IFRS Adoption in the United States: Hurry Up and Wait
(This article on IFRS adoption in the United States was contributed to Corporate Compliance Insights by Mr. Ken Marshall, Co-leader of Ernst & Young LLP’s IFRS Markets team in the United States.)
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Hurry Up and Wait: IFRS Adoption in the US
If economics be the dismal science, then the global slump that began in 2007 makes it seem still more so. With America’s regulators preoccupied with managing the credit crisis and its companies facing the imperative to cut costs — including on projects that require a long-term commitment of resources, what once appeared almost certain momentum toward US adoption of International Financial Reporting Standards (IFRS) has slowed.
At the same time, there seems near universal agreement that a single global set of accounting policies and financial reporting standards would benefit investors. International standards setters and regulators, including the US Financial Accounting Standards Board (FASB), its counterpart the International Accounting Standards Board (IASB), and the US Securities & Exchange Commission (SEC) all share the view that comparability between US and other countries’ accounting standards will increase transparency in the global marketplace and protect investors.[1]
In its proposed “Roadmap” issued in November of 2008, the SEC notes that its support of one international standard dates at least to 1988, and that IFRS is the optimal means to achieving this goal:
The increasing acceptance and use of IFRS in major capital markets throughout the world over the past several years, and its anticipated use in other countries in the near future, indicate that IFRS has the potential to become the set of accounting standards that best provide a common platform on which companies can report and investors can compare financial information.[2]
US filers largely agree, as expressed in comment letters on the proposed Roadmap directed to the SEC before the comment period ended on April 20 of this year.
But despite the ostensible support of the SEC and favorable comments from US filers, progress toward IFRS conversion in the US has been overshadowed by the macroeconomic problems afflicting global markets.
Since the end of the comment period, the SEC’s conversion timeline and next steps toward adoption have not been updated. In fairness, the SEC has had other major issues to manage in the last year, including a change in the White House, the challenges presented by the financial crisis, the necessity to investigate massive frauds, and ongoing oversight responsibilities in an environment where Congress has increased its scrutiny of all regulatory agencies.
Delay or Deliver IFRS Adoption: What Will the Future Bring?
As global markets increasingly interact, the need for consistent standards is patently clear. More than 110 countries already require, permit or base their standards on IFRS, and the number is growing. Given the strength, size and global reach of the US capital markets, the US cannot afford to remain an outlier. There will be a cost to the US economy and to investors should we not adopt IFRS.
Converting to IFRS will benefit global companies, affording them the opportunity to improve processes, eliminate parallel accounting across international jurisdictions, and streamline accounting and financial systems. IFRS adoption will not only affect the accounting and reporting functions. It also significantly affects IT systems and tax reporting, as well as functional areas such as internal audit, performance management, training and development, HR and compensation, investor relations, legal (i.e., contracts) and more.
But any benefits of conversion still look far in the future to many large US SEC-registrants. Capital spending is constrained; project spending is constantly being scrutinized; and the implications of IFRS conversion are only slowly percolating up to the C-suite.
Company leaders also know that an ongoing process of converging standards by FASB and IASB will gradually align US GAAP and IFRS in some key areas, so certain challenges of converting to IFRS will be addressed over time anyway. These include important areas such as revenue recognition, consolidation, lease accounting, fair-value accounting and hedge accounting.
Milestones and Progress Steps: Will 2011 Bring the Change?
To sum up the sentiment of many executives, board members, and finance personnel, while reviewing the longer-term implications of IFRS seems prudent, many believe it too soon to spend any significant effort on an IFRS conversion project. This sentiment is reinforced by continuing uncertainty about the timing of the SEC’s announcement of a required adoption date.
In its proposed Roadmap, the SEC detailed discrete milestones that it would consider progress on in deciding whether to formally adopt a timeline for requiring US filers to convert. These milestones include the following:
- Improvements in IFRS accounting standards
- Education and training relating to IFRS
- Accountability and funding of the International Accounting Standards Committee Foundation (IASC)
- Improvements in the use of interactive data (XBRL) for financial reporting
The proposed Roadmap discusses an adoption date for US public companies of 2014, 2015 or 2106 – depending on the size of the issuer. However, in its proposed Roadmap, the SEC indicated that it did not expect to make a decision about whether to move forward to require IFRS until 2011, when it will evaluate progress on the milestones, but ultimately will base its decision on what is best for investors and the capital markets.
However, in the opinion of many, if the SEC abides by a conversion date of 2014 but waits to announce such a requirement until 2011, large US filers would not have sufficient time to prepare and implement an efficient conversion, will face increased costs, and will run a further risk that education and training will lag the need for competent resources before, during, and after the conversion.
The potential benefits of IFRS conversion are real. Strategic and proactive companies will emerge from the process with more streamlined financial reporting and tax reporting capabilities, as well as enhanced efficiency. They will have integrated global accounting systems, with substantially reduced need to abide by local statutory reporting in different jurisdictions. And investors worldwide would be able to count on having financial statement comparability across all major economies — including the US. This promises to be an enormous benefit as public investment and private capital increasingly cross borders.
Conversion vs. Convergence: The Uneasy Balance
A firm deadline for IFRS adoption is necessary to spur conversion planning, and to encourage US accounting professionals and executives to become educated about IFRS. But it is also important to acknowledge the ongoing effort of the US Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to converge specific accounting standards over time.
As noted, many regulatory leaders, including members of FASB and the SEC, have historically supported adoption of a single set of high-quality global accounting standards. FASB and IASB together issued their own “Roadmap” (a.k.a., the “Memorandum of Understanding,” or MoU) in February 2006 that detailed how they planned to converge standards, an ongoing effort scheduled for completion in 2011.[3]
Convergence will bring the US GAAP and IFRS closer together, as IASB and FASB seek to issue new, aligned standards such as for revenue recognition and lease accounting, as well as for the principles governing how financial statements are presented. As standard setters issue updates, US companies will adjust to ongoing changes in US GAAP, thereby gradually converging with IFRS.
This convergence promises to make the task of converting to IFRS easier, but gradual convergence will not resolve all challenges. While the goal of the joint FASB and IASB convergence projects is to issue identical standards, differences in the two bodies of accounting literature likely will remain. Despite their best efforts, as of this writing the IASB and FASB have not yet been successful in issuing even a single identical standard. The first major area addressed under the convergence project was business combinations, but the resulting standards — while substantially aligned — still contain important differences.
Even if the FASB and the IASB complete their ambitious work program by 2011, other standards will continue to evolve and divergent approaches will persist. So a “flip-the-switch” conversion moment will be necessary if we are to achieve the overarching objective of a single global set of accounting and financial reporting standards. And successful conversion will require many functional areas to work together on IFRS readiness, strategy and planning — from an early diagnostic phase through post-adoption review.
Conclusion
The mood of US companies and financial markets has recently become more buoyant. Whether this is a long-term upward trend remains tough to predict. Harder to forecast is whether market forces and/or the current US administration will favor issuing some pronouncement on US adoption of IFRS prior to 2011.
But setting a firm conversion date remains critical to prompting companies to initiate planning.
Without such a date, company executives, Boards, and Audit Committees have little incentive to plan for an eventual transition, and may struggle to prioritize an IFRS project over other mission-critical IT systems and internal changes. They face the possibility of a diminished pool of experienced resources to perform IFRS conversion work once it becomes necessary.
Conversely, companies that plan sooner for the conversion will have more time to implement the project, and will benefit accordingly — from increased efficiencies, a smoother transition, and lower project costs.
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Kenneth Marshall is Co-leader of Ernst & Young LLP’s IFRS Markets team in the United States, developing conversion methodology and enablement tools for projects involving IFRS, as well as global resource development, implementation planning, and client service delivery.
His responsibilities also include liaising with academia, developing curricula for firm-wide training, and promoting professional and client networks in the marketplace.
The views herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP.
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[1] Securities and Exchange Commission, “Roadmap for the potential use of financial statements prepared in accordance with International Financial Reporting Standards by US issuers,” 17 CFR Parts 210, 229, 230, 240, 244 and 249 [Release Nos. 33-8982; 34-58960; File No. S7-27-08] RIN 3235-AJ93, p. 10. View at www.sec.gov.
[2] Ibid., p. 13.
[3] “A Roadmap for Convergence between IFRSs and US GAAP—2006-2008: Memorandum of Understanding between the FASB and the IASB,” a joint publication of the FASB and the IASB, 27 Feb. 2006. View the press release online at www.fasb.org/news/nr022706.shtml. See also the update memorandum, “Completing the February 2006 Memorandum of Understanding: A progress report and timetable for completion,” September 2008. View online at www.fasb.org/intl/MOU_09-11-08.pdf.
* – IFRS adoption image credit: Mirage Global
Tags: Accounting, Ernst & Young, GAAP, IFRS, IFRS adoption, International FInancial Reporting Standards, Ken Marshall, sec
