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The End of GAAP Could Begin Next Year

The SEC suggests that some companies could forgo GAAP by the end of 2009, and that all companies may have to do the same by 2016.
Sarah Johnson and Marie Leone, CFO.com | US
August 27, 2008

The Securities and Exchange Commission has raised the possibility that some U.S. publicly traded companies will be able to use international financial reporting standards next year.

On Wednesday, the SEC commissioners proposed a timetable for transitioning all public companies from U.S. generally accepted accounting standards to IFRS within eight years, with the allowance for some companies to begin using the global rules earlier. If this so-called roadmap is approved, the SEC estimates that 110 companies would be eligible to use IFRS at the end of fiscal years ending after December 15, 2009, depending on their size and industry.

The roadmap further calls for the SEC to make a decision in 2011 regarding whether to require all of its registrants to use IFRS. The commissioners would base their decision on the progress made on, among other things, funding the International Accounting Standards Committee Foundation (which governs the International Accounting Standards Board), IFRS data tagging, and accounting education.

Before the commissioners voted unanimously to release the proposal for a 60-day comment period, SEC chairman Christopher Cox said IFRS has the potential to become a "uniter of the world's capital markets and investors everywhere." Nearly 100 countries have required or allowed their companies to prepare their financial statements using IFRS, he added.

The widespread use of the global standards and the fact that the majority of U.S. investors own foreign companies' securities "make it plain that if we do nothing and simply let these trends develop with each passing year, comparability and transparency will decrease for U.S. investors and issuers," Cox said.

David Tweedie, chairman of the International Accounting Standards Board — the overseas counterpart to the U.S. Financial Accounting Standards Board — applauded the decision. "Following its decision to remove the reconciliation requirement last year, the SEC's proposal is another important vote of confidence in the IASB and FASB's process of convergence," commented Tweedie. "The result of our work will be an improved set of IFRSs to assist investors throughout the world, he added.

Accounting firms, large companies, and academics have told the SEC that only a firm deadline could motivate people to get up to speed on IFRS in the United States. Under the proposed roadmap, large accelerated filers would begin using IFRS in 2014, followed by accelerated filers in 2015, and smaller companies in 2016 (see chart).

These dates don't surprise D.J. Gannon, a partner at Deloitte & Touche, who said the deadlines are reasonable for U.S. companies to meet. "It is a sigh of relief in a sense because this expectation has been building since the [SEC's] concept release came out last year.... It will allow people to move forward with an actual plan," Gannon told CFO.com.

During the past year, the SEC has held roundtables on the topic of IFRS and has reviewed the nearly 100 letters received to its questionnaire, or concept release, for gauging the public's interest in allowing a second accounting language in the United States.

In response, large U.S. multinationals and the large accounting firms estimate that it would take U.S.-domiciled companies two to three years to make the switch to IFRS, with smaller businesses needing more time. Several multinationals have told the SEC that allowing IFRS in the U.S. would bring them efficiency and cost savings since their foreign subsidiaries are already using the global standards.

The SEC's roadmap would allow companies in about 30 industries to use IFRS early but would require them to either provide an audited GAAP reconciliation report or three years' worth of unaudited reconciliation reports. Only the top 20 companies in each industry would be eligible, based on market capitalization and whether the largest of their foreign counterparts also use IFRS.

Critical to the question over whether all U.S. publicly traded companies could one day make a changeover to IFRS is American accountants' familiarity with the rules. Only 19 percent to CFOs and controllers have experience preparing financial statements under IFRS, according to a recent Grant Thornton survey.

If the roadmap's dates hold true, finance executives will need to get better acquainted with the global standards. Indeed, despite the fact that a new administration will be in office in 2011 when the commissioners would make its critical decision on IFRS, today's commissioners' view will likely be sustained, predicts Gannon. "By that time, we'll have some experience working with those companies that did convert over, we'll have a more of a general sense of where the standards are practice-wise globally," he says. "Those are the things that will help the commission move forward strongly with the mandate."


SEC Proposed Timeline for Moving Companies to IFRS
Date SEC Action
End of 2009 Limited group of large companies given the option to use IFRS. SEC estimates 110 U.S. companies will be able to take advantage of the offer.
2011 SEC evaluates the progress of achieving proposed milestones, and makes a decision about whether to mandate adoption of IFRS. If IFRS is mandated, the commission will develop a staged roll out, starting with the largest public companies first.
2014 Year the first wave of companies will be mandated to report financial results using international accounting standards, if IFRS requirements are adopted in 2011.
2016 Year that all public companies, big and small, will be mandated to report financial results using international accounting standards, if IFRS requirements are adopted in 2011.
Source: The Securities and Exchange Commission



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