Proposed IFRS roadmap posted

By Cydney Posner

As you may recall, in August, the SEC voted to propose a roadmap for U.S. issuers to adopt-- by 2014-- International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (the "IASB"). Approximately 113 countries around the world currently require or permit IFRS reporting for their domestic listed companies. The SEC believes that U.S. investors would benefit from an enhanced ability to compare financial information of U.S. companies with that of non-U.S. companies.

The SEC has finally posted the proposed 165-page roadmap to mandatory adoption of IFRS for U.S. issuers. Under the roadmap, the SEC would make a decision about whether or not to adopt IFRS in 2011, leading to a potential adoption date in 2014. (The release states that SEC action in 2011 should provide issuers with sufficient early notice of the transition to IFRS to permit them to begin their internal accounting using IFRS in 2012, which would be the earliest fiscal year that would be covered under the earliest anticipated phase-in for IFRS reporting in 2014.) The release makes clear that any decision to expand the use of IFRS to U.S. issuers would require that the SEC evaluate whether global developments support the assertion of IFRS as the single set of high-quality globally accepted accounting standards that is applied consistently across companies, industries and countries. Although the release does not address how the SEC would mandate use of IFRS, the most likely option--and one that has been used in other jurisdictions-- is to have the FASB, as the designated standard setter, incorporate all provisions under IFRS, and all future changes to IFRS, directly into U.S. GAAP.

There are loads of complexities here: substantive areas that commentators believe need to be improved (revenue recognition, fair-value measurement, consolidation, and derecognition), other regulatory agencies that require U.S. GAAP, outstanding agreements that explicitly reference U.S. GAAP in its entirety or by section, not to mention training of companies, auditors, regulators and investors. In addition, IFRS is generally principles-based and therefore less prescriptive than U.S. GAAP, typically providing more options but less developed guidance. The results of a recent study from Moody’s Investors Service showed that, following examination of the financial statements of 30 large European companies after adoption of IFRS, while transparency improved, the latitude available under IFRS financial reporting led to greater inconsistency, higher profits, deteriorated balance sheets and reduced comparability. On the other hand, the same article quotes a commentator with a different perspective, who argues that "U.S. capital markets tend to think more rigidly about comparability to the point of expecting uniformity—which isn’t precisely what IFRS wants to achieve….The goal in mind is for everything to be the same….Under IFRS, it’s more from the perspective of transparency. You’re not always going to have the same answer to similar questions, but you’ll have better information in the financial statements that users can use to make financial decisions."

The roadmap sets forth milestones which, if achieved, could lead to the eventual use of IFRS by all U.S. issuers. These milestones relate to:

• improvements in accounting standards (whether IFRS accounting standards are of high quality and sufficiently comprehensive, consistently applied and established under a robust, independent process);
• the accountability and funding of the IASC Foundation (whether there is a secure, stable funding mechanism that permits the Foundation to function independently and that enhances the IASB’s standard setting process);
• improvement in the ability to use interactive data for IFRS reporting (the state of development of an IFRS list of tags for interactive data reporting);
• education and training relating to IFRS;
• limited early use of IFRS where this use would enhance comparability for U.S. investors (discussed below);
• the anticipated timing of future rulemaking by the SEC; and
• the implementation of the mandatory use of IFRS by U.S. issuers (probably using a staged transition).

The roadmap would allow a limited number of U.S. issuers to elect early use of IFRS where it would enhance the comparability of financial reporting. This possibility would be limited to a group of larger U.S. companies in industries in which IFRS is the most used set of standards globally. (But if IFRS is ultimately not adopted, the result could be a confusing dual reporting system in the U.S.) The option to move to IFRS would be made available to eligible

U.S. issuers for filings for fiscal years ending on or after December 15, 2009. To accommodate the limited early use of IFRS, the release proposes a number of conforming rule amendments.

As noted above, the SEC is considering implementation using a staged transition, under which large accelerated filers would begin using IFRS in filings for fiscal years ending on or after December 15, 2014, accelerated filers would begin in filings for years ending on or after December 15, 2015 and non-accelerated filers, including smaller reporting companies, would begin for years ending on or after December 15, 2016. The SEC expects that it would require three years of audited financial statements in the first year of IFRS reporting.

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