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FINANCIAL REPORTING / INTERNATIONAL

No IFRS Requirement Until 2015 or Later Under New SEC Timeline

 

By ALEXANDRA DEFELICE and MATTHEW G. LAMOREAUX

FEB. 24, 2010

The
SEC unanimously approved on Wednesday a new timeline that envisions
2015 as the earliest possible date for the required use of IFRS by U.S.
public companies. The SEC action calls for more study of IFRS and a
2011 vote on whether to move ahead with a mandate to use IFRS.

While
it affirms the commission’s desire to keep moving toward IFRS adoption,
the new timeline offers issuers some breathing room from the 2014
deadline originally spelled out in the proposed road map the SEC
unveiled in 2008.

That road map also would have allowed certain U.S. companies to use IFRS before 2014. But in the statement
approved Wednesday the SEC said it is not pursuing an early adoption
option and, accordingly, withdrew the proposed rules that would have
permitted it. The SEC could reconsider this position at a later date.

The
statement also says the SEC is not excluding the possibility that
issuers may be permitted to choose between the use of IFRS or U.S. GAAP.

The
statement says the SEC staff will continue work on a detailed plan for
IFRS adoption and will provide periodic written public reports on the
plan’s progress starting no later than October 2010. 

The
work plan recognizes IFRS is best positioned to serve as the single set
of high-quality global accounting standards Commissioner Kathleen Casey
said. “It would serve to help ease the transition to IFRS and minimize
the impact of any obstacles along the way. It also considers whether
the transition should be optional vs. mandatory and whether the
transition should take place by all public companies on the same date
or staggered,” she said.

“The
work plan does not raise any new obstacles or establish a checklist
prior to the use of IFRS,” Casey said. “It sets forth key steps and
processes staff will take to provide necessary information to the
commission and to evaluate key transitional issues in transitioning to
IFRS in order to drive the process.”

The statement directs the SEC staff to develop the plan with the following issues in mind:

• 
  
  Determining
  whether IFRS is sufficiently developed and consistent in application
  for use as the single set of accounting standards in the U.S. reporting
  system.
  
  


• 
  
  Ensuring that accounting standards are set by an independent standard setter and for the benefit of investors.
  
  


• 
  
  Investor understanding and education regarding IFRS and how it differs from U.S. GAAP.
  
  


• 
  
  Understanding
  whether U.S. laws or regulations, outside of the securities laws and
  regulatory reporting, would be affected by a change in accounting
  standards.
  
  


• 
  
  Understanding
  the impact on companies both large and small, including changes to
  accounting systems, changes to contractual arrangements, corporate
  governance considerations and litigation contingencies.
  
  


• 
  
  Determining
  whether the people who prepare and audit financial statements are
  sufficiently prepared, through education and experience, to convert to
  IFRS.
  
  

The
SEC staff will conduct research, and also seek comments from and hold
discussions with investors, preparers, auditors, attorneys and
academics, among others. It is not clear whether public comment on the
plan would be sought.

While SEC Chairman Mary Schapiro
stressed that the SEC is “on track to make a recommendation in 2011,”
commissioners said that requiring U.S. public companies to report in
IFRS is a highly significant decision that they would not make unless
they are certain it is the best move for investors and the companies
involved. (Click here to watch the video of Schapiro's remarks on the SEC's IFRS proposal.)

A
key issue is progress of the convergence project undertaken by FASB and
the International Accounting Standards Board (IASB) under which the two
standard-setting boards have agreed to merge their separate sets of
standards into a single, high-quality set. Under the agreement, the
boards are taking the best approach from either U.S. GAAP or IFRS or
jointly developing entirely new standards where the current standards
of neither body are deemed to be of sufficient quality (see "Countdown to Convergence").

In
response to a question from Schapiro on the future role of FASB under
the staff’s work plan, SEC Chief Accountant James Kroeker said he could
foresee FASB continuing to have a substantive role moving forward, even
post-transition.

Reaction

Investors, issuers and representatives of the CPA profession contacted by the JofA
Wednesday generally responded positively to the SEC’s plan, though some
were clearly disappointed that the SEC did not set a certain date for
IFRS adoption. 

“The
decision puts healthy pressure on all parties involved to achieve the
best product for investors,” said Standard & Poor’s Chief
Accountant Neri Bukspan, CPA. “The SEC made an appropriate decision in
continued support of a global set of consistent high-quality accounting
standards, which we support at Standard & Poor’s.”

However, Bukspan echoed concerns expressed by Commissioner Luis Aguilar
who, while expressing support for the SEC statement, demanded strong
regulation and rigorous law enforcement and questioned whether fraud
can be prevented under IFRS and whether the costs involved in making
the switch will be justified.

“To
be effective, IFRS will require some global consistency, global
structure, appropriate funding and oversight as well as consistent
enforcement,” said Bukspan.

Many
stakeholders who commented on the earlier proposal cited concern over
the cost of moving to the new standard. They also said the 2008 road
map would not give them enough time to transition to the new standards
if the SEC does not reach a decision until 2011.

The
road map, which was introduced under former Chairman Christopher Cox,
outlined a plan that would have required the largest U.S. companies to
file IFRS reports for fiscal years beginning on or after Dec. 15, 2014,
provided certain milestones (including—but not limited to—improvements
in accounting standards) had been met by 2011.

For
the new plan unveiled Wednesday, early feedback from issuers was mixed.
“We support the renewed commitment by the SEC to move forward with
their consideration of whether IFRS is suitable for use by U.S.
domestic companies and how that transition should take place,” said
IBM’s Aaron Anderson, CPA. “Having applied IFRS for many of our
subsidiaries’ statutory filings, we are confident the evidence gathered
will support a decision in 2011 to allow or require IFRS for
U.S.-domiciled companies in addition to the foreign filers who have
that option today.”

“After
all this time, the SEC decision is somewhat disappointing,” said Eli
Lilly Chief Accounting Officer Arnold C. Hanish. “This doesn’t help us
and it’s not inconsequential because there’s cost associated with
waiting. We have systems projects in progress that if we knew the SEC’s
end game, we could incorporate modifications once rather than having to
make multiple changes. We have competitors that are currently reporting
 under IFRS and  a few  affiliates that have  been required to adopt
 IFRS for  local statutory  reporting. It’s time for the SEC to drive a
stake in the ground so we, FASB and IASB have a date certain to drive  toward.”

Accounting
and auditing groups, while applauding the SEC’s action, focused on the
need for the SEC to set a certain date for the use of IFRS.

“The
AICPA supports the thoughtful and concrete steps the SEC is taking as
outlined in its plan today to prepare for this transition,” said AICPA
President and CEO Barry Melancon. “The AICPA believes that it is
critical for the SEC to set a date certain for use of IFRS in the U.S.,
and we urge the commission, as it completes this work plan in 2011, to
ensure investor confidence is maintained and key milestones lead
successfully to global standards in 2015.”

The
International Federation of Accountants (IFAC), while expressing
support for the SEC decision, pushed for earlier adoption. “We are
disappointed that [the SEC] is not seeking an adoption date closer to
the ambitions of the G-20—by June 2011—and urge

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