by Marine Cole

Make Or Break? Long-Delayed IFRS to Get More Exposure in ’11

Feb 02, 2011
IT Leadership

U.S. companies likely will feel the heat this year as important accounting-related decisions come their way, potentially pressuring them into costly and complicated changes to their reporting systems. To some extent, that's what their neighbors north of the border have experienced in recent years.

U.S. companies likely will feel the heat this year as important accounting-related decisions come their way, potentially pressuring them into costly and complicated changes to their reporting systems. To some extent, that’s what their neighbors north of the border have experienced in recent years.

Financial executives in the U.S. should pay close attention to their Canadian counterparts at those publicly-traded companies that adopted International Financial Reporting Standards starting this Jan. 1. In the U.S., the Securities and Exchange Commission is expected to come up with a decision this year on whether companies — many of which have been only reluctantly following the stop-and-go progress of IFRS here — will move more quickly toward adoption of IFRS.

Plans for a possible switch to international standards, and away from U.S. generally accepted accounting principles, have been nearly at a standstill since the SEC last tackled the issue in late 2008. Then, the SEC issued a roadmap outlining possible dates for IFRS adoption, ranging from 2012 to 2014. One criticism at the time was that the roadmap and the system were too vague, and businesses were reluctant to start working toward IFRS in the face of such uncertainty.

After almost two years with little progress — because of the financial crisis and the change in administrations — the SEC undertook a follow-up project last year to resume studying a to move to IFRS.

And that is where things stood as 2010 ended. In its study, dubbed the Work Plan, the SEC is analyzing six areas — the first two considering characteristics of IFRS and its standard setting that might be particularly relevant to an SEC determination on whether to incorporate IFRS into the reporting system for U.S. issuers. The other areas cover transitional considerations enabling the SEC to better evaluate the scope and timing of a move, and what approach to take to its changes.

Although the process is continuing, the SEC issued a progress report on its study at the end of October, but remained vague on its approach to IFRS. It did reiterate though that it would deliver the results of its study some time in 2011.

Better Global Comparisons

“The SEC continues to believe that a single set of high-quality globally accepted accounting standards will benefit U.S. investors and that this goal is consistent with our mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation,” the SEC said in its report. One obvious goal for the change: helping investors compare between U.S. and non-U.S. companies in the case of cross-border mergers and acquisitions.

Although most CFOs seem to agree, at least on that point, they aren’t rushing to prepare for a potential switch.

According to an October survey conducted by KPMG and Financial Executives International, 88% of executives responsible for corporate financial reporting feel that IFRS would indeed enhance global comparability, but 75% said their organizations would wait until the SEC requires IFRS as the standard for filing financial reports, before moving away from U.S. GAAP.

Meanwhile, the International Accounting Standards Board and the Financial Accounting Standards Board continue to conduct convergence projects to bring international standards and U.S. GAAP closer to each other, with a target date of completion this June. While CFOs can still expect the completion of the convergence projects by FASB and IASB this year, the best bet is that this will slip past June, because the two boards have decided that the need for high-quality standards is more important than meeting any deadline.

Nevertheless, these projects, instituting stricter rules for accounting for leases, for one thing, so far have appeared to be the most efficient way far to bring the two systems closer to each other.

Some accounting experts and financial executives, though, have reservations about both the convergence projects and the work of the SEC in advancing them.

Big-Bang or Slow-Burn?

There are complaints, for example, that it won’t be possible to actually assess the quality of the new standards until companies have used them for several years. Further, disagreements persist over whether convergence projects, once completed, will all be issued at the same time (the so-called big bang theory) or one by one (the slow-burn theory.) “There’s a wide range of opinions on that from preparers, but most of them said over time would be preferred,” says Jay Hanson, national director of accounting at McGladrey & Pullen.

Critics also fault the SEC for having backed down on the adoption of IFRS, arguing that the agency is simply buying time with its Work Plan — to what will happen with the convergence projects.

“It’s been a slow going,” says Michael Corkery, senior manager at the accounting firm Nussbaum Yates Berg Klein & Wolpow. “The SEC has been non committal as far as a switch to IFRS, but the convergence projects could bridge that gap.”

Most jurisdictions that have moved to IFRS have followed either a convergence approach or an endorsement approach. But for Paul Beswick, the SEC’s deputy chief accountant, a “condorsement” approach — a word coined Dec. 5 during his speech at the AICPA National Conference on Current SEC and PCAOB Developments — may be the best alternative. This hybrid approach would let some standards converge with IFRS, and would be endorsed within U.S. GAAP.

Such an approach would be less expensive for companies, and less disruptive of business, while still achieving the broader goal of merging U.S. and non-U.S. standards.

“There are certainly benefits to maintaining U.S. GAAP,” says Lisa Filomia-Aktas, partner, Ernst & Young, Financial Services Office. “So many agreements and legislation refer to it.” With that approach, companies wouldn’t have to go through the hurdle of having to keep two sets of books — one following U.S. GAAP and the other IFRS — for several years, as they would have to do if they moved to IFRS, according to McGladrey’s Hanson.

But as Sir David Tweedie, chairman of IASB, has said, such a hybrid approach would defeat the purpose of having a single uniform set of global accounting standards.

With so many possible approaches and so few guidelines at this point, it can be challenging for CFOs wondering how to tackle the IFRS monster.

Either Way, Changes Are Coming

So far, CFOs of U.S. companies have paid little attention to the prospect of full adoption of IFRS. And, according to many experts, their companies should continue to hold back on any pre-adoption moves until the SEC gives the green light on a specific adoption date. “If I’m a CFO of a public company, I don’t think I would do anything on IFRS, but I’m going to focus on convergence projects,” says Hanson. “We’ve seen very few U.S. companies applying IFRS. Most of the time, it would be U.S. subsidiaries of foreign companies.”

Looking at the range of convergence projects — and studying the Canadian experience this year — would be a good way for a company to start familiarizing itself with international standards and the differences they present. These differences often play out industry-by-industry. For technology companies, while U.S. GAAP offers a multitude of clearly defined rules about when to recognize revenue from software sales (at the beginning of a project, or when it is completed, IFRS offers only a couple of standards — with little guidance. That would require increased management judgment in the area of revenue recognition. Under IFRS, CFOs across all industries would be required to provide greater disclosure and more documentation to back their statements. Generally, IFRS is seen as a more principles-based approach, with GAAP being more rules-based.

“Whether we move to IFRS or not, a lot of accounting changes are coming,” says Ms. Folimia-Aktas. She adds that companies should look for ways to simplify their infrastructures to facilitate such changes.

Accounting experts also encourage financial executives to become more active in sending comment letters with their opinions to the SEC and FASB. It could also be a good idea to start hiring people well versed in IFRS, who will at the very least, be useful on the convergence projects.

Even if the SEC suddenly becomes proactive on a switch to IFRS, which few people believe it will happen, FASB and IASB have already said they would allow for a transitional period of several years for U.S. companies to get ready. But if that’s the path the SEC picks, then businesses should be ready to foot the bill, much as they did with the expensive compliance with the Sarbanes-Oxley reforms.

“A lot of people are hoping IFRS doesn’t happen,” says Corkery.

Marine Cole is a New York-based business and financial writer.