them must also be made. While these issues are not new, the SEC has placed considerable importance and urgency on them. Nonetheless, no specific time frame has been proposed to reach these milestones.

The key issues include:

  1. Continued improvement in IFRS — in line with the objective of continuous improvement as part of the convergence between U.S. GAAP and IFRS.
  2. Change in the IASB organization — to reinforce its accountability and to stabilize its funding. Earlier this year, the Trustees of IASB proposed to set up an oversight committee, which would include the SEC, the European Commission and the U.K.’s Financial Services Authority.
  3. Reader Note: Don’t miss IFRS sessions at the upcoming AICPA & PDI National Oil & Gas Conference, November 10-11, Austin, TX.

  4. Develop an IFRS eXtensible Business Reporting Language (XBRL) taxonomy — mirroring the existing U.S. GAAP XBRL taxonomy. The International Accounting Standards Committee (IASC) Foundation announced the publication of the IFRS taxonomy guide on August 28, 2008.
  5. Training and education — of users, such as preparers, auditors or investors in the U.S.

The proposed deadline for the assessment of the progress made on these topics and the final decision on the transition is 2011.

Transition Timeline

The proposal provides a clear timeline for the required adoption of IFRS by U.S. issuers:

  • Large accelerated filers — 2014 financial statements (i.e. December 31, 2014 for a calendar-year filer);
  • Accelerated filers — 2015 financial statements; and
  • Others — 2016 financial statements

The current regulations require two-year comparative financial statements in the filings. Under this timeline, the adoption date of IFRS for a large accelerated filer is 2014 with a December 31, 2011 transition date and would have to present financial statements for 2012 and 2013.

Early Adoption Option in 2009

Under the current proposal, a limited numbers of filers will be allowed to adopt IFRS for years ending on or after December 15, 2009. Large companies that meet the following criteria would qualify for this early adoption:

  • The company must be in the top-20 of its industry;
  • IFRS must be the most used accounting standard in the industry, which does not mean that more than 50 percent of companies are under IFRS; and
  • The company must receive a no objection letter from the SEC.

While the SEC has singled out about 110 companies that would meet this criterion, it expects to exclude large companies with activities in which U.S. groups are dominant from early adoption.

Impact of Early Adoption

Before opting for this early adoption a company has to consider the impact of the change on its business, especially on agreements and commitments. A company may want to consider the decision of its U.S. peers prior to gearing for early IFRS adoption. A transition to IFRS would certainly improve the comparability with foreign competitors, but would have the opposite effect with U.S. competitors that are still using U.S. GAAP.

Finally, the proposal is silent on the “reversal strategy” for early adopters, if in 2011 the SEC decides on maintaining U.S. GAAP.

Conclusion

While the SEC has made no set decision, both companies and CPAs should be prepared for what’s to come. The roadmap presents a clear path to the transition to IFRS, but the SEC has decided to stay short on the decision, which has been postponed until 2011, and to leave open the discussion.

However, a company’s strategy to wait until 2011 for the SEC decision on the transition towards IFRS may backfire since once the decision is made, there would be almost no time to move properly to IFRS.

Experience shows that the transition to IFRS will impact not only your firm’s accounting department, but the entire company because:

  • Business decisions will be impacted by the accounting standards. For example, 1) in general, while research and development costs are expensed under U.S. GAAP, they can be capitalized under IFRS; and 2) hedge accounting is different under both standards and will require a change in processes in order to maintain a similar result;
  • Tax planning has to be revalued; and
  • Internal control and processes have to be reviewed.

The reporting, including budgeting, will have to be revisited along with systems in order to maintain an effective management of the performance.

Likewise, companies should already include in their thought process the impact of IFRS post-transition before entering into long-term transactions. A transaction, such as a lease agreement, designed to achieve a certain type of accounting under U.S. GAAP, may have a materially different accounting under IFRS.

The SEC in its proposal addresses the lack of technical expertise on IFRS in the U.S. and acknowledges that if accountants and auditors are not ready, the transition towards IFRS may be in jeopardy.

By issuing its proposal, the SEC confirms its strategy with regards to IFRS in the U.S., but leaves all doors open by delaying the final decision until 2011. Does this mean that IFRS in the U.S. will be as successful as the metrics system? Or just the opposite, that the U.S. will confirm the true international nature of IFRS by adopting them? What do you think? Send your feedback here.

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Remi Forgeas is an audit and assurance partner for Mazars in the U.S. For European IFRS contact, you can reach Steven Brice, who is a technical partner in the financial reporting advisory group for Mazars in the U.K.

The views expressed in this article are the author’s own.