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The drop-dead date for a single set of world-wide financial reporting standards? Don't ask.
Marie Leone, CFO.com | US
June 17, 2008
Like geeky high school sophomores trying to screw up the courage to ask the homecoming queen to the prom, participants at yesterday's accounting forum at Baruch College couldn't quite bring themselves to ask for what they wanted: a date.
Despite the presence of Securities and Exchange Commission officials Conrad Hewitt and John White at the forum—and despite frequent allusions to the need for a firm date—participants never directly asked by when, exactly, the SEC will mandate that U.S. companies file financial results using international financial reporting standards.
That was, however, what they wanted to know. Most of the 35 other members of the panel, which was sponsored by the Financial Accounting Standards Board, made a point of noting that they could better deal with the inevitable switch from U.S. generally accepted accounting standards to IFRS if they had a firm date. "The ball is very much in the court of the SEC," remarked FASB chairman Robert Herz.
Shareholders are looking for a "date certain" order from the SEC, said panelist Gail Hanson of the Wisconsin Investment Board, who is a former CFO of Cobalt Corp. Speaking for the investor community, Hanson noted that shareholders want to know that the regulator will give companies "sufficient" lead time to make the switch.
Meanwhile, IFRS has become a "just-in-time" training issue for large accounting firms, said Sam Ranzilla, a committee member of the Center for Audit Quality and a KPMG partner. Ranzilla said that he could mandate IFRS training for everyone at KPMG.
But if there doesn't end up being a reason to use it for a year or more, it will be forgotten and the firm will have wasted a lot of time and money. "Tell me a due date, then I'll deal with it. People are too busy making a living [to start preparing for IFRS when the effective date is unknown]," added Judy O'Dell, the president of FASB's private companies financial reporting committee and CFO of a family-owned real-estate and construction firm. Many private companies will likely follow in the accounting footsteps of their public-company counterparts and report results using IFRS within five to seven years, she said.
Indeed, many U.S. multinationals already report using IFRS in overseas subsidiaries. Further, in November 2007, the SEC allowed foreign companies to file their financials in IFRS, rather than require them to reconcile them to U.S. GAAP as they had been previously required to do. By February, the SEC proposed that it give American companies the option of reporting using IFRS immediately and mandate such accounting in the future. That proposal is still being reviewed.
Since 2002, FASB and the International Accounting Standards Board have been working together on a joint convergence project to harmonize U.S. GAAP and IFRS. Their approach has been to tweak existing standards and adopt similar ones; come to a consensus on converging more disparate rules; and replace poorly-constructed or out-of-date standards. That entire effort is expected to take another three to five years to complete.
While panel members called on the SEC to set a date, Hewitt, the agency's chief accountant and panelist, suggested that moving to IFRS is a foregone conclusion. "I think we should be focused on implementation of switching to IFRS," he said.
Citing recent speeches by SEC chairman Christopher Cox, Hewitt noted that the commission is slated to take up the issue of IFRS rulemaking later this summer. The chief accountant said he was "convinced" that the rest of the world would make the switch to IFRS within the next three years and that the United States shouldn't be left behind.
Rick Murray of the U.S. Chamber of Commerce also called for convergence and implementation "as quickly as possible," as did Barry Melancon, president and chief executive officer of the American Institute of Certified Public Accountants. Agreeing with Hewitt that "the focus should be on implementation" Melancon stressed the need to get the word out to accountants that IFRS is coming. "I think we have to now go over the top with awareness [campaigns]."
A recent survey of AICPA members found that less than half (42 percent) of the 1,240 respondent had heard "a great deal" about IFRS, while 48 percent had "heard something" about the international standards.
Early Is a Relative Term
It's likely—although by no means a lead-pipe cinch—that an SEC mandate to use IFRS is about three to five years away. Hewitt said the SEC has already asked the AICPA to include "something about IFRS" in the institute's auditing standards and education programs and has asked academics to include international standards in new text books.
Investor education about the new standards will also be "a big milestone" for the SEC, he said. "Please stay tuned to see what we come up with."
Regarding implementation plans, panelists speculated on whether the SEC would order a gradual adoption of IFRS, thereby giving early adopters a chance to test-drive the conversion. The other choice is to set a date on which all public companies would be required to have completely moved over to IFRS. Based on the AICPA survey, only 9 percent of those polled said that if given the option, they would adopt IFRS "early."
Most panelists were skittish about advocating giving companies an early adoption choice. "We did not support the optional approach," said Georgene Palacky of the CFA Institute. Representing financial statement users, she noted that the institute's membership finds it "quite troublesome." The thinking is that such a transition period could drag on and that operating under two accounting systems would be confusing for investors and other users.
Nevertheless, FASB member Tom Linsmeier said that there is a notion in the marketplace that having the option to slowly wade into IFRS on the way to a single set of high-quality accounting standards could be one way to "get the bugs out."
The prospect of inertia created by the SEC's lack of a date seemed to trouble some forum participants. For example, the challenge for small audit firms is that "there is no demand [for IFRS]," said Steven Rafferty, a committee member from the Center for Audit Quality and partner with BKD.
Smaller audit firms aren't ready for IFRS because most clients are not aware of the possible change, according to Rafferty. The process of moving clients to IFRS will be demanding for big and small audit firms, he said, noting that checklists, processes, consultations, quality control, and practice experience will have to be worked on before auditors are prepared to review corporate books. "We've not begun [the IFRS] process, to be honest," noted Rafferty.
Indeed, with no hard-and-fast conversion date, smaller firms can't afford to muster resources or start training. That in turn, says Rafferty, will produce the unintended consequence of exacerbating the problem of a concentration of audit work among larger firms because the accounting giants would be the only ones able to handle IFRS work.
Academics are running into the same kind of problems. Panelist Sue Haka, president-elect of the American Accounting Association and a Michigan State accounting professor, underscored the "chicken and the egg trap" created by the lack of a firm date. The CPA exam drives accounting curricula at colleges, universities, and continuing education programs.
But without a "date certain" from the SEC regarding IFRS, state accountancy boards and the AICPA won't work together to update the CPA exam— at least not until they can be sure that schools are teaching IFRS, laments Haka.