The Securities and Exchange Commission (“Commission”) has issued a roadmap for integrating U.S. financial reporting into a more globally uniform standard, International Financial Reporting Standards (IFRS).
The Commission has been working on the adoption of a single, widely accepted set of high-quality accounting standards that will enable investors to make better-informed investment decisions by having U.S. reporting companies reporting on the same basis as companies in other countries. The Commission also recognizes a need to better enable U.S. public companies to access the global capital markets.
To achieve these goals, the Commission recently proposed a roadmap for shifting public company financial reporting from U.S. Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards over the next six years. IFRS is a set of accounting standards that is promulgated by the International Accounting Standards Board (IASB). The IASB operates in a similar manner as the Financial Accounting Standard Board (FASB) in the U.S. Many of the basic principles of IFRS are consistent with those of GAAP; however, IFRS is more principles driven than GAAP. Due to this fundamental difference, and IFRS adherence to fair value accounting for long-life and intangible assets, its greater discretion about accounting decisions, and its greater emphasis on footnote discussions, the transition by U.S. companies from GAAP to IFRS will be a complicated process.
The Commission’s proposed roadmap is intended to provide a framework for the Commission and potential adopters of IFRS to evaluate the acceptability of IFRS as the accounting standard. In determining the proposed timeline for adopting IFRS, the Commission also recognized the need to allow PCAOB-registered U.S. public accounting firms to develop the necessary expertise in IFRS. The timeline established provides that issuers will be required to adopt IFRS over a period of time based on the size of the issuer, with large accelerated filer required to adopt first, followed by accelerated filers and finally nonaccelerated filers. Once IFRS is required for an issuer, it will need to be used in reports and registration statements filed with the Commission.
Reasons for the Timeline
In establishing the timeline, the Commission recognized the importance of providing U.S. investors access to the tools to effectively and efficiently compare their investment opportunities in the global capital markets. The roadmap also states that the Commission recognizes that U.S. public companies will be able to better compete for capital on a global basis because there will be readily available consistent, comparable financial information across companies, industries and countries. The Commission recognizes that acceptance of IFRS as a uniform set of financial reporting standards in major capital markets is rapidly growing. IFRS is required or permitted in about 113 countries, including all of the European Union member states, Australia, Israel, and Brazil.
Before fully and formally subscribing to IFRS, the SEC wants to be certain that IFRS evolves into a set of comprehensive, high-quality accounting standards comparable to FASB guidelines. The Commission will engage in an ongoing evaluation of IFRS that will measure progress of the transition of IFRS into a set of comprehensive, high-quality accounting standards at various milestones. The Commission plans to decide in 2011 whether U.S. public companies will be required to use IFRS starting in 2014 based on this evaluation.
Adoption of IFRS
The Commission will allow certain large U.S. public companies to begin using IFRS beginning with fiscal periods ending after December 15, 2009. Early eligibility will be limited to U.S. public companies, with no objection from the Commission, that are among the 20 largest public companies in their industries on a global basis, measured by market capitalization, but only if IFRS is used by a plurality of this set of 20 companies. The Commission also proposes a three-stage mandatory transition for U.S. public companies to move from GAAP, under which large accelerated filers would begin to file IFRS financial statements for fiscal years ending on or after December 15, 2014, and accelerated and non-accelerated filers would begin filing in the subsequent two years.
The Commission recognized that during the transition to IFRS, financial statements will need to be provided that will allow investors to compare results from prior periods that were presented under GAAP and has made two proposals for providing such information. Under Proposal A, a U.S. public company would provide a one-time reconciliation from GAAP financial statements to IFRS in a footnote to its audited financial statements. Under Proposal B, a U.S. public company would, in addition to disclosing the initial reconciliation, also provide on an annual basis a reconciliation from IFRS financial statements to GAAP covering a three-year period.
Planning for IFRS
Public companies should consider consulting with auditors and counsel concerning IFRS and begin developing in-house IFRS expertise. During the transition, U.S. public companies may need to run parallel accounting systems to produce both GAAP and IFRS financial reports. The transition will also include a review of contracts and agreements that contain financial covenants, including indentures, loan agreements, executive employment contracts, licenses, and joint venture agreements, to determine whether the agreements allow for the use of IFRS and the amendment of those documents if they do not.
Comments to Release
The Commission is seeking comments from the public through February 19, 2009 and has posed a series of questions in its release.