SEC Should Push for XBRL Convergence

If overseas companies fail to adopt the computer language, full transparency and accessibility to global financial information would be lost.
Kristine BrandsSeptember 27, 2012

When Securities and Exchange Commission staff issued the commission’s final report in July on its work plan to incorporate International Financial Reporting Standards (IFRS) into U.S. financial reporting, a key item was left out of the discussions— using the eXtensible Business Reporting Language (XBRL) on a global basis. 

Though much work still needs to be done on meshing U.S. reporting standards with those promulgated by the International Accounting Standards Board (IASB), adoption of the IASB’s IFRS is only part of the solution to achieve standardized global reporting. The SEC needs to push global regulators to require the use of XBRL markup language in IFRS reporting worldwide.

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After all, the SEC has had a stellar record with its successful implementation in the of the 2009 XBRL Reporting Mandate in the United States. The mandate required all registered U.S. companies to use the electronic filing of XBRL when they submit financial reports to the SEC. This way all financial statements were encoded in a similar manner. As a result of the 2009 mandate, the United States became a global leader in the transparency of publicly filed financial statements..

Today, more than 9,000 U.S. publicly traded companies are complying with the mandate, providing the investing public unprecedented access to financial data. This initiative takes financial reporting into the digital age.

The same success, however, could play out in the global arena if the U.S. presses for global adoption of XBRL reporting and IASB continues to move forward with its own progress on that front. To date, IASB continues to modify and improve the robustness of XBRL for IFRS. However, it has not achieved the level of financial reporting transparency attained by the United States.

Still, the European Commission is considering requiring XBRL for IFRS reporting in 2018. Along with global financial reporting, using XBRL would be a benefit to all users of financial statements. Without it, full transparency and accessibility to global financial information would be lost.

But other factors still need to be considered by the executives of individual companies when they make the decision about to adopt XBRL for IFRS. The systems involved in the collection of that data, such as Enterprise Resource Planning (ERP) systems, which integrate various business operations typically through a shared database, all have to be in sync. The SEC’s final staff report addressed ERP at a high level. But several specific concerns were raised, including the time and expense required to update accounting systems to accommodate IFRS reporting.

Transition to IFRS is not a trivial activity. It can require additional data, new calculations, and additional disclosures and reporting requirements. For example, several IFRS standards like those concerning leases, revenue, and fixed assets, have more complex reporting requirements that necessitate system modifications. Evaluating the scope of obligatory system modifications will require technical accounting expertise and collaboration with a company’s information-technology group to allow for proper disclosures. These requirements alone could overload any plans to use spreadsheets or separate systems during the transition period to IFRS, much less on a permanent basis.

The IFRS conversion plan may also require companies to maintain a dual accounting system to report IFRS and U.S. GAAP financial statements during the transition period. The ERP system needs enough capacity to handle dual reporting requirements.

As CFOs and other company executives evaluate ERP needs, they should consider an IFRS conversion scenario and choose upgrades or new systems that can be modified to meet the requirements. It’s also helpful to choose a vendor with an IFRS conversion track record, personnel with an understanding of IFRS, and software tools for preconfigured applications like an IFRS chart of accounts and business rules to make the conversion to IFRS reporting requirements easier. Front-end planning for IFRS ERP systems will position a company for a smoother and lower cost transition. Thus, given the lead-times and cost of systems conversions, companies need to continually revisit the potential impact of IFRS on ERP systems.

Similarly, internal control issues within an organization were also cited in the SEC’s IFRS staff report as another potential IFRS conversion area that needs addressing. As one educates an organization about IFRS, it is important to note that modifications to internal controls will be needed to address IFRS requirements on mitigating the risk of material internal control weaknesses.

The Committee of Sponsoring Organizations of the Treadway Commission (COSO)’s Internal Control Integrated Framework (IC-IF) will probably continue to serve as the principal guidance for designing and maintaining internal control systems. The enhancements added to COSO’s 2012 IC-IF update project (expected to be released in early 2013) have strengthened the framework and will facilitate the development of IFRS financial statements’ internal control.

After SEC staff spent more than two years developing the work plan for IFRS conversion, CFOs and other company executives still remain in limbo. But while many of the outstanding issues over IFRS conversion are out of CFOs’ control, it’s important to place XBRL, ERP, and internal control implications on their radar screens now and start to understand how they affect an organization. Even though it appears the SEC abruptly dropped work on the IFRS conversion plan, they could restart it just as quickly.

Kristine Brands, CMA, is an assistant professor at Regis University in Colorado Springs, Colorado. She is also a member of the IMA Global Board of Directors.

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