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IFRS Roadmap Milestones: Part 7

July 13, 2009

This post is the seventh of seven posts about progress on the IFRS Roadmap milestones. As a reminder, here is a list of the Milestones. The SEC will judge progress on these milestones as a pre-requisite for moving forward with a mandate for IFRS adoption.

IFRS Roadmap Milestones

  • Improving Specific Accounting Standards
  • Improving the Structure and Funding of the IASB
  • Facilitating the use of interactive data (XBRL) under IFRS
  • Updating the Education and licensing of U.S. Accountants
  • Evaluating the early adoption experiences of a limited group of companies
  • Timing of future rulemaking
  • Sequencing of companies required to use IFRS

The first four milestones are conditions precedent to the adoption of IFRS in the United States. The remaining three milestones pertain to the experience of adopting IFRS and how IFRS should be adopted in the United States.

Sequencing of companies required to use IFRS

In my view, the eventual adoption of IFRS in the United States is certain. What is not certain is when IFRS will be adopted here and whether IFRS adoption will be sequenced as proposed in the SEC’s preliminary IFRS Roadmap or adopted all at once using a “big bang” approach. I expect the SEC’s new leadership to shed some light on its views later this year when a revised roadmap is likely to be issued. It would not surprise me if they elected to defer mandatory adoption a couple of years due to current economic pressures. This seventh roadmap milestone involves the SEC’s decision on whether, when and how to sequence the adoption of IFRS.

The SEC proposed its IFRS Roadmap on November 14, 2008 and the comment period for the proposed Roadmap ended April 20, 2009. Under the proposed Roadmap, the SEC envisioned a sequenced approach to adoption pursuant to which a limited number of US filers would be permitted at their option to adopt IFRS early beginning for fiscal periods ending after December 15, 2009. The mandatory adoption of IFRS would follow with large accelerated filers implementing IFRS for fiscal years ending on or after December 15, 2014, accelerated filers implementing IFRS for years ending on or after December 15, 2015, and non-accelerated filers implementing IFRS for years ending on or after December 15, 2016. This timetable is thought to allow filers time to implement IFRS books, records and internal accounting controls for the fiscal year end reporting periods from 2012 to 2014 for large accelerated filers, 2013 to 2015 for accelerated filers, and 2014 to 2016 for non-accelerated filers.

The staged approach is based on the premise that larger SEC filers would be better able to allocate resources to the IFRS transition more quickly than smaller filers. By staging or sequencing IFRS adoption, the SEC would also allow later adopters the ability to learn from the adoption experiences of larger filers. In addition, a staged transition may also help manage resource demands on consultants and other market participants.

While sequenced adoption of IFRS permits some transition cost avoidance, sequencing would result in non-comparability of financial information due to application of the IFRS transition provisions at differing dates. Staging the transition would temporarily create a two GAAP system in the United States for at least three years. Further, it would require investors to be familiar with IFRS and U.S. GAAP as well as how each affects the financial statements of target companies when comparing investment alternatives.

The SEC’s desire to “ratify” its Roadmap as late as 2011 is contingent on achieving satisfactory results with respect to each of the seven roadmap milestones. Ratifying the roadmap timetable as late as 2011 limits the amount of clarity that IFRS adopters have when choosing whether to adopt IFRS early beginning in 2009. This is likely to reduce early adoption of IFRS due to roadmap uncertainty. In addition, approving the Roadmap in 2011 allows very little time to plan for an orderly and efficient transition to capturing IFRS accounting information beginning in the periods 2012 to 2014 for large accelerated filers.

With the current roadmap uncertainty, what should you do now to prepare for the eventual adoption of IFRS by your company?

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