On February 24, 2010, the SEC issued a statement reaffirming its commitment to the goal of a single set of high-quality global accounting standards. The SEC acknowledged that International Financial Reporting Standards (“IFRS”), rather than U.S. GAAP, would likely serve as that set of standards for the U.S. capital markets in the coming years, and expressed its support for the ongoing convergence process between the Financial Accounting Standards Board (“FASB”), which sets the standards for U.S. GAAP, and the International Accounting Standards Board (“IASB”), which sets the standards for IFRS.

The SEC last addressed the topic of global accounting standards in November 2008 when it issued a proposed “Roadmap” for the eventual adoption of IFRS for U.S. issuers. The SEC’s recent statement can be viewed as a cautious step forward in furtherance of the Roadmap. SEC Chairman Mary Schapiro noted that “[f]or nearly 30 years, the [SEC] has promoted a single set of high-quality globally accepted accounting standards, which would advance the dual goals of improving financial reporting within the U.S. and reducing country-by-country disparities in financial reporting,…[b]ut supporting this goal is only the beginning of the discussion, not the end.”

The likely result of this initiative is that U.S. reporting companies will ultimately be required to adopt IFRS.

The SEC Commissioners have directed the SEC staff to undertake a work plan (the “Work Plan”) for the convergence process, which they believe should enhance both an understanding of the SEC’s purpose and public transparency regarding convergence. The information obtained through the Work Plan is intended to aid the SEC in evaluating the impact of IFRS on the U.S. capital markets and in determining a timetable for incorporating IFRS into the U.S. financial reporting system. The SEC expects to be in a position to make a determination regarding adoption of IFRS for U.S. issuers in 2011. Once a determination is made, it would then be several years before IFRS becomes a requirement for U.S. public companies. The SEC indicated that the earliest that U.S. companies would be required to report using IFRS would be 2015.

The 2008 Roadmap included a series of milestones that were to guide the SEC in determining whether to require U.S. reporting companies to adopt IFRS. The SEC received more than 200 comment letters on the Roadmap from a wide variety of market participants, including investors, regulators, issuers, accountants, attorneys, academics, standards setters and international organizations. Commentators expressed widespread support for the goal of having a single set of globally accepted accounting standards, but differed in their views about the feasibility of achieving global accounting standards, whether IFRS is appropriate to serve as that set of standards and whether the Roadmap is the appropriate path to convergence.  

The SEC has now underscored the importance of carefully considering whether a change to IFRS is in the best interest of U.S. investors and markets. Among other things, the staff’s Work Plan is expected to address many of the issues highlighted by commentators, including:  

  • Determining whether IFRS is sufficiently developed and consistent in its 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.  
  • Determining 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, for example 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.  

Going forward, the SEC staff is to provide 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 thereafter until the work is complete.