Despite Delays and Ongoing Concerns, Companies See the Wisdom of Advanced IFRS Preparations

Despite the Securities and Exchange Commission’s decision to extend the public comment period for its International Financial Reporting Standards (IFRS) Roadmap and ongoing concerns over the feasibility of the proposed conversion timelines and overall effectiveness of IFRS, some companies are forging ahead with preparations to transition to the new standards.

“We think it’s coming no matter what.  The timing has been uncertain, but there has been talk of one global set of accounting standards for years and now may be the time where we have to think about converting,” said Matthew Birney, Manager of IFRS Policy and Implementation, United Technologies Corp. (UTC), a Hartford, Conn.-based provider of high technology products and support services to the building systems and aerospace industries.  “That conversion will be complex, so we come up with a methodical plan.  Given the virtual certainty that we will be converting to IFRS, we thought it made sense to start looking now.”

Hurry Up and Wait

The SEC finally published its long-awaited IFRS Roadmap in November 2008 and opened up a 90-day comment period, giving proponents hope that conversion activities could finally get underway. 

In the Roadmap, the SEC proposed a staged approach to the transition, beginning with large accelerated filers for fiscal years ending on or after Dec. 15, 2014.  Smaller accelerated filers would begin using IFRS for years ending on or after Dec. 15, 2015 and non-accelerated filers would begin for years ending on or after Dec. 15, 2016.  It also would allow the 20 largest U.S.-based companies in a given industry according to market capitalization to begin transitioning in 2010 for financial statements after Dec. 15, 2009.

Things have changed since November, however.  In February, the SEC announced it was extending the public comment period by two months to give companies more time to review and comment on the Roadmap.  Further, new SEC Chair Mary Shapiro has made it clear that, while she believes a single set of accounting standards would be beneficial, she nonetheless has serious concerns about the current Roadmap and IFRS in general.

“I have some concerns about IFRS standards generally.  They are not as detailed as the U.S. standards.  There’s a lot left to interpretation.  Even if adopted, there will still be a lack of consistency, I believe, around the world on how they are implemented and how they are enforced,” said Shapiro in her January testimony before the Senate Committee on Banking, Housing and Urban Affairs.  “… So, I will tell you that I will take a great big breath and look at this entire area again, carefully, and will not necessarily feel bound by the existing road map that is out there for comment.”

Also coming into play were comments filed by organizations and companies expressing their own concerns over the Roadmap and IFRS in general.  Many asked the SEC to postpone the conversion indefinitely, while others urged the completion of a study on the implications of IFRS for U.S. companies before a final decision is made on a mandate.

For example, despite such benefits as a more streamlined reporting process, enhanced comparability among global issuers and exposure to new capital markets, there are drawbacks to IFRS that must be considered.

“It will be costly,” said UTC’s Birney.  “The SEC included in their Roadmap an estimate of an eighth of a percent of annual revenues.  That’s a little light.  For UTC, that would be $75 million, but we think it could be more.”

Also, agencies such as the Internal Revenue Service may continue to require filings under US GAAP, even if the SEC mandates IFRS.  If so, companies will still be required to file in both GAAP and IFRS.

“We are suggesting that the SEC coordinate with these other agencies.  It doesn’t have oversight, but it can get the ball rolling.  If it’s just one agency that’s changing [to IFRS], it really doesn’t do anything to help us,” said Birney.

Still others are concerned about the key differences between the two sets of standards, and suggest that the convergence of US GAAP and IFRS should be substantially complete prior to an IFRS mandate.  Some would like to see a process for resolving differences in the adoption and application of IFRS provisions in other countries before the U.S. adopts IFRS.

Finally, some are not sure that the U.S. financial, legal and regulatory oversight bodies are ready to operate under “principles-based” standards.  Nor are they fully convinced that the methodology, milestones and timeline outlined in the SEC Roadmap provide for a thorough assessment of the suitability of IFRS, or for providing issuers with the time required to make the significant changes necessary for conversion.

“It would be a mistake and an undue burden to issuers to mandate the adoption of IFRS without first ensuring that our regulatory and legal bodies are ready for such a switch.  We also are concerned about the significant investment in both time and dollars such a conversion would require,” said Reed N. Brimhall, Vice President, Controller and Chief Accounting Officer, URS Corp., a San Francisco-based global provider of engineering, construction and technical services.  “…We are in the midst of an unprecedented economic crisis.

Forging Ahead

With so many concerns to be explored – and the fact that the Roadmap’s publication coincided with many companies’ year-end close cycles – even IFRS proponents support the SEC’s decision to extend the public comment period.  However, while the extra administrative time will bring some relief, some companies are not waiting for a definite deadline to begin conversion planning.

UTC has already established a department dedicated to laying the groundwork and establishing the infrastructure for the transition – something Birney urges other companies, particularly large accelerated filers, to do.

“If they want to avoid a situation where they’re caught behind schedule and are trying to meet a mandate very quickly, [companies] need to get started now,” he said, noting that it took Europe three years to fully transition to IFRS.  “…If the 2014 date does stick, the Roadmap requires two years of prior financial statements, which means companies will have to show 2011 year-end in IFRS.  That means less than three years to get started.  Getting started now can’t hurt you; it will only put you in a better position.”

URS has also begun its conversion planning; a process it estimates will take a minimum of two to three years.

Transitioning to IFRS will impact not only the company’s accounting policies, but also business and accounting processes, tax planning and regulatory compliance.  Significant changes will also need to be made to its business and financial information systems.

“We want to ensure that we have an adequate amount of time so that we are not forced into converting to meet the minimum requirements,” said Brimhall.  “Instead, we want to use this as an opportunity to take a ‘clean-sheet of paper’ approach to our financial policies and procedures.  By taking a proactive approach, we believe that we will be better able to achieve the best results for our company, while minimizing the costs associated with such a significant conversion.”

Because the transition to IFRS is most likely a matter of “when” and not “if,” it would be prudent for potentially impacted companies to follow suit.

“Converting to IFRS is likely to have far-reaching effects on any organization, so companies should take advantage of the time that is available to assess their financial and business impacts and to make the necessary changes,” said Brimhall.
 

 Also in this month's issue:

IASB, FASB Propose Eliminating Differences in Lease Accounting

Consultant of the Quarter:  Bill Leonard, Boston