The SEC on Friday released a long-awaited road map for the transition by U.S. public companies to the use of International Financial Reporting Standards (IFRS).
The Commission set a longer-than-expected 90-day comment period for the proposal, which puts forth milestones that, if met, could lead to the required use of IFRS by U.S. issuers beginning in 2014. The Commission is also seeking comment on two alternative proposals under which U.S. issuers that elect to use IFRS would disclose U.S. GAAP information.
The 165-page document echoes the broad outlines of the plan unveiled Aug. 27, when the Commission voted unanimously to seek comments on the road map. Under the proposal, the SEC would decide in 2011 whether to proceed with rulemaking to require that U.S. issuers use IFRS beginning in 2014. Early adoption beginning with filings in 2010 would be allowed for certain issuers (see the milestones below for details on eligibility).
“The Commission has long expressed its support for a single set of high-quality global accounting standards as an important means of enhancing … comparability,” the proposal states. “We believe that IFRS has the potential to best provide the common platform on which companies can report and investors can compare financial information.”
The 90-day comment period shifts the potential adoption of the road map to an SEC led by President-elect Barack Obama’s pick to succeed current Chairman Christopher Cox, who has said he intends to resign at the end of President Bush’s term.
The road map
spells out seven milestones that would influence the SEC’s 2011
decision on whether to move forward. The milestones are:
- Improvements in accounting standards
- The accountability and funding of the International Accounting Standards Committee Foundation
- Improvement in the ability to use interactive data for IFRS reporting
- Education and training in the U.S. relating to IFRS
- Limited early use of IFRS, beginning with filings in 2010, where this would enhance comparability for U.S. investors. Eligibility would be based on both the prevalence of the use of IFRS and the significance of the issuer in a given industry. The SEC estimates that a minimum of 110 companies could be eligible.
- The anticipated timing of future rulemaking by the Commission
- Implementation of the mandatory use of IFRS, including considerations relating to whether any mandatory use of IFRS should be staged or sequenced among groups of companies based on their market capitalization.
Under a staged transition, IFRS filings would begin for large accelerated filers for fiscal years ending on or after Dec. 15, 2014. Remaining accelerated filers would begin IFRS filings for years ending on or after Dec. 15, 2015. Non-accelerated filers, including smaller reporting companies, would begin IFRS filings for years ending on or after Dec. 15, 2016.
The Commission believes a staged rollout would help mitigate the costs of the shift to issuers and the resource demands on auditors, consultants and others. But the Commission acknowledges in the document that a staged rollout would lead to a lack of comparability of financial information and would temporarily create a dual system of reporting that would require investors to be familiar with U.S. GAAP and IFRS.
The road map spells out two alternative proposals under which U.S. issuers that elect to use IFRS would disclose U.S. GAAP information.
Under the first alternative, Proposal A, a U.S. issuer that elects to file IFRS financial statements would provide the reconciling information from U.S. GAAP to IFRS called for under IFRS 1, First-time Adoption of International Financial Reporting Standards, in a footnote to its audited financial statements.
Under the second alternative, Proposal B, U.S. issuers that elect to file IFRS financial statements would provide the reconciling information from U.S. GAAP to IFRS required under IFRS 1 and would also disclose on an annual basis certain unaudited supplemental U.S. GAAP financial information covering a three-year period.
The Commission stressed the importance of uniformly applying IFRS. “Any decision we may take to expand the use of IFRS to U.S. issuers would necessitate our evaluation of whether global developments support the assertion of IFRS as the single set of high-quality globally accepted accounting standards that is applied consistently across companies, industries and countries,” the proposal states.
The release does not address the method the Commission would use to mandate IFRS for U.S. issuers. One of the options, according to the road map, would be for FASB to continue to be the designated standard setter for purposes of establishing the financial reporting standards in issuer filings with the Commission. Under that option, FASB would likely incorporate all provisions under IFRS and all future changes to IFRS directly into U.S. GAAP. Similar approaches have been used by a “significant number of other jurisdictions when they adopted IFRS as the basis of financial reporting in their capital markets,” the document states.
Discussion of potential costs and benefits is part of the road map. In industries with a large number of companies using IFRS, allowing U.S. issuers to move to IFRS could help eliminate accounting differences within the industry and potentially help investors by improving comparability, the Commission states. For the large companies the Commission expects to be eligible for early adoption, based on data used for purposes of the Paperwork Reduction Act, the SEC estimates the costs for issuers of transitioning to IFRS would be approximately $32 million per company and relate to the first three years of filings on Form 10-K under IFRS. Total estimated costs for the approximately 110 issuers estimated to be eligible for early adoption would be approximately $3.5 billion.
The road map is available at www.sec.gov/rules/proposed/2008/33-8982.pdf. The comment period ends 90 days after the document is published in the Federal Register.