SEC on IFRS: Not So Fast

The SEC gives everyone more time for a possible transition from U.S. GAAP to international reporting standards.
Sarah Johnson and Marie LeoneFebruary 26, 2010

The Securities and Exchange Commission has extended its time line for requiring U.S. publicly traded companies to apply international financial reporting standards to their financial statements: the earliest that U.S. companies may be able to use IFRS is now 2015. The deadline in the SEC’s original “roadmap” was 2014, although some large companies could have prepared their U.S. filings with IFRS this year (that option has been discarded).

In its statement on Wednesday, the SEC also approved a work plan developed by its staff to keep track of all the moving parts that are involved with a wholesale change to IFRS. Commentators on the SEC’s initial roadmap had asked the commission to provide more specifics on how the U.S. financial-reporting system could incorporate IFRS, and to give companies more time to prepare for the switch. The commission said it plans to keep tabs on the quality of IFRS, the independence of the International Accounting Standards Board, and investors’ and accountants’ knowledge of IFRS, as well as monitor how U.S. regulations and companies would be affected by the change to global standards.

In addition to moving the earliest adoption date, the commission said it will keep its promise to decide next year whether to move forward with the adjusted roadmap or scrap it.

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The SEC statement is significant because it “puts this commission on record as supporting the initiative,” says Deloitte partner D.J. Gannon. Last year, during the confirmation hearings for SEC chairman Mary Schapiro, there was a lot of speculation about whether the SEC would support the notion of considering a move to IFRS. “Now we’ve got an answer to that question,” says Gannon.

The SEC is also directing its staff to provide regular updates on the issues raised in the nearly 240 comment letters the commission received on its proposal. Many finance executives who commented on the roadmap were concerned about the cost of switching accounting systems, the justification for doing so, and the lack of a definitive date for a changeover, for example.

Gannon says the new work plan is a major departure from the roadmap in that the SEC staff is now actively pursuing how to deal with the practical realities of moving to a different reporting system. That means the next logical step is implementation rule making, says Gannon, something that “was clearly contemplated as part of this statement and work plan.”

Some finance executives think the announcement helped ease anxieties about potential transition costs. Lewis Dulitz, vice president of accounting policies and research for medical-products manufacturer Covidien, calls the work plan a “major victory” for companies, because it’s a commitment from the SEC that it will make an investment to assess the impact of IFRS on the U.S. reporting environment. That’s important, says Dulitz, because the estimated cost of conversion in the roadmap soured many companies on IFRS. “The work plan is a means to gain the confidence of [SEC] constituents,” he says.

Other executives were pleased that the SEC is slowing down its march toward IFRS and has built in more time to research the financial effect on smaller companies. “We believe the mandated implementation costs to U.S. issuers and U.S. registrants will be far in excess of any calculated benefits, real or imagined,” wrote Davey Tree Expert Co. CFO David Adante and controller Nicholas Sucic in an e-mail to CFO.

Some companies that initially had been pushing for early adoption of the global rules backed off last year, saying that other issues had become more pressing, such as maintaining liquidity during the financial crisis. Meanwhile, a growing number of IFRS-conversion critics say the switch would benefit only the largest of international companies while creating hardship for smaller firms that largely do business in the United States.

Some larger companies also have reservations. Paul Farr, CFO of power company PPL Corp., agrees that there were a few silver linings in the SEC announcement, such as a continued focus on convergence and the acknowledgment that concerns voiced in comment letters would be addressed. But he remains skeptical about the perceived benefits of switching to IFRS. He points out that regulated industries, such as the power sector, which are characterized by stable earnings and predictable cash-flow streams, “become potentially much more volatile under IFRS.” That’s because unlike regulatory accounting in the United States, IFRS does not allow companies to defer expenses that have a high likelihood of being recovered, such as storm costs and environmental capital expenditures.

The IASB is looking at revamping its regulatory accounting, but there’s a lot more work to be done, says Farr. The CFO finds it “difficult” to support standards that “can’t yet contemplate something that is so important to our company.”