Acceptance of IFRS Continues
Is It Time for U.S. Companies
to Prepare for the Transition?
MARCH 2008 - International
Financial Reporting Standards (IFRS), issued by the International
Accounting Standards Board (IASB), are increasingly being viewed
as the single set of high-quality accounting standards that global
capital market participants have long been hoping for. As a result
of a European Union (EU) directive, in 2005 a large number of
publicly traded companies in those member countries adopted EU-endorsed
IFRS. More than 6,000 of these companies previously reported in
their home country’s version of GAAP. Today approximately
100 countries require or permit IFRS in varying degrees, either
as originally issued by the IASB or as modified and endorsed by
a particular jurisdiction.
use of IFRS is partly due to the belief that the IASB’s
standards are enhanced by the geographically diverse views that
are considered in developing those standards. Many companies view
adopting IFRS as an efficient and cost-effective way to access
foreign capital markets. Global capital markets benefit from such
standards because they facilitate financial statement comparisons,
and investors have more confidence in accounting standards that
have attained global acceptance. Issuers also benefit from the
lower cost of capital that results from a reduced risk premium.
Boosted by SEC Action
2007, IFRS received another boost when the SEC adopted rules to
allow foreign private issuers to file financial statements prepared
in accordance with IFRS as issued by the IASB, without reconciliation
to U.S. GAAP.
the new rules, the SEC adopted amendments to Form 20-F; conforming
changes to Regulation S-X; and conforming amendments to other
regulations, forms, and rules under the Securities Act and the
Securities Exchange Act. The rules are applicable to financial
statements for financial years ending after November 15, 2007,
and interim periods within those years. The new rules are effective
as of March 4, 2008.
regarding reconciliation to U.S. GAAP do not change for a foreign
private issuer that files its financial statements using a basis
of accounting other than IFRS as issued by the IASB. The new rules
contain a temporary transition accommodation for existing EU registrants
that use the carve-out to International Accounting Standard (IAS)
39, Financial Instruments: Recognition and Measurement,
regarding hedge accounting (i.e., EU-endorsed IFRS). Specifically,
for the first two financial years that end after November 15,
2007, the SEC will accept financial statements from EU registrants
that use the IAS 39 carve-out without a reconciliation to U.S.
GAAP if those financial statements otherwise comply with and contain
a reconciliation to IFRS as issued by the IASB.
Registrants and IFRS
SEC was considering the above rules for foreign private issuers,
it became apparent that if foreign private issuers were to be
allowed to file financial statements prepared in accordance with
IFRS without reconciliation to U.S. GAAP, the question of whether
domestic registrants should be allowed (or required) to report
using IFRS would come to the forefront. As a result, in August
2007 the SEC issued a concept release on allowing U.S. issuers
to prepare financial statements in accordance with IFRS. The SEC
held two public roundtable discussions on the topic in December
made at the December public roundtables and comment letters received
on the concept release point to overwhelming agreement that the
U.S. capital markets should move to IFRS. This was also the message
heard from speakers at the AICPA’s national conference on
current SEC and PCAOB developments in December 2007. Given the
level of support for IFRS, the SEC staff is mulling over how ready
U.S. registrants are for such a move, as well as how and when
the transition would be made.
how ready U.S. market participants are for the move to IFRS will
be particularly challenging because of the lack of IFRS knowledge
in the United States. IFRS is not widely taught at U.S. colleges
and universities and is not covered on the CPA exam. A vast shift
in educational requirements will need to occur and an adequate
transition period will be required. If the U.S. capital markets
are to embrace IFRS in the near term, the SEC and the AICPA must
encourage the development and deployment of necessary educational
to training their staff and identifying the differences between
IFRS and U.S. GAAP, companies expected to adopt IFRS will have
to make changes to their information systems and internal controls.
These activities will take a great deal of planning, coordination,
time, money, and effort, so it is important to start early. In
a speech at the AICPA’s International Issues Conference
on January 10, 2008, SEC Chairman Christopher Cox remarked that,
from the SEC’s standpoint, “IFRS is coming.”
It is telling that a few companies have already heeded that message
and formed project teams to prepare for the transition.
to the movement to IFRS is that U.S. financial statement preparers
and auditors are used to the bright lines and detailed rules inherent
in U.S. GAAP, but not to the principles-based standards that make
up IFRS. Not only will these individuals have to learn to make
the judgments necessary when applying IFRS, but regulators will
have to learn to accept reasonable auditor judgments made in good
faith. In this regard, on January 11, 2008, the SEC’s Advisory
Committee on Improvements to Financial Reporting voted to approve
recommendations for a framework for professional judgment by auditors.
the Transition: How and When?
various SEC speeches and the two public roundtable discussions
held in December 2007, three main approaches have been identified
for making the transition to IFRS. The first, allowing the current
convergence process between FASB and the IASB to continue until
the two systems are “substantially equivalent,” is
considered by many to be the least preferable, due to the time
it would take as well as the view that there is no strong agreement
on what “substantially equivalent” means. Another
concern is that the two systems will never be the same, and to
maintain them both will be costly and confusing to investors.
transition approach is to provide a mandatory adoption date but
permit early adoption. This approach is beneficial because it
would establish a date by which the U.S. capital markets will
make the full transition to IFRS. Early adopters could enjoy benefits
such as cost savings and greater comparability as soon as the
option is available. Under this approach, companies adopting at
the mandatory adoption date can benefit from early adopters’
experiences, and until the mandatory adoption date arrives FASB
and the IASB can make additional progress on convergence. During
this time, convergence activities will lead to improvements in
both sets of standards, and the removal of additional differences
between the two systems will lead to a smoother changeover. Certain
observers have warned that the time between the early adoption
date and the mandatory adoption date should be kept to a minimum,
because allowing U.S. GAAP and IFRS to coexist for an extended
period of time could cause confusion in the capital markets.
transition approach is to require adoption at a future date with
no early adoption permitted. Until the mandatory adoption date
arrives, FASB and the IASB can make additional progress on convergence,
and any confusion from having U.S. GAAP and IFRS coexist can be
avoided. Only the second and third approaches seem to be receiving
favorable attention at this time.
The two major
issues remaining are: which transition approach to select, and
when to make the switch. Many have suggested 2011, because it
would coincide with transition to IFRS in other countries, such
as Canada, India, and Korea. This timeframe is considered feasible
by many because it matches the three-year changeover previously
afforded EU publicly traded companies. There is a consensus that,
somewhere within three to five years, the U.S. capital markets
will have adopted IFRS, so now is the time to start to get ready.
Cabrera, CPA, is a senior manager at Grant Thornton, LLP,
New York, N.Y., and a member of the NYSSCPA’s International
Accounting and Auditing Committee.