For U.S. GAAP, the end of an era could be in the making. In August, the SEC unveiled a proposed road map that begins to widen the acceptance of International Financial Reporting Standards. The plan could lead to a requirement for U.S. public companies to begin using IFRS by 2014.
“It may be a very long time indeed before the world’s six and a half billion people can all speak in the same tongue,” SEC Chairman Christopher Cox said at the meeting during which the commission agreed to seek comments on the proposal. “Fortunately, we won’t have to wait nearly as long for the language of business and finance to converge. One of the more revolutionary developments in the world’s capital markets is the remarkably quickening pace of acceptance of a true lingua franca for accounting.”
The road map would allow 110 of the largest publicly held companies—equal to 14% of U.S. market capitalization—to begin using IFRS voluntarily for their 2009 financial statements. The limited early use of IFRS is one of seven milestones the SEC would weigh in 2011 when deciding whether to mandate the use of IFRS. The proposal, now in the comment phase, leaves open the option of sequencing the rollout based on market capitalization.
AICPA President and CEO Barry Melancon expressed support for the SEC moving ahead with the proposal and for the concept of moving to a single set of high-quality global accounting standards for public companies. “The SEC noted education and training as one of the key milestones for the transition,” Melancon said. “The AICPA is working to help members and future professionals understand IFRS and acquire the necessary skills to use these standards.”
Arleen R. Thomas, AICPA senior vice president–member competency and development, said “the Institute supports an orderly transition from U.S. GAAP to IFRS and believes the U.S. capital markets will insist on IFRS. The SEC’s plan continues a robust and thoughtful debate that is critical as the transition occurs.”
The JofA asked a group of other accounting thought leaders for their views on the SEC’s proposal. Here are excerpts of their comments:
UNDERSTANDING THE FULL IMPACT
D.J. Gannon, leader of the Deloitte IFRS Center of Excellence
Many have focused solely on the technical accounting impacts related to IFRS. Understanding the broader impacts that IFRS may have is important to preparing a successful implementation. Assessing other issues like tax, internal processes and controls, regulatory and statutory reporting, technology infrastructure, and organizational issues such as treasury and cash management, legal and contracts, compensation and human resources, and communication is key.
While conversion to IFRS on a consolidated basis may be a few years away, companies can start taking advantage of opportunities now to convert to IFRS for statutory reporting purposes overseas. Many countries already permit the use of IFRS. Converting to IFRS for statutory reporting purposes for subsidiaries in those countries may provide an opportunity to develop a multiyear strategy and a detailed road map for conversion to IFRS. By leveraging the training and experience gained on these statutory conversions, companies can be better positioned to execute a consolidated IFRS conversion in the future.
PREPARATION BEGINS NOW
Dave Kaplan, international accounting leader, Pricewaterhouse Coopers
IFRS is well-established and a sufficiently high-quality and robust system of financial reporting, and it will become part of our lives. As a profession, it’s in our best interest to learn about it and become proficient in it.
One of the challenges is the issue of GAAP reconciliation. The SEC laid out two options in its proposal—one calling for the traditional IFRS first-time adoption reconciliation, the other requiring that step plus an ongoing unaudited reconciliation of the financial statements from IFRS to U.S. GAAP. Clearly the second one is a more costly approach for companies and for investors who at the end of the day would bear the expense. A well-run company would want to address that by running parallel or dual systems.
IFRS EXPECTED TO INCREASE INVESTOR CONFIDENCE
Cindy Fornelli, executive director, Center for Audit Quality
We believe investors would benefit substantially if the participants in all of the major markets agreed on a common, easily accessible and understandable accounting language. If IFRS is to become the favored language of the accounting and business worlds, it should speak to the world’s investors first and foremost.
Sixty-two percent of investors surveyed by the CAQ [in July] told us the creation of a single, uniform, international set of accounting standards would give them a higher level of confidence. Our hope is that IFRS will enable investors to more easily compare financial results of publicly traded companies in every corner of the world.
DON’T PUT INVESTORS IN THE BACK SEAT
Jack T. Ciesielski, owner of R.G. Associates Inc., former member of FASAC, AcSEC and FASB’s EITF
I certainly support convergence, but I’m cautious. I don’t want investors to suffer a loss of information or a decrease in the quality of information that they’ve become accustomed to receiving under U.S. GAAP. This is a monumental undertaking, almost as complicated as a moonshot, and I would hate to see investor information take a back seat to political expediency.
There are plenty of places where IFRS and U.S. GAAP are close, but the nuances of standards application can propel differences that last for years. There are plenty of accounting choices between the two that can produce accounting differences that last for years. How will the convergence process deal with these lasting differences? Or any differences, for that matter?
Some are obvious: We allow choices between LIFO and FIFO, while under IFRS, LIFO cannot be used. If we were to eliminate LIFO usage here, would the SEC require “early adopters” to restate past statements under FIFO assumptions so that investors would clearly see the change’s effect on trends? That could be a very cumbersome, perhaps impossible, task for some firms. Would the SEC give them a free pass?
I am concerned that in speeding up the U.S. to achieve convergence with other IFRS-using regimes, the SEC may give up too much from the investor’s point of view to hasten the process. The benefits to investors have often been framed as “more choices, better information,” but more choices don’t always mean better investing, and better information depends on how standards are applied.
FIRST STEPS FOR ISSUERS
Aaron Anderson, director, IFRS policy and implementation, IBM
While the accounting differences between IFRS and U.S. GAAP may be significant for your company, there are several fundamental questions that should be answered before this comparison is started.
First, where are you doing IFRS today? If you have operations in Europe, Australia, Israel, China and dozens of other countries around the world, you’re likely preparing statutory reports in some form of IFRS already. In answering this question, you will have to go deeper than the name of the country’s accounting standard. Specifically, is a country’s GAAP really “IFRS by a different name” or is it called IFRS—but is not?
Second, what adjustments are you currently making between your U.S. GAAP books and your statutory books prepared in accordance with IFRS? In most cases, these financial statements are audited and will provide you with a good starting point for determining the GAAP differences impacting your company.
Third, what benefits can you derive from the use of one GAAP for both statutory and consolidated reporting? That is, would adoption of IFRS globally by your company create opportunities for a broader finance transformation project that would increase standardization, centralization of processes, and realization of economies of scale? Are you a candidate for opting to report in IFRS under the criteria proposed by the SEC?
Finally, who in your organization would be impacted by a change from U.S. GAAP to IFRS? Studies have indicated that a strong internal, cross-functional team is a key element of a successful IFRS conversion. Identifying the various functional impacts of a change in accounting standards—and getting the buy-in from the leaders of those functions— will allow you to focus your company’s response to IFRS.
ACCOUNTING EDUCATION: READY FOR THE CHALLENGE
David R. Campbell Sr., head, Department of Accounting, Drexel University
From an educational perspective we are better positioned than most countries for the transition, since the United States has one of the strongest platforms for developing entry-level accounting professionals globally.
We will definitely be challenged. However, the theoretical foundations underpinning U.S. GAAP and IFRS are similar— and merging through convergence—and I’m confident that accounting educators will respond to our changing environment and deliver high-quality students ready to enter and provide leadership in the global IFRS financial reporting arena in the coming years.
Based upon my experience in Europe during the transition period from national GAAPs to IFRS, I view the SEC road map as an opportunity to rethink financial reporting across all dimensions. Those in the C-suite should not overlook their increased responsibilities in setting sound accounting policies that fit their business model, and they must be ready to explain and justify these policies in the context of the IFRS framework.
CHOOSING A PATH FOR PRIVATE COMPANIES
Judith O’Dell, chair, Private Company Financial Reporting Committee (PCFRC)
In all of the publicity surrounding the SEC road map, little mention has been made of its effect on private companies. For the past year, the PCFRC has been discussing and presenting at CPE sessions possible scenarios for private companies once public companies are required to convert to IFRS.
We see five possibilities: IASB’s International Financial Reporting Standard for Private Entities, which is in development; a U.S.-adapted version of the Private Entities document; IFRS with differences for private companies; separate U.S. private company GAAP; U.S. GAAP maintained and updated for private companies.
There are pros and cons to each of these approaches, and some are dependent on maintaining a standard-setting body in the U.S. One question to be answered is whether the IASB’s Private Entities document will meet the needs of and be accepted by users of U.S. private company financial statements.
Since the AICPA has approved the IASB as a GAAP-setting body, a private company more easily can adopt IFRS tomorrow or adopt the Private Entities document once it is approved by the IASB.
One advantage smaller private companies have over some of their foreign counterparts is the ability to report using income tax or cash basis financial statements, and I don’t see that changing.
Online-only news analysis:
MORE THAN AN ACCOUNTING EXERCISE
Danita Ostling, Americas IFRS leader, Ernst & Young
Given the strength and size of the U.S. capital market, we cannot afford to be left behind. In today’s global economy, it’s vital we speak the same “language.” More than 100 countries require, permit or base their standards on IFRS—and that number is increasing.
Conversion to IFRS is more than an accounting exercise and will have an effect outside the finance function in areas such as information technology, human resources and investor relations. Education is critical. And while 2014 is years away, all public companies need to allow time to plan and address issues surrounding the conversion.
MANY POTENTIAL BENEFITS; TRAINING AND EDUCATION CHALLENGING
Paul Munter, partner, Department of Professional Practice–Audit, KPMG
We believe that the move to a single set of high-quality, globally accepted accounting standards has the potential to provide many benefits to U.S. companies and to U.S. capital providers. We also recognize that there will be challenges to the process of companies’ conversion from U.S. GAAP to IFRS.
One of the challenges is the need for training and education, which the SEC has identified as a milestone in its proposed road map. Preparers, auditors and investors will need to be educated on IFRS and its application. Additionally, IFRS will need to become more fully integrated into college and university curricula so that the preparers, auditors and investors of the future understand IFRS.
The AICPA developed www.ifrs.com to provide access to IFRS publications, articles, conferences, educational courses, videos and links to additional sources of information.
For more on the SEC road map, visit www.sec.gov/spotlight/ifrsroadmap.htm.