SEC Proposes Roadmap For U.S. Issuers To Switch To IFRS
On November 14, 2008, the U.S. Securities and Exchange
Commission (SEC) published its long-awaited "roadmap" to
a potential future mandatory requirement for U.S. issuers to
prepare and issue financial reports under International Financial
Reporting Standards (IFRS) as issued by the International
Accounting Standards Board (IASB) instead of U.S. generally
accepted accounting principles (U.S. GAAP). Comments on the rule
proposal are due no later than February 19, 2009.
The SEC's proposed rulemaking represents a significant step
in the ongoing collaborative effort among the SEC, IASB, Financial
Accounting Standards Board (FASB), and other international
securities and accounting regulators to promote the development of
a single high-quality set of global accounting standards to keep
pace with the increasingly global nature of the financial
marketplace, where even the most unsophisticated U.S. investor can
purchase foreign equity securities listed on a non-U.S. stock
market through a U.S. broker or even via the internet. The
SEC's proposed rulemaking is designed to provide a level
accounting playing field on which U.S. investors may make their
investment decisions. Given the broad and rapid worldwide
acceptance of the IFRS, the SEC acknowledged that IFRS "has
the potential to become the set of accounting standards that best
provide a common platform on which companies can report and
investors can compare financial information."
Companies should begin to prepare now for the potential switch
to IFRS and evaluate with their financial and legal advisors how to
manage the challenges and issues such an undertaking will involve.
As discussed below, the switch to IFRS may produce a number of
collateral consequences that issuers should plan for in advance
How We Got Here – The Move to IFRS
Since 2002, the mantra of the FASB and the IASB has been
"convergence"—that is, preservation of both
U.S. GAAP and IFRS, but elimination of the differences between the
two standards so that users of financial statements could
confidently compare the financial results of U.S. and non-U.S.
issuers without requiring a "reconciliation." The
fast-growing acceptance of IFRS around the world appears to have
overtaken efforts to harmonize the two different accounting
standards. IFRS is now either permitted or required in
approximately 113 countries worldwide, including the Member States
of the European Union, and approximately 110 foreign private
issuers filed financial statements prepared under IFRS in their
Form 20-F annual reports. Canada has also announced that it is
moving to incorporate IFRS into Canadian GAAP in 2011, adding more
than 450 SEC-registered Canadian companies to the IFRS sphere.
Historically, foreign private issuers that filed financial
statements with the SEC under foreign GAAP were required to prepare
burdensome and costly U.S. GAAP "reconciliations" to
include in the footnotes to the audited financial statements. In
recognition of the fast-growing acceptance of IFRS, in 2005, the
SEC allowed foreign private issuers that switched to IFRS to file
two years (rather than the full three years) of audited IFRS
financial statements in their SEC registration statements and
annual reports. In December 2007, the SEC completed the transition
for foreign private issuers by adopting amendments to their Form
20-F rules to accept financial statements prepared under IFRS
without any reconciliation to U.S. GAAP.
Recognizing that U.S. issuers, especially those with a large
global footprints that compete for capital against non-U.S.
competitors, would benefit as much from a transition to IFRS as
foreign private issuers, the SEC also issued a Concept Release
asking for feedback on the idea of allowing U.S. issuers to
similarly prepare their financial statements under IFRS. Based on
the feedback it received on the 2007 Concept Release, and the need
to lay down a concrete timetable and framework for a transition to
IFRS, the SEC published its roadmap.
The Roadmap – Timetable and Milestones
If adopted, the roadmap will require IFRS to replace U.S. GAAP
as the basis for financial reporting for U.S. issuers by as early
as 2014, assuming certain implementation milestones are deemed to
have been achieved by 2011. These milestones relate to the
following:
Improvements in accounting standards. Despite more
than six years of work towards "converging" IFRS and U.S.
GAAP, the SEC acknowledged that further work needs to be done to
fill the gaps in IFRS (e.g., IFRS currently provides
limited guidance on the accounting for insurance contracts and for
extractive enterprises) and eliminate the remaining significant
differences between IFRS and U.S. GAAP (discussed further below).
The 2011 date in the roadmap conveniently dovetails with the
expected date of completion of the joint work plan of the IASB and
FASB on the convergence project pursuant to its 2006 Memorandum of
Understanding.
Shoring up the accountability and funding of the
International Accounting Standard Committee (IASC) Foundation.
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