The move to International Financial Reporting Standards (IFRS) was a hot topic in 2008. Then the financial crisis happened, followed by the change in the Administration. Does it mean that the project to IFRS is buried?

We do not believe so. 2011 is still far enough and the International Accounting Standards Board (IASB) is taking actions to address concerns raised by the U.S. Securities and Exchange Commission (SEC) in its proposal.

After a period during which IFRS were a “hot topic” for the US regulator and commentators, it seems that the pace is slowing down. Does it mean that IFRS will not be adopted in the USA?

Definitely the rapid pace towards the adoption of IFRS is gone, but it would be a stretch to conclude that the plan itself is buried, even if the timetable may eventually be modified.

The Fast Pace to IFRS Is Gone

The newly-appointed SEC Chairperson, Mary Schapiro, indicated that the move to IFRS is not a priority.

In early February, the SEC announced the extension of the public comments period for the proposal on the roadmap to IFRS. Comments are now to be received by April 20, 2009, whereas the initial deadline was February 19.

Finally, the SEC provided, in November, an estimate of $32 million for the cost to the transition to IFRS for companies that would qualify for the early transition in 2009 (i.e. the largest firms). In the current financial environment, few companies are willing (or even able) to dedicate this amount of money for accounting matters.
 
This Is Not a Surprise

Considering the financial crisis and economic turmoil, the acknowledgement by the SEC that the move to IFRS is not a priority for 2009 should not be a surprise.

Likewise, the extension of the comments period was decided following requests from respondents who pointed out that a 60-day period for comments on such a complex matter was too short. This decision can be considered as recognition of the importance of the topic for the financial community.

Moreover, it is important to realize that, except for the very small number of entities that may opt to IFRS in 2009, the real deadline is 2011, when the SEC makes its final determination for an effective transition in 2014 (for the largest companies).

Therefore, a loss in momentum in 2009 does not necessarily imply the project will not be completed.

Convergence Is Making Significant Progress

The Financial Accounting Standards Board (FASB) and the IASB indicated at the end of 2008 that the convergence projects should be completed by 2011.
 
Two examples to illustrate the meaning of the convergence:

• The newly effective US GAAP standard on non-controlling interest (SFAS 160) will erase differences that existed with IFRS for the accounting of “minority interests”;
• In December 2008, IASB and FASB issued a joint project on revenue recognition. The objective is to amend U.S. Generally Accepted Accounting Principles (GAAP) and IFRS on revenue recognition in order to determine a common standard.

Once the convergence is completed, CPAs can expect a less complex and expensive transition from GAAP to IFRS.

IASB Addressing SEC Concerns

The proposal issued by the SEC states that the final decision will be made in 2011 depending upon the reach of (or at least progress towards) four milestones. Two of these milestones relate directly to IASB and IFRS.

IASB: Independent and Financially Stable

The SEC put on top of the agenda the independence and the stable funding of the IASC Foundation, organization that oversees the IASB.

This concern was already on the agenda for the Trustees of the IASC Foundation. After discussions initiated in 2007, the Trustees announced, in January 2009, the first part of the Constitution Review. The two major amendments are:

• Set up of a Monitoring Board of Public authorities. This Monitoring Board will ensure that the Trustees continue to work in accordance with the IASC Foundation Constitution. Trustees will be accountable to this new Monitoring Board. The Board will comprise members from the European Commission, the SEC, the Japan Financial Service Agency, and the Emerging Markets and Technical Committees of the International Organization of Securities Commission (IOSCO).
• Expansion of the IASB to 16 members from 12 currently. Four members will come from the Asia/Oceania region; four members from Europe; four members from North America; one member from Africa; one member from South America and two members appointed from any area. Additional guidelines will ensure the geographical diversity.

Additional changes are expected especially with regards to the funding, but these recent amendments clearly address some of the SEC concerns.

IFRS: Already High-Quality Standard With Room for Improvement

Besides the process of adopting accounting standards, the SEC is concerned by the quality of the IFRS.

Despite the convergence process between IFRS and GAAP, significant issues are still open and until they are resolved the transition may be problematic for specific industries. One of the critical issues is that the IASB refuses to adopt accounting standards for specialized industries, whereas they exist under US GAAP.

However, changes were recently noted on this matter. The IASB has accepted to add to its agenda the accounting for rate-regulated activities. Under GAAP, these activities are recorded in accordance with Accounting for the Effects of Certain Types of Regulation (SFAS 71), whereas there is no similar pronouncement under current IFRS. If the IASB decides to move forward on this project, this would represent a major step for utilities companies.

The IASB also issued an exposure draft on the revision of First-time Application of IFRS (IFRS 1). The period for comments ended late January 2009 and adoption is expected during the second quarter of 2009. The objective of these proposed amendments is to prevent excessive cost for entities at the time of the transition on specific matters by adding new exemptions. Even if this revision does not target companies preparing their financial statements under GAAP, one cannot overlook the fact that they will be the first ones to benefit from this revision.

Conclusion

It’s no longer a question of whether the transition from GAAP to IFRS will happen, but when. Chances are it will take place based on a revised timetable.

A lot has to be accomplished before the SEC gives a positive determination on the transition to IFRS in 2011. But, it has to be noted that in 2011, the United States will probably be the last large industrial country referring to accounting standards different from IFRS. Canada and Mexico, the two other members of NAFTA will move to IFRS in 2011 and 2012, respectively, and Japan just launched a consultation for a transition in 2011. Consequently, the U.S. could pay a significant opportunity cost, much higher than the anticipated cost for the transition by not moving to IFRS.

The apparent paradox is that after months of (sometimes heated) discussions on the transition to IFRS, it is when the SEC seems less active on the topic, that companies are financially challenged thus making the move to IFRS less an option and more a certainty.

Remi Forgeas, CPA, 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.