Why today’s perspective is not as clear compared to the dominant view two years ago when the SEC was discussing its roadmap to the adoption of IFRS for domestic registrants.
Where is the U.S. Securities and Exchange Commission (SEC) project on the adoption of International Financial Reporting Standards (IFRS) heading? Today, we have to admit this is a difficult assessment to make. Compared to the dominant view two years ago when the SEC was discussing its roadmap to the adoption of IFRS for domestic registrants, the perspective is not as clear.
Various factors explain this shift:
The financial crisis forced companies to put on hold some projects not seen as critical to manage and develop their operations. It is, therefore, not surprising that companies are not thrilled to have to convert to IFRS.
Companies still remember that actual costs incurred to implement Sarbanes-Oxley (SOX) were significantly higher than amounts projected by the SEC. As a result, the general view is that actual costs to complete the transition will be significantly higher than those projected by the SEC.
From the SEC standpoint, the transition to IFRS disappeared from the priorities on its agenda. First, there is enough to do with the impacts of the financial crisis and the financial reform. Second, the roadmap provides a clear timeline: 2011 for the final decision, 2014 or 2015 for the effectiveness of the transition, if any.
Some people tend to believe that the International Accounting Standards Board- (IASB) and the Financial Accounting Standards Board (FASB)-led convergence project removes the need for a global accounting standard, since the convergence will ensure there is sufficient comparability between the two standards. The acknowledgement that IFRS may lead to more diversity in accounting treatment linked with the convergence project has a negative effect on the transition since converged U.S. Generally Accepted Accounting Principles (GAAP) may be seen as just “another option.”
The SEC Continues Its ‘Due Diligence’
The SEC has been continuing its analysis and progresses have been made with the transition. As part of the analysis, the SEC issued in August a request for comments (PDF) on the transition to IFRS.
The comments period ends October 18, 2010.
The topics covered by the SEC in its requests are focused on the investors’ readiness to transition to IFRS and to IFRS:
- Investors’ current knowledge of IFRS
- Investors’ education processes on changes and timeliness (six questions)
- Estimated time to undertake the changes (two questions)
And the accounting community or is it a response to concerns expressed by investors? With this request for comments, the SEC shows that investors are an important piece of the equation for its final determination.
If the number of answers received by the SEC is an indicator of the level of interest of the financial community for this project, CPAs can easily conclude that there is very limited interest in this topic: as of September 30, the SEC posted only two answers for comment letters for 33-9134 (PDF) on its website. To put it in perspective, the SEC received approximately 200 comments letters on its proposal to the Roadmap.
On a side note, one intriguing aspect of this whole project is the disconnection between the limited number of people participating actively in the discussions around the IFRS adoption and the changes on Corporate America if the SEC adopts IFRS.
Is the Convergence Project a Valid Alternative to the Transition?
The Norwalk agreement is eight-years old and the convergence project is scheduled to be completed in 2011. This represents a great success especially considering the skepticism that existed at the time of the agreement about the capabilities of the two Boards effectively complete this task.
Though the convergence has not always been on top of their agendas when standards were being developed and adopted, the two Boards separately worked for years with their own view of what the convergence project meant. Other objectives, such as improvement of financial reporting have been more prevalent. As a result, some easy differences were solved (for example accounting for borrowing costs), while a few major items were addressed. Finally, a lot of pressure exists now on the two Boards to meet the 2011 deadline, whereas the most complex topics (such as revenue recognition, leases, financial statements) are still open.
One recurring thought around the convergence is whether this project is for the transition to IFRS or just the opposite in which case it will make it become obsolete.
One often hears the observation that once the two accounting standards are converged differences will be minimal and therefore there will be no need for the U.S. to move to IFRS. After all, differences that would exist may be not greater than those resulting from different options accepted under current IFRS.
The problem is that once achieved there is no insurance that convergence will be maintained over time:
- The two Boards will not be able to maintain their working relationship on standards development at the same level.
- Interpretations issued by the Emerging Issues Task Force (EITF) and IFRS Interpretations Committee, formerly known as International Financial Reporting Interpretations Committee (IFRIC), may generate significant differences in application of standards. EITF focuses more on providing guidance on specific situations, whereas the IFRS Interpretations Committee focuses more on providing guidance on general situations not covered by existing standards. The difference in number of interpretations issued by these two committees over the years reflects these different perspectives. Since 2001, the IFRS Interpretations Committee issued less than 20 interpretations, whereas during the same period the EITF issued roughly 120 interpretations. Without a coordinated effort of these two organizations, standards will diverge as the result of differences in interpretations.
- If the USA do not move toward IFRS it is probable that other members of the IASB will request that USA reduce their role with this organization. In such a situation, the USA will be less active in the development and adoption of the international standards.
The final consideration is the assessment of the cost of the transition. It is obvious that companies will incur direct expenses in order to complete their transition to IFRS. However, the final cost may be less important than foreseen because the convergence project leads to the adoption of new standards, which will generate implementation costs. Another aspect is that international groups have already subsidiaries applying IFRS and their control and processes were adjusted to reflect this set of rules (at least locally). Therefore, the transition to IFRS for U.S. companies may be less expensive and complex than it was in other countries.
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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, you can 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™.