Remi Forgeas

IFRS Deadline Is Fast Approaching in the U.S.

And the SEC is making progress.

December 20, 2010
by Remi Forgeas, CPA

The IFRS clock in the USA is ticking: 2011 is approaching fast and no one really knows where the U.S. Securities and Exchange Commission (SEC) wants to go with the adoption of International Financial Reporting Standards (IFRS) for U.S. companies. For the last two years, the SEC maintained its stance: in 2011, the decision will be made and announced, no indication will be provided before this deadline. In addition, this decision will be the result of a comprehensive analysis of consequences and impacts.

By the end of October, the SEC issued a Working Plan update that provides explicit and implicit information on open options looked at by the SEC. It may be useful to recap where the U.S. stands in the use of IFRS today before reviewing more details in this update.

Who Has the Ability to Apply IFRS in the U.S.?

Table 1: Accounting Standards to Be Applied by U.S. Companies

Domestic Issuers   Reporting Under U.S. GAAP Only
Foreign Private Issuers (reporting under IFRS in their home country)   Either Reconciliation to U.S. GAAP or reporting under IFRS as issued by the IASB
Private companies   Choice between U.S. GAAP, IFRS and IFRS for SMEs, other comprehensive basis of accounting, such as tax- or cash-basis

The focal point of discussions around IFRS is clearly around the SEC position with the common view that if the SEC refuses the use of IFRS for domestic filers, IFRS will share the same fate as the metric system: widely applies internationally, barely used in the U.S. However, one should not underestimate the long-term impact of the AICPA decision on the use of IFRS by private companies. The decision by the AICPA in May 2008 to recognize the International Accounting Standards Board (IASB) as a recognized standard setter and therefore allowing AICPA members the option to use IFRS as an alternative to U.S. GAAP has limited impact today: just a very limited number of companies, mostly U.S. subsidiaries of foreign groups, have adopted IFRS for their statutory accounts. But various factors may come into play to rapidly increase the number of companies electing to use IFRS:

  • IFRS will be part of the CPA exam starting next year, which means that within the next few years, new professionals will be quite aware of IFRS concepts;
  • More professionals have knowledge and understanding of IFRS, especially lenders and lawyers, which in turn may facilitate the acceptance of IFRS financial statements;
  • More countries apply or plan to apply IFRS (including Canada and Mexico), and as a consequence more U.S. subsidiaries of foreign groups will likely be interested in applying IFRS locally to limit cost of the reporting to the parent (i.e. no reconciliation needed anymore);
  • IFRS for Small and Medium Entities may appeal to a lot of U.S. companies meeting scope requirements, especially considering the “small GAAP concept” is not taboo anymore (see the FASB Blue Ribbon Panel recent discussions on GAAP for private companies);
  • The completion of the convergence project will significantly reduce the impacts, the cost (however, the implementation of new accounting standards under U.S. GAAP will have a cost, potentially significant, for companies ) and the duration of the transition to IFRS.

The SEC Is Following Its Roadmap

In accordance with its Roadmap, the SEC reiterated several times that it will make its decision in 2011. Although no indication was given by the Commission, some believe that the final decision should be known during the early part of the second half of 2011, once the new standards on major topics such as financial instruments, leases or revenue recognition are adopted and the new IASB members are appointed (June 2011).

On October 29, the SEC staff issued its first progress report on IFRS Work Plan. The Work Plan was published in February 2010. The purpose of this Work Plan is to identify areas and factors relevant to the SEC determination on the (potential) transition to IFRS.

This is the first progress report of a periodic update to be issued by the Staff over the next few months. This document is relatively short (40 pages) and covers the six topics identified in the Work Plan (see SEC Release No. 33-9109 — Appendix to 2010 Statement):

  1. Sufficient development and application of IFRS for the U.S. domestic reporting system;
  2. The independence of standard setting for the benefit of investors;
  3. Investor understanding and education regarding IFRS;
  4. Examination of the U.S. regulatory environment that would be affected by a change in accounting standards;
  5. The impact on issuers, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations, and litigation contingencies; and
  6. Human capital readiness.

We can note that the Staff focuses its concerns on impacts if IFRS are adopted, but does not raise the question of the impacts for the USA if IFRS were not adopted.

Few Comments on the Progress Report

An interesting aspect of this Work Plan is that the Staff tries to provide a timeline for tackling the various matters and also benchmark the IFRS experience with other experiences (for example comparison of the funding of the IFRS Foundation with the Financial Accounting Standards Board (FASB) funding).

The first point with regards of the development of the IFRS compared to the U.S. GAAP is a recurring topic for discussion that can be summarized by the following view:

The dichotomy IFRS is principle based whereas U.S. GAAP are rule based does not exist; the real difference is that U.S. GAAP are more mature than IFRS, and with the passage of time IFRS will increase the weight of specific guidance. Especially, IASB will adopt, despite its initial view, industry specific standards (two illustrations: insurance, rate regulated activities). Therefore, IFRS is not mature enough compared to U.S. GAAP.

This may be too restricted because even if there may be a need for industry specific standards, it does not mean that interpretations issued by International Financial Reporting Interpretations Committee (IFRIC) will be more case by case specific, nor that the IASB will issue standards with bright lines (the recent exposure drafts on leases and revenue recognition tend to demonstrate that the FASB is moving toward the IASB on this question).

The SEC in the same section touches upon the future role of the FASB, but stays short on its own future ability to issue standards (through the issuance of Staff Accounting Bulletin).

Another important concern of the SEC is the independence of the IASB from political pressure. The Staff provides the key for its analysis: oversight by the Monitoring Board, composition of the IASB, funding of the IFRS Foundation.

If the first two chapters address concerns relating to IFRS themselves, the other four chapters are more US-centric. For most of the points raised in these four parts, the Staff defers the answers until further researches or analyzes are completed.

This progress report is the first one and it is not a surprise that most of the questions are still open with a presentation of various options and comparisons with international solutions.

However, besides the technical aspects targeted by the SEC, the real question is political: can the U.S. adopt accounting standards that are issued by an authority that is not controlled by the Congress?

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Remi Forgeas, CPA, is an audit and assurance partner for Mazars U.S. and provides his views on international convergence of GAAP and whether progress is really being made in light of recent developments. For U.K. IFRS, contact Steven Brice who is a technical partner in the financial reporting advisory group.

* The views expressed in this article are the author’s own and do not necessarily reflect the views of the AICPA or AICPA CPA Insider™.