SEC Issues Statement on Path to IFRS Adoption

March 3, 2010

On February 24, 2010, the Securities and Exchange Commission ("SEC") issued a statement reaffirming its support for a single set of globally accepted accounting standards, yet refrained from establishing a firm timeline for incorporating such standards into the U.S. financial reporting system.  The SEC’s statement encourages efforts currently underway to harmonize U.S. Generally Accepted Accounting Principles ("GAAP") and International Financial Reporting Standards ("IFRS") and directs SEC staff to develop and execute a work plan on the potential adoption of IFRS for U.S. public companies.

The statement provides that, assuming certain milestones are met, the SEC will be in a position to determine in 2011 whether to transition the U.S. financial reporting system from GAAP to IFRS.  If the SEC decides in 2011 that U.S. public companies should transition financial reporting to IFRS, then the statement indicates that the earliest U.S. issuers would be required to report under the new system likely would be 2015.

An overview of the SEC’s statement and work plan is set forth below, and the full text is available at http://sec.gov/rules/other/2010/33-9109.pdf.

Background:  Convergence Efforts and the Potential Transition to IFRS

The SEC’s statement comes amid wider efforts to move toward a single set of high-quality, globally accepted accounting standards.  The primary goal of these efforts is to enhance the comparability of reporting companies’ financial statements for investors, analysts, and other market participants.  

Since 2002, the Financial Accounting Standards Board ("FASB"), which sets standards for U.S. companies, and the International Accounting Standards Board ("IASB"), which establishes IFRS, have worked together to harmonize their financial reporting systems.  These efforts gained urgency in September 2009 when leaders of the Group of Twenty nations ("G-20") called upon the standard-setting bodies to re-double their efforts and complete their convergence projects by June 2011.  FASB and IASB expressed commitment to meet this goal in a November 2009 joint statement.

In addition to voicing support for convergence projects, the SEC has taken steps toward the adoption of IFRS for U.S. issuers.  In November 2008, the SEC proposed a roadmap for IFRS’s incorporation into the U.S. reporting system.  The roadmap proposed a number of milestones and prompted over 200 comments from a wide range of market participants.[1]

Overview of Statement and Work Plan

As the SEC’s first significant action on IFRS since the 2008 roadmap, the SEC’s statement voiced continued support for uniform global accounting standards and signaled that much work remained before any transition to IFRS could occur. 

The statement directs SEC staff to develop and carry out an ambitious work plan to assist the SEC in its determination of whether, when, and how to transition to IFRS.  Influenced by comments on the 2008 roadmap, the work plan includes six specific areas that SEC staff will analyze relating to a potential transition to IFRS:

1.  Sufficient development and application of IFRS for the U.S. domestic reporting system.  SEC staff will examine the comprehensiveness of IFRS, the ability to audit and enforce IFRS, and the comparability of IFRS financial statements within and across jurisdictions.

2.  The independence of standard setting for the benefit of investors.  SEC staff will evaluate oversight of the IFRS Foundation, the body that oversees IASB; composition of the IFRS Foundation and IASB; funding of the IFRS Foundation; the IASB standard-setting process; and whether the IFRS standard setter comports with the requirements of U.S. law.

3.  Investor understanding and education regarding IFRS.  SEC staff will analyze U.S. investors’ current knowledge of IFRS, gather information on how U.S. investors educate themselves about changes in accounting standards, and consider how to improve U.S. investor understanding of IFRS prior to its adoption.

4.  Examination of the U.S. regulatory environment that would be affected by a change in accounting standards.  Because U.S. issuers provide financial information to a number of regulators, some of which rely on GAAP, SEC staff will study effects that a transition to IFRS for SEC reporting purposes would have on the wider domestic regulatory environment.

5.  The impact on issuers from a transition to IFRS.  SEC staff will examine the effect on U.S. public companies, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations, and litigation contingencies.

6.  Human capital readiness.  SEC staff will assess the preparedness for a transition to IFRS of all parties involved in the U.S. financial reporting process, including investors, preparers, auditors, regulators, and educators.

The statement requires that SEC staff provide written, public progress reports on the work plan beginning in October 2010 and frequently thereafter until the work plan is completed in 2011 (without giving a more definitive time frame).

In addition to directing SEC staff to execute the work plan, the statement provides a tentative timeline for subsequent SEC actions.  Assuming the GAAP-IFRS convergence projects and the SEC staff’s work plan are completed as scheduled, the SEC believes it will be in a position to determine in 2011 whether to transition the U.S. domestic reporting system to IFRS.  If the SEC decides in 2011 to make such a transition, then the statement suggests that the first time U.S. public companies would be required to report under the new system would be 2015 or 2016.  The work plan, however, will further evaluate this timeline.  The statement indicates that the SEC is no longer contemplating voluntary early adoption of IFRS by U.S. public companies, although that too is subject to change.

What Companies Should Do Now

U.S. public companies should consider taking the following steps in light of the SEC’s recent statement:

• Monitor GAAP-IFRS convergence efforts.  As FASB and IASB work to complete convergence projects by June 2011, there is potential for significant changes to GAAP in the near term.  The two systems of accounting standards deal differently with certain issues–for example, accounting for contingencies–and efforts to bridge these differences could entail modifications to GAAP that would have significant ramifications for U.S. public companies.  FASB currently has a number of accounting standards under review with an eye toward harmonizing them with IFRS. Companies will be well advised to watch FASB’s activities in these areas and make an effort to understand the impact of such changes on their own financial reports and disclosures.
• Communicate concerns with potential IFRS adoption to SEC staff.  The work plan states that SEC staff will gather information relating to IFRS adoption through a variety of methods, including seeking comment from and holding conversations with U.S. public companies.  Companies with concerns about IFRS may seek to participate in these discussions with SEC staff.
• Communicate with auditors regarding IFRS adoption issues.  U.S. public companies also may wish to communicate their concerns regarding the adoption of IFRS with their auditors.  Auditors often have significant knowledge of transitional issues relating to IFRS and can provide a strong voice with regulators.
• Communicate with auditors about accounting system and other changes that may be required in the event IFRS is adopted.  Although still seemingly well into the future, as the convergence process proceeds, companies should consult with their auditors about any changes in systems and procedures that may be required to implement changes required by convergence and the lead times, training and changes in procedures that may be required to implement any such changes.  It is fair to assume that some of these transition efforts will take months, if not years, to implement, and having an early assessment of the lead time needed will prove helpful.