Without question, the U.S. Securities and Exchange Commission (SEC) has been working hard to address the complexities and timeline of how to integrate International Financial Reporting Standards (IFRS) into the U.S. financial reporting process. On October 29, 2010, the Office of the Chief Accountant and Division of Corporate Finance released a progress report on its “Work Plan for the Consideration of Incorporating IFRS into the Financial Reporting System for U.S. Issuers.” Yes, the title’s definitely daunting — so will be the reporting requirements if IFRS is adopted in the United States.
For those not familiar with the Work Plan, it addresses:
- Sufficient development and application of IFRS for the U.S. domestic reporting system;
- Independent standard setting for the benefit of investors;
- Investor Education and Understanding of IFRS;
- Examining the U.S. regulatory environment and understanding the impact from changing the accounting standards;
- The impact on financial statements of issuers (large and small) relating to: (a) changes in accounting systems, (b) changes to contractual arrangements, (c) corporate governance and (d) litigation contingencies; and
- Human capital readiness with respect to: (a) education and training and (b) auditor capacity.
The SEC said it will continue following the Work Plan but did not offer specifics on when updates will be released. A final decision on whether to incorporate IFRS into the U.S. financial reporting system will be made during 2011.
Still unanswered is whether the Work Plan will be completed with enough time to allow the SEC opportunity to consider the full impact on U.S. financial reporting before a final decision is made. The IFRS train has momentum and putting on the breaks may cause an unfavorable ripple in the international community.
Not surprisingly, companies whose business interests span borders express the greatest support for IFRS. Conversely, corporations operating solely in the U.S. question whether a global international standard is needed. Conversion and educational costs are also of concern as highlighted in the SEC’s latest IFRS progress report, as well as from comments received on the original SEC IFRS Roadmap issued in 2008.
The International Accounting Standard Board (IASB) and Financial Accounting Standards Board (FASB) continue to focus on convergence. However, significant differences remain between IFRS and Generally Accepted Accounting Principles (GAAP). In many instances, IFRS does not provide in-depth industry-specific guidance as outlined under GAAP. This leaves more room for interpretation and possible disparity in reporting among peer businesses. Revenue recognition under IFRS is also significantly less extensive than under GAAP. Other notable differences include:
- The Last In First Out (LIFO) method is not permitted under IFRS;
- A single-step method for impairment write-downs is used in IFRS, as opposed to the two-step method used under GAAP;
- IFRS uses a different probability threshold and measurement objective for contingencies; and
- Curing debt covenant violations after year-end is not permitted under IFRS.
Those who support IFRS are encouraged by the level of attention and refinement in considering implementation issues. And, those with misgivings are at least encouraged more time will be spent evaluating the impact of IFRS before it becomes a U.S. standard.
Private Company GAAP
While the attention of IFRS is on public company reporting, private company stakeholders desire a simpler GAAP with fewer complexities. In response, the Financial Accounting Foundation (FAF), the AICPA and the National Association of State Boards of Accountancy (NASBA) formed a blue ribbon panel in 2009 to study the development of private company GAAP.
At its October 8 meeting, a majority of blue-ribbon panel members expressed support for a standard-setting model for private companies based on U.S. GAAP with exceptions for private companies and that the standards should set by a separate board under the FAF’s oversight. The panel is expected to make its recommendations to the FAF Board of Trustees in January 2011.
If IFRS is enacted, you may see larger private companies conforming to reporting standards of their public company counterparts for comparability. The IASB has also issued IFRS for Small and Medium-sized Entities (IFRS for SMEs), which is a modification and simplification of full IFRS aimed at meeting the needs of private company financial statement users.
Will the Dodd-Frank Act Impact IFRS?
The Dodd-Frank Act, signed into law on July 21, 2010, is designed to deter the type of events that led to recent financial meltdown on Wall Street. The Act represents the most sweeping financial legislation passed since the Great Depression.
Corporate governance, proxy rules and executive compensation extend the impact of Dodd-Frank to substantially all U.S. public companies, as well as certain foreign private issuers. This has prompted the European Union (EU) and other Group of Twenty Finance Ministers and Central Bank Governors (G20) countries to conduct in-depth studies of financial services risk and launch their own financial reform efforts.
How will Dodd-Frank affect IFRS adoption? With several hundred Dodd-Frank regulations yet to be written it’s difficult to predict. Since Dodd-Frank calls for more transparency in financial reporting, rule-making is sure to have an impact on U.S. companies required to comply with IFRS. For now, it appears that compliance with Dodd-Frank will be among the regulatory issues addressed as convergence efforts continue.
If the SEC decides that IFRS is the financial reporting protocol, U.S. companies will most likely not be required to comply until 2015, or later. Keep in mind, however, that if financial statements for three years are presented, this could impact issuers as early as 2013.
We haven’t reached our destination but the train is certainly headed toward IFRS — where U.S. companies will be reporting on the same basis as their global constituents. Financial statement preparers need to pay close attention to SEC developments as the IFRS landscape becomes clearer in the coming months.
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Bruce Zaret, CPA is an Advisory Services partner in the Dallas office of Weaver, the largest regional independent certified public accounting firm in the Southwest with offices in Austin, Dallas, Fort Worth, Houston, Midland, Odessa and San Antonio. He can be reached at (972) 448-9232 or firstname.lastname@example.org.