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IFRS Roadmap Milestones

How is the SEC progressing on its 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.

Milestone 1: Improving Specific Accounting Standards

The FASB and the IASB are continuing their progress on accounting standard convergence. They hope to complete their convergence plan by 2011. Their objective is a set of common, high quality reporting standards for companies around the world. The FASB and IASB have made significant progress on some important standards, but still have work to do in order to reach their goal. The summary below includes the progress of both boards. On some projects one board has issued a standard while the other board is still in the discussion memorandum or exposure draft stage. Some of the major standards already addressed as well as being worked on include:

Complete or Significant Progress Made

  • Business Combinations
  • Fair Value Measurement
  • Consolidations
  • Liability and Equity distinctions
  • Financial Statement Presentation
  • Post Retirement Benefits
  • Revenue Recognition
  • Derecognition
  • Financial Instruments
  • Income Taxes (IASB only)
  • Joint Ventures (IASB only)

As you can see from the list above, the FASB and IASB are working hard on convergence and are trying to complete their work by 2011 at which time somewhat of a moratorium on modifying standards is expected to give companies a chance to transition to IFRS with a stable set of accounting standards.

Milestone 2: Improving the Structure and Funding of the IASB

The second milestone involves progress on improving the structure and funding of the IASB. The International Accounting Standards Board (IASB) is trying to improve its structure and funding. To date they have made progress, but still need to continue to work on establishing a structure and funding approach that global securities regulators will support. The most significant area left to be addressed is funding. Here is a summary of the progress made by the IASB.

  • The IASC Foundation governs the IASB and consists of 22 Trustees (six each from North America, Asia/Oceana and EU coupled with four Trustees from any region)
  • Phase 1 of IASC constitutional modifications were recently announced. The constitutional changes were made in an attempt to address recommendations made by the G-20 in their November 2008 financial crisis summit meeting
  • An IFRS Oversight Board was established. Members consist primarily of Securities Regulators (representatives from the SEC, the European Commission, the Japan Financial Services Agency, and the Emerging Markets & Technical Committees of the International Organization of Securities Commissions)

IASB Oversight Board

Milestone 3: Facilitating the use of interactive data (XBRL) under IFRS

Early this year the International Accounting Standards Committee Foundation (IASC Foundation) released the 2009 IFRS Taxonomy for comment. The comment period ended March 24. Development and approval of an IFRS Taxonomy is essential to being able to utilize XBRL for IFRS reporting. Taxonomies describe in detail the contextual information related to data tags used to describe and report business information.

The IASC Foundation also published an IFRS Taxonomy Module Manager with viewer functionality and an IFRS tool for use in open code environments (like Java, Groovy and Google Web Toolkit). XBRL is an open standard standard that is used to store and transport business information.

It is clear that the IASC Foundation is trying to facilitate the use of XBRL for IFRS reporting. Having issued a draft 2009 IFRS Taxonomy as well as a Taxomony Manager, IFRS tool and XBRL viewer for IFRS, the initial steps toward achieving the SEC’s third milestone are obviously underway. The IASC foundation is beginning to enable XBRL use for IFRS reporting.

Milestone 4: Updating the Education and Licensing of U.S. Accountants

Updating the Education of U.S. Accountants

University professors are beginning to analyze global accounting convergence and the potential adoption of IFRS by the United States. One such abstract is located here. A few IFRS textbooks are also becoming available including “IFRS 2008: Interpretation and Application of International Accounting and Financial Reporting Standards 2008” by Barry J. Epstein and Eva K. Jermakowicz and “Applying International Accounting Standards” by Keith Alfredson, Ken Leo, Ruth Picker, Paul Pacter and Jennie Radford.

Universities are beginning to prepare for inclusion of IFRS in their accounting curricula. Students are also beginning to realize that they will need to learn more about IFRS because it will be important in the future, even though it adds significantly to their curriculum.

In February 2009, a major CPA firm announced the awarding of $700,000 in grants to 26 colleges and universities to accelerate the preparedness of U.S. accounting students for eventual adoption of IFRS. Major CPA firms are also making a significant amount of information on IFRS available in the form of online materials and free webcasts.

Updating the Licensing of U.S. Accountants

In 2008, the AICPA issued an Exposure Draft that proposed inclusion of IFRS in the uniform CPA exam. The Exposure Draft proposed that the IFRS conceptual framework be tested and that additional testing of international standards occur if IFRS becomes generally accepted in the United States (the comment period has ended). The exposure draft proposing inclusion of IFRS in the CPA exam and comments to the exposure draft are available at http://www.cpa-exam.org/cpa/exposure_draft.html. The proposed content and skill specifications may be found there as well.

“The CPA Examination tests the knowledge and skills that are relevant for entry-level CPAs. In doing so, the public is protected,” said Craig Mills, executive director of Examinations for the AICPA. “That’s why the AICPA Board of Examiners, which oversees the exam, is already assessing strategies to incorporate IFRS into the exam.” Coverage of IFRS on the Exam is expected by the year 2012, but possibly sooner.

The AICPA published a request for volunteers to develop question on IFRS for the uniform CPA Exam. Volunteers will participate in a two-day workshop on preparing multiple-choice questions facilitated by AICPA test development experts. Additional development workshops will be organized throughout 2009 and 2010 (dates and locations to be arranged). A short presentation before each workshop will provide an overview of the CPA Exam and instruction on the multiple choice question development process. Applicants may send a resume or curriculum vitae to rwarias@aicpa.org

Milestone 5: Evaluating the early adoption experiences of a limited group of companies

The fifth IFRS milestone involves the SEC’s evaluation of the IFRS adoption experiences of companies that elect to adopt IFRS early. The SEC has set forth rules that would allow some companies to adopt IFRS as early as fiscal years ending after December 15, 2009. To adopt early, a company would need to meet both of the following criteria:

  • IFRS would have to be the most-often-used set of standards by the 20 largest companies in an entity’s industry
  • The entity must be among the largest 20 public companies by market capitalization in its industry. Industries are defined by a company’s two digit SIC code.

The SEC’s has a method for determining eligibility and a process for requesting a letter of no-objection to file using IFRS (as published by the IASB). Qualifying companies would be permitted to file financial statements based on IFRS for fiscal years ending after December 15, 2009

Whether the early adoption experience is positive or negative, it may influence the decision to mandate the use of IFRS for U.S. companies. Of greater concern is how many eligible companies will choose to adopt IFRS early. The nature of the IFRS Roadmap is that the decision whether to adopt is subject to the SEC’s “go”/“no-go” vote to be taken by 2011. In the public meeting where the SEC commissioners voted to approve the IFRS Roadmap, one of the commissioners stated that staying with U.S. GAAP had to “on the table” when the SEC votes whether to adopt IFRS. If a company early adopts IFRS the commissioner anticipated that they would need to be able to return to U.S. GAAP if necessary, an obvious disincentive to early adoption.

Yet there may be advantages to early adoption. Global companies could reap significant cost reductions from using one accounting standard in all of their locations throughout the world. Companies may want to adopt early, despite the risks for one or more of the following reasons

  • Implementation of a truly global finance function
  • Beginning to implement streamlined global processes and procedures
  • The ability to comparable financial results across the organization globally
  • Development of common technology platforms and applications
  • Sharing resources globally across the organization
  • Better comparability to competitors that use IFRS
  • A significant amount of revenue or operations operating in countries that require IFRS

There could be other benefits as well including improved financial results from the change in to principles based accounting standards, improved access to global capital markets, streamlined M&A activities, streamlined audits, simplified global tax planning, etc.

Milestone 6: Timing of future rulemaking

The SEC decision on when to migrate to IFRS has been the topic of much speculation. Under former Chairman Cox, the SEC was a strong advocate of moving to IFRS. During his term the mandatory reconciliation to U.S. GAAP for foreign private issuers was eliminated for those who file with the SEC using IFRS as issued by the IASB. In addition, the commissioners voted to issue a draft Roadmap to IFRS (“Roadmap”) for public comment. The Roadmap envisions migrating to IFRS beginning in 2014 with some companies eligible to adopt early for fiscal period ending after December 15, 2009.

The tone at the SEC appears to have changed under the leadership of Chairman Schapiro. Schapiro commented about IFRS during her senate confirmation hearing by mentioning her concerns regarding the roadmap. “I will take a deep breath and look at this entire area again carefully and I will not necessarily feel bound by the existing roadmap that is out for public comment,” Schapiro declared, adding “I will proceed with great caution so we don’t have a race to the bottom,”. During her confirmation hearing Schapiro made her views clear when she said, “the cost to switch from U.S. GAAP to IFRS is going to be extraordinary” and “we have to think carefully about whether imposing those sorts of costs on U.S. industry really makes sense.”

When the SEC issued its draft Roadmap for public comment, they predicated the transition to IFRS upon seven milestones. Based on the progress made on these milestones, one of which considers the timing of future IFRS rulemaking, a decision would be made about when to transition by 2011. The SEC is hoping to analyze the results of early adopter experiences (see last post). A favorable outcome on early adopter experiences would be a harbinger for earlier (“on-time”2014 adoption) adoption of IFRS and unfavorable experiences would point toward a delay in adoption.

There are risks to adopting IFRS and to not adopting IFRS. The risks of adopting IFRS are relatively intuitive such as cost of adoption, adoption error or omission risk, risk of limited or no ROI on adoption, lack of expertise risk and so on. What is less intuitive is the risk of not adopting IFRS. Some of these risks include lack of access to global capital markets, lack of comparability with international competitors, lack of cost reduction through international efficiencies (elimination of multiple GAAPs, multiple accounting policies, multiple accounting applications, and the like).

Most people agree that having a single global accounting and reporting standard would be a very good thing. With about 120 countries using IFRS and one country using U.S. GAAP, it is clear that there is only one way a global accounting standard will be achieved is if the U.S. adopts IFRS. By 2011 we will be the only major nation in the world not using IFRS. It seems clear that U.S. adoption of IFRS is ultimately inevitable.

I am expecting the SEC to issue a revised Roadmap to IFRS later this year. It would not surprise me if the commissioners delayed adoption a couple of years. We will learn what their thinking is about the timing of future rulemaking then.

Milestone 7: 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? How will adoption of IFRS affect your company?

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2 Comments leave one →
  1. July 14, 2012 12:22 pm

    The Staff of the SEC have released their report entitled Work Plan for the Consideration of Incorporating IFRS into the Financial Reporting System for US Issuers.
    It is a 127 page comprehensive study of the feasibility, the present situation and what might possibly lie ahead. The report, however, reflects a positive attitude towards US adoption of IFRS. If any member would like a copy of the report please email me at cliffbeacham@hotmail.com

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  1. SEC Views on IFRS – Part 1 « IFRS USA

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