SEC: Early IFRS Adoption Will Cost Firms $32M

The regulator releases its roadmap for transitioning U.S. companies to international accounting rules, and estimates the costs.
Sarah Johnson and Marie LeoneNovember 17, 2008

The Securities and Exchange Commission estimates that U.S. companies will spend between 0.125 percent and 0.13 percent of their revenue on making the transition to international financial reporting standards from U.S. GAAP in the first year of filing.

Under the SEC’s proposed timeline, released on Friday, all publicly traded U.S. companies would be required to use IFRS within six years if the SEC votes in 2011 to push its plan forward. However, at least 110 companies could use the international rules as early as next year, depending on their size and their industry. The SEC predicts that those companies would each incur about $32 million in additional costs in the 10-Ks they file in 2010.

The SEC claims much of that cost will subside in subsequent years, predicting a decline of as much as 75 percent in companies’ second year of filing IFRS statements. The switch will require companies to train their internal finance staffs on IFRS and make changes to their IT systems.

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In addition, the 165-page proposal would require companies to straddle both IFRS and U.S. generally accepted accounting principles for three years as they make the transition. The SEC will expect to see three years’ worth of IFRS-prepared financial statements for each filing. For instance, the largest calendar-year companies that are not considered early adopters would submit their first IFRS-based filing with the SEC in 2015, which would include audited IFRS financial statements for years ending Dec. 31 of 2012, 2013, and 2014.

This means that under the SEC current plan, the largest companies would begin using IFRS in 2012, followed by the smallest companies applying the rules to their 2014 financial reports. However, those filings would not be submitted to the SEC until three years later, so some companies may decide to retroactively apply IFRS to previously filed financial filings — a prospect that doesn’t sit well with accounting firms that have been encouraging companies to begin thinking about their IFRS implementation plans now. Accounting firms were hoping the SEC would back off its cautious approach and actually require companies to adopt IFRS through this proposal.

Without a mandate to begin applying IFRS, companies are less likely to pay attention and get ready, they have said. Companies will need more time to prepare than the SEC plan gives them, since its early adoption plan “is far too limited,” Richard Fuchs, PricewaterhouseCoopers partner and global IFRS specialist, said today during the Financial Executives International’s annual conference in New York City.

The roadmap has other timing problems. Comments to the roadmap are due in mid-February, nearly a month after President-elect Barack Obama takes office, putting the future of the timeline into question as SEC chairman and Republican Christopher Cox has indicated he will resign early next year.

In addition, Friday’s release of the plan comes two-and-a-half months after the commissioners voted to propose it for a 60-day comment period (the latest version gives commenters 90 days to respond following the roadmap’s publication in the Federal Register). Soon after the vote, Lehman Brothers collapsed and so did the U.S. financial markets. Amid the turmoil, the independence of the standard-setter behind IFRS has been put into question.

As the plan stands now, the SEC will be deciding in 2011 whether to require U.S. companies to use IFRS. The decision will hinge on progress made in the convergence project between the U.S. and international standard-setters; IFRS education in the United States; the International Accounting Standards Board’s stability; and the consistent application of IFRS worldwide. More than 100 countries have adopted IFRS but some of them have made changes to the version of IASB’s rules. “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 roadmap says.

In recent weeks, IASB has appeared to cave in to pressure by banks and country leaders for a provision making the fair-value standard more like U.S. GAAP, a development that IASB Chairman David Tweedie has said makes him want to resign. The SEC promises to keep an eye on IASB’s integrity. “It is important that accounting standards be established under a robust, independent process that includes careful consideration of possible alternative approaches and due process, which allows for input from and consideration of views expressed by affected parties, including investors,” the roadmap says.

To be sure, despite these conditions, the proposed roadmap would make it hard for the SEC to backtrack on the plan, considering that it allows some companies to use IFRS early. Indeed, the SEC asks reviewers of its roadmap to comment on whether the commission should require those early adopters to revert to U.S. GAAP if the regulator decides to abandon the roadmap in 2011. The SEC estimates that companies in 34 industries that have a heavy use of IFRS globally could apply for early adoption, which would require a no-action letter from the commission. The eligible companies’ market capitalization ranges from $250 million to $300 billion.

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