On November 14, 2008, the Securities and Exchange Commission (SEC) issued its long-awaited proposed rule (Roadmap) setting out milestones that, if achieved, could lead to mandatory transition by US public companies from the use of US generally accepted accounting principles (US GAAP) to the use of International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The transition would start in fiscal years ending on or after December 15, 2014. The Roadmap also contains a proposal that certain US issuers be given the option to use IFRS earlier — namely, in financial statements for fiscal years ending on or after December 15, 2009.
In the Roadmap, the SEC noted the use of IFRS in member states of the European Union, Australia and Israel, and the announced intention to use IFRS in Canada and Brazil. It also noted that in the case of Canada (following a transitional period), a separate and distinct Canadian GAAP would cease to exist as a basis of financial reporting for public companies.
In an earlier issue, we reported on the adoption by the Canadian Accounting Standards Board (CASB) of January 1, 2011 as the starting date for the mandatory adoption of IFRS by Canadian publicly accountable enterprises, including public listed companies. In that report, we also described the SEC’s decision to permit foreign private issuers to use IFRS in filing annual reports on Form 20-F without reconciliation to US GAAP for fiscal years ending on or after November 15, 2007.
In the Roadmap, the SEC stated that "the use of a single, widely accepted set of high-quality accounting standards would benefit both the global capital markets and U.S. investors by providing a common basis for investors, issuers and others to evaluate opportunities and prospects in different jurisdictions." During the comment period, which ends on April 20, 2009, the SEC is seeking comments on a number of questions posed in the Roadmap. If the SEC does decide to proceed with the adoption of IFRS, it will publish a final version of the Roadmap.
The Roadmap sets out seven milestones that would need to be achieved in order for the mandatory adoption of IFRS by US issuers to be implemented:
- Improvements in accounting standards that will permit IFRS to meet the test of a "single set of high-quality, globally accepted accounting standards."
- Demonstration that the IASB and its oversight body, the IASB Foundation, have secure, stable funding mechanisms, and the establishment of a Monitoring Group composed of securities authorities charged with the adoption or recognition of accounting standards used in their respective jurisdictions.
- Broad adoption of Extensible Business Reporting Language (XBRL) by US companies. On December 17, 2008, the SEC approved its XBRL rules with the effective date for the first group of filers being fiscal periods ending on or after June 15, 2009 rather than December 15, 2008 as earlier proposed.
- Achievement of appropriate levels of education and training for the use of IFRS in the United States.
- Approval by the SEC of limited early use by eligible entities for fiscal years ending on or after December 15, 2009. (These are entities of significant size and in industries where more than half of the top 20 issuers measured by market capitalization use IFRS.)
- Following a determination by the SEC in 2011 to proceed with mandatory adoption in 2014, development of a timetable for future rule-making by the SEC.
- Commencing in 2014, phasing in of IFRS in annual stages for large accelerated filers, accelerated filers, and non-accelerated filers, respectively.
Among aspects of significant interest in the Roadmap are the following:
- For the purposes of early, voluntary filings until 2011, the determination by the SEC of whether a one-time reconciliation between IFRS and US GAAP will be required at the time of the initial annual filing, or whether that one-time reconciliation plus an ongoing annual reconciliation will be required until a decision is made by the SEC in 2011 to adopt mandatory filing using IFRS beginning in 2014.
- The requirement that the initial annual filing of financial statements using IFRS include comparative information for the prior three years, necessitating that the prior two years’ financial information published using US GAAP be restated using IFRS. The European Union required only two years of audited financial statements using IFRS for the initial filing.