SEC roadmap for IFRS is far from clear
Since August, when the SEC published a roadmap for US issuers transitioning into using international financial reporting standard (IFRS) instead of US GAAP, auditors and analysts have debated how to conform to the standard.
For now, the SEC seems to support the concept of US-domiciled companies moving away from US GAAP and toward IFRS. There is, however, some doubt about the Commission’s appetite for a single, international accounting method. As Mark Plichta, partner in Foley and Lardner’s transactional and securities practice, says, ‘The SEC may still change its mind.’ He suggests that, given the raucous financial markets, a new Congress may not wish to defer to an international body.
Slow to the punch
With regulators still fighting over details and a real likelihood of significant change in policy, US companies are not exactly rushing to early adoption. Participants on the recent Foley and Lardner and Corporate Secretary webcast examining the issues were polled on IFRS preparedness. Fewer than 10 percent have chosen early adoption.
John Wozniak, vice president and assistant controller at Motorola, explained that while there are some benefits to IFRS adoption, there are a lot of challenges in transitioning. Early adoption is not an option for everyone. Any company wanting to adopt IFRS must apply to the SEC and the issuer must be among the 20 largest public companies in its industry globally. Further to this, IFRS must be used more often than any other basis of accounting by those 20 largest public companies in that industry as measured by market capitalization on a global basis.
Apart from the regulatory issues, there are other challenges, including the unclear timeline; early adoption can start as soon as end of year 2009. The SEC will then decide in 2011 if IFRS is in the best interest of US companies and investors. If the answer is yes, then full adoption is penciled in for 2014 for large accelerated filers.
So adoption is a long way off but the incredible amount of work that transitioning takes means companies should start looking at the process now. Wozniak suggests forming a multi-disciplinary team to evaluate IFRS adoption, comprising leaders from accounting, internal audit, treasury, tax, IT, legal and compliance and reporting. It is also wise to hire an accounting firm, possibly non-US or international as US knowledge of IFRS is limited, to identify the key differences and determine the best model for adoption.
Corporate legal teams, both inside and outside counsel, need to play a major role in adoption conversations as liability risks will likely increase during and directly following a transition. Many form contracts will need revising as revenue recognition guidance is severely limited with IFRS, which can be confusing and cause disputes when the principles-based approach is one that US regulators and investors are not familiar with.
When looking ahead to 2014, there are a lot of issues companies should consider. There is no need to rush but starting sooner rather than later will make the process smoother if IFRS is indeed the way forward.
