Start Your IFRS Engines?

In the wake of last week's meeting of U.S. and international accounting standard setters, the SEC's Mary Schapiro gives a nod to the rulemakers' co...
Marie LeoneNovember 6, 2009

A 40-word statement by Securities and Exchange Commission chairman Mary Schapiro Thursday night, after U.S. and international accounting rulemakers reaffirmed their commitment to creating a single set of principles, didn’t say much on its face. The innocuous two sentences read: “I am greatly encouraged by the commitment of the IASB and the FASB to provide greater transparency to the standard setting process and their convergence efforts. I believe that these efforts will result in improved financial information provided to investors.”

But after being relatively silent on the subject of international standards since taking the SEC reins in January, Schapiro, with her acknowledgment of the convergence project, may have provided the clue companies have been looking for with respect to a major upcoming decision by the regulator. Schapiro and her fellow commissioners are scheduled to decide in 2011 whether to require American companies to file financial reports using international financial reporting standards instead of U.S. generally accepted accounting principles.

If the SEC decides that moving to IFRS is a good idea, then according to the current time line, the largest companies will start reporting under the international standards beginning in 2014, and all public companies will make the transition by 2016. But the timetable is likely negotiable, depending on feedback the SEC receives from corporations, investors, and auditors, as well as from educators, who will have to roll out coursework to prepare new accountants for IFRS.

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Some U.S.-based companies, such as industrial conglomerate United Technologies and health-care-products manufacturer Covidien, have already decided to make the accounting switch ahead of the SEC’s decision. The overarching rationale for beginning the IFRS changeover now is that both companies have extensive multinational operations, and reporting consolidated financial results using a single set of standards is, in the long run, more efficient and less costly.

At a recent meeting on global standards, executives of the two companies cited additional reasons for switching to IFRS ahead of an SEC mandate. United Technologies has acquired many companies based in countries that already require or at least recognize IFRS for statutory filing, said Margaret Smyth, the company’s vice president and corporate controller. So integrating those new subsidiaries has the company already working on IFRS conversion.

Lewis Dulitz, Covidien’s vice president of accounting policies and research, pointed out a rules-based reason for ramping up IFRS conversion efforts; that is, the SEC’s roadmap specifies that companies will have to file three years’ worth of IFRS-prepared financial statements along with results filed in U.S. GAAP before making the switch. In practice, the three-year rule means that large companies would have to start dual reporting — in IFRS and U.S. GAAP — beginning in 2012, if the roadmap deadlines stay intact.

“It seems more difficult to convert to IFRS now than it did four years ago,” noted Dulitz, referring to the one year of comparable financial statements that companies had to provide when his former employer, Amsterdam-based Royal Ahold, converted from various local GAAPs to IFRS. Suddenly, the U.S. GAAP-to-IFRS conversion doesn’t seem so far away, opined Dulitz at the conference sponsored by the International Accounting Standards Board and the American Institute of Certified Public Accountants.

Other finance executives from U.S. companies have balked at the idea of moving to IFRS. Nearly 40 finance executives who commented on the SEC’s proposal worried about the cost of switching accounting systems and doubt that many companies will consider the change worth the trouble if they are not forced into making the change. “Conversion to IFRS could lead to confusion and reduced marketplace confidence in financial statements at a time when confidence in the U.S. financial markets is already low,” wrote Patrick Mulva, controller for ExxonMobil.

What’s more, Robert Pozen, institutional investor and chairman of MFS, asserts in his new book, Too Big to Save? How to Fix the U.S. Financial System, that only the 100 to 300 largest U.S. companies should be required to switch to IFRS. Pozen writes that the SEC should not adopt the international standards as the nation’s official accounting rules until several significant issues are resolved, including working out discrepancies between IFRS and U.S. GAAP with regard to the accounting treatment for revenue recognition, joint ventures, and research and development. Pozen was the chairman of the SEC’s Advisory Committee on Improvements to Financial Reporting.

Schapiro’s comments followed a joint meeting of the IASB and the Financial Accounting Standards Board held last week. At the meeting, members agreed to come together more frequently during the next year to meet their deadline of finishing major convergence projects by the end of 2011.


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