Thursday, August 28, 2008

On the Road Again: SEC Approves Release of IFRS Roadmap

The SEC voted on Aug. 27 to release for public comment a proposed IFRS Roadmap – outlining milestones that would form the basis of an SEC decision to be made by 2011 on whether to mandate the use of IFRS by public companies in their SEC filings beginning in 2014. As noted in SEC’s press release, there will be a sixty day comment period on the proposal. Separately, the SEC also voted on a number of items impacting Foreign Private Issuers and cross-border business combinations, as noted in this SEC press release.

As described further in the Opening Remarks of SEC Chief Accountant Conrad Hewitt, Division of Corporation Finance Director John White, and Chief of the Office of International Corporation Finance of Corp Fin, Paul Dudek, as part of its IFRS Roadmap, the SEC is proposing to permit early adoption of IFRS by a limited number of companies that meet a two-pronged test, and seeks comment on two alternatives for the number of years of reconciliation from U.S. GAAP to IFRS that would be required of the early adopters. (‘Alternative a’ would be one year of reconciliation in an audited footnote consistent with IFRS 1, First Time Adoption of IFRS; ‘Alternative b’ would be three years of unaudited reconciling information for the same three years as the audited financial statements included in the SEC filing.) Dudek said the SEC currently estimates 110 companies would be eligible for early adoption.

Hewitt noted the Commission’s proposal was responsive to the request of constituents to provide a date certain, White noted the proposal for early adoption was aimed at enhancing comparability for those in an ‘IFRS industry’ on a limited basis, and Dudek outlined the milestones in the proposal, as well as the eligibility criteria for early adopters.

Additionally, “the proposal considers whether [any mandatory requirement for IFRS] should be staged from 2014 to 2016 depending on the company size (large accelerated filers – 2014; accelerated filers – 2015; non-accelerated filers – 2016),” as noted by Christine DiFabio, Vice President, Technical Activities, of FEI, who provides details from the SEC meeting in this FEI summary. (Summary can be downloaded by FEI members only, see info on FEI membership).
Commission Duty-Bound To Determine What Role IFRS Should Play In U.S. Noting that, “Today, all of Europe and nearly 100 countries around the world require or permit the use of IFRS,” with that number expected to increase, SEC Chairman Christopher Cox said in his opening remarks, “The increasing worldwide acceptance of financial reporting using IFRS, and U.S. investors increasing ownership of securities issued by foreign companies that report their financial information in IFRS make it plain that if we do nothing, and simply let these trends develop, with each passing year, comparability and transparency will decrease for U.S. investors and U.S. issuers.

“To help fulfill its statutory missions of protecting investors and facilitating capital formation,” continued Cox, “the Commission is duty-bound to determine what role IFRS should play in U.S. capital markets, including whether it should be available for use in the future by U.S. public companies.”

Cox also observed, “the increased use of IFRS around the world is a fairly recent phenomenon,” observing “the majority of companies that are currently reporting financial results based on IFRS have only been doing so for a few years.” He added, “This relatively limited history is an important reason that the United States needs to continue to support the work of the IASB, and the foundation that oversees it, the IASCF.” He described five items the SEC deems to be ‘keys to the success of IFRS”:

  • “the standards are created in the interests of investors – that has to be their overarching purpose”
  • “the standard setting process be transparent”
  • “the standard setter must be independent – that means independent from special pleaders, from the political process, from favored industries or industry players, and from national or regional biases
  • “the standard setter must be accountable – this means ensuring that IFRS actually meets the needs of investors and other stakeholders, and that they are updated in a timely way, and
  • “it’s vitally important that all of the stakeholders themselves participate in the standard setting process in order to ensure the continued success of IFRS.

“The proposed roadmap is cautious, and careful,” said Cox, noting, “it’s a proposed multi-year plan, that sets both the basis for considering the mandatory use of IFRS by U.S. issuers, and several milestones, that if achieved, could lead to the use of IFRS in the U.S.”

The milestones described by Corp Fin’s Dudek were in many ways analogous to the points referenced by Cox noted above. Specifically, Dudek mentioned the SEC will look at, among other things:

  • improvements in the accounting standards
  • the accountability and funding of the International Accounting Standards Committee Foundation;
  • improvement in the ability to use interactive data for IFRS reporting; and
  • education and training in the United States relating to IFRS, among investors, auditors and others.

Two Pronged Test To Determine Eligibility for Early adoption
The eligibility requirements for early adoption of IFRS by U.S. issuers fall into a sort of two-pronged test:
(1) Comparability: if a company is in an ‘IFRS industry’ – i.e. if IFRS is used as the basis of financial reporting more often than any other basis of accounting by the 20 largest public companies in that industry (as measured by market cap on a global basis, and
(2) Limitation: if the company is among the 20 largest public companies in its industry on a global basis.

The Need for Education
Commissioner Elisse Walter noted that regarding education and training, “a lot of it is not within our control,” and asked, “what plans do we have [so] that we can feel comfortable the accounting expertise is out there, auditors are out there?”

Hewitt said professors have indicated to him “all of a sudden [they are] starting to get interested” in IFRS, “starting to add appendices to textbooks, seriously planning within the next two years to teach students” about IFRS. He acknowledged that on the investors side, there is no question there needs to be more training.

Wayne Carnall, Chief Accountant in the Division of Corporation Finance, observed, “While university education is a very important part of the process, most people graduating school today will not be signing [audit] reports or certifications under [Sarbanes-Oxley Section] 302 for 20 odd years, it’s the people doing the work today [that need] to be able to learn IFRS.”

“A good example is what happened in Europe," said Carnall. "It was a challenge, but not an impediment to moving forward.” He added, If Europe can do it, I’m confident we can do it.”

NOTE: To help identify and address the multitude of issues that will arise from the move to IFRS in the U.S., FEI was one of the charter members of the
Corporate Roundtable on International Financial Reporting (CRIFR). See also FEI’s Statement on SEC’s IFRS Roadmap.

Driver’s Ed
Maybe some folks will listen to Willie Nelson’s
On The Road Again as background music for reading SEC’s proposed IFRS Roadmap. Although some of the lyrics would seem to speak to the ‘old days’ – e.g. “Insisting that the world keep turnin' our way…” … other lyrics may inspire the move to one set of global accounting standards – a move predicted for a number of years now by the SEC, FASB, IASB and others:

“On the road again
Goin' places that I've never been
Seein' things that I may never see again,
And I can't wait to get on the road again.”

On the education front, as we noted earlier this week, KPMG is hosting a webcast at 11am EDT Aug. 28 on the IFRS roadmap developments, see

And, learn more about IFRS at FEI’s upcoming conferences: Current Financial Reporting Issues (CFRI - FEI’s annual conference covering a range of SEC, PCAOB, FASB and IASB Developments), Nov 17-18, NYC, and “IFRS: Strategies for Adopting a Single Set of Standards,” sponsored by Deloitte, Nov. 19 in NYC. Further info on our upcoming conferences can be found on under Networking Events.

FASB To Release Proposed Changes to Going Concern, Subsequent Events
Separately, on the FASB front, FASB voted on Aug. 27 to release for public comment its proposed standards on going concern and subsequent events. These two projects were launched mainly to move the topics from auditing literature to accounting literature (i.e. by placing them into FASB's Codification). However, after agreeing on one change at the Aug. 27 meeting versus previous deliberations - specifically, to determine a going concern based on the IFRS 1 requirement of looking at 'all available information' - which board member Larry Smith noted would be a significant change from U.S. auditing literature - the board decided to release the proposed standards (possibly in the form of a proposed FSP) on going concern and subsequent events for a 60 day comment period, rather than simply include them in the codification and rely on comments from the 'verification phase' of the codification. The board reaffirmed its prior decisions on subsequent events, as described in the
board handout. See FASB's Summary of Decisions Reached at the board meeting, posted in FASB's News Center. If you received this blog post from ‘a friend’ you can sign up here to get the blog by email.

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