In November 2008, the SEC published a proposed “Roadmap” that would potentially require U.S.-reporting issuers to convert from U.S. GAAP to IFRS. Since that time, the SEC has been silent on the issue, at least officially.
That silence ended on February 24, 2010, when the SEC issued a Statement reaffirming its support for a global set of accounting standards, stating that IFRS is best-positioned to serve as a global set of standards for the U.S. capital markets, and directing its staff to execute a work plan for the SEC to make a determination in 2011 on the approach and timeline for incorporating IFRS into the domestic financial reporting system. The Statement also makes it clear that the SEC continues to encourage the convergence of GAAP and IFRS in order to narrow the differences between the two sets of standards. However, it leaves at least as many questions as answers.
Background of Convergence/Conversion
Beginning in 2002, the FASB and the IASB began a formal process to converge GAAP and IFRS by announcing the issuance of a memorandum of understanding to collaborate on the development of common, high-quality accounting standards with the ultimate goal of achieving a single set of global accounting standards. The memorandum was updated in 2006 and again in 2008 to identify targets for completion of the convergence projects that the FASB and the IASB believed were most critical.
In 2007, the SEC took a proactive role in the process by taking two actions aimed towards a potential move from GAAP to IFRS in the United States. First, the SEC issued a concept release on whether U.S. issuers should be allowed to prepare financial statements in accordance with IFRS. Second, the SEC adopted rules allowing foreign private issuers to use IFRS financial statements in SEC filings without reconciling them to GAAP, as was formerly required.
In November 2008, the SEC took another leap forward towards the potential adoption of IFRS by U.S. issuers by proposing the Roadmap, which included a series of milestones that would guide the SEC in determining whether to transition U.S. public companies from GAAP to IFRS. The Roadmap contemplated that, after the completion of certain milestones and after the consideration of public comments, the SEC could be in a position by 2011 to decide whether to require the use of IFRS by U.S. issuers beginning in 2014, and potentially allowing early adoption by certain U.S. issuers beginning with filings for fiscal years ending on or after December 15, 2009.
After proposing the Roadmap, the SEC received more than 200 comment letters from a wide variety of market participants, including investors, regulators, issuers, accountants, and attorneys. The commenters generally expressed widespread support for the goal of having a single set of high-quality, globally accepted accounting standards, but differed in their views about the approach in the Roadmap. The key areas of concern expressed by commenters included:
- The readiness of IFRS to serve as the set of U.S. accounting standards for U.S. issuers (i.e., IFRS is not sufficiently developed)
- The need for continued convergence of IFRS and GAAP
- The timeframe set for transitioning GAAP to IFRS
- The potential costs of transitioning from GAAP to IFRS
After considering the comments received on the Roadmap, the SEC acknowledged that a more comprehensive plan is necessary to lay out transparently how it will decide if, how, and when IFRS will be incorporated into the U.S. financial reporting system. Therefore, in the Statement, the SEC directed the staff of the Office of the Chief Accountant, with consultation from other divisions, to execute a work plan that was included as an appendix to the Statement. That work plan sets forth specific areas and factors relevant to the determination of whether, when, and how the current financial reporting system for U.S. issuers should be transitioned to a system incorporating IFRS. Included in the work plan will be consideration of IFRS, as it exists today and after the completion of the convergence projects currently underway between U.S. and international accounting standards-setters.
Among other things, the work plan addresses many of the issues highlighted by commenters to the Roadmap, including:
- Determining whether IFRS is sufficiently developed and consistent in application for use as the single set of accounting standards in the United States
- 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 such as tax 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 make the conversion to IFRS
The SEC staff intends to provide public progress reports on the work plan as well as the status of the FASB and IASB convergence projects, beginning no later than October 2010 and frequently thereafter until the work is complete.
Timeline for Transitioning to IFRS
By 2011, assuming completion of these convergence projects and the steps outlined in the work plan, the SEC will decide whether to incorporate IFRS into the U.S. financial reporting system, and if so, when and how.
In response to comments on the Roadmap expressing that U.S. companies would need approximately a four- to five-year timeframe to successfully implement a change in their financial reporting systems to incorporate IFRS, the SEC stated that if it determines in 2011 to incorporate IFRS into the U.S. financial reporting system, the first time that U.S. companies would report under such a system would be no earlier than 2015. The SEC has asked its staff, as part of the work plan, to further evaluate that timeline.
Uncertainty and Unanswered Questions
Although the Statement makes it clear that the SEC is in favor of incorporating IFRS into the U.S. financial reporting system, the method and date for such incorporation is unclear. Some of the questions that remain unanswered are:
- Will there be a conversion to IFRS or will the transition to IFRS be a process of continuing convergence of GAAP and IFRS?
- If there is a conversion to IFRS, will it be a standard-by-standard adoption or will it be a wholesale adoption of IFRS in the United States?
- What will be the timeline for reporting under IFRS?
- Will early adoption be permitted?
- Will the initial adoption of IFRS by U.S. public companies be optional?
- How much time will U.S. public companies have to “phase in” IFRS?
How Should Companies Prepare?
The SEC acknowledged that the incorporation of IFRS for U.S. issuers could represent a fundamental change that would require significant transition time, effort, and cost for issuers. One of the goals of the work plan is to provide additional information about the magnitude of these changes and the logistics necessary for implementing them. Since the Statement has not answered many of the most fundamental questions about how U.S. public companies will transition to IFRS, most public companies will continue to take a “wait-and-see” approach before committing significant time and resources to IFRS preparation. In the meantime, companies should make sure to stay abreast of current convergence projects and their implications and be ready to adapt to ongoing changes in accounting principles.