SEC Releases Long-Awaited Roadmap to IFRS
Large accelerated filers would be required to use International Financial Reporting Standards (IFRS) beginning in 2014 under the long-awaited roadmap for transitioning to the new standards released by the Securities and Exchange Commission (SEC) on Nov. 18, 2008.
In an overview of the roadmap, the SEC writes: “As capital markets have become increasingly global, U.S. investors have a corresponding increase in international investment opportunities. In this environment, we believe that U.S. investors would benefit from an enhanced ability to compare financial information of U.S. companies with that of non-U.S. companies. The Commission has long expressed its support for a single set of high-quality global accounting standards as an important means of enhancing this comparability. We believe that IFRS has the potential to best provide the common platform on which companies can report and investors can compare financial information.”
In the 165-page document, the SEC proposes a staged transition that would require IFRS filings for large public companies for fiscal years ending on or after Dec. 15, 2014. Non-accelerated filers would be required to use IFRS filings for years ending on or after Dec. 15, 2016.
The SEC would require three years’ worth of IFRS-prepared financial statements for each filing. Thus, accelerated filers would submit their first IFRS-based filing with the SEC in 2015, which would include audited IFRS financial statements for years ending Dec. 31 of 2012, 2013, and 2014.
The roadmap also allows for the early adoption of IFRS by some companies as soon as 2010. The SEC estimates that at least 110 companies could be eligible for early adoption, based upon how prevalent the use of IFRS and the significance of the company within its given industry.
The staged transition is “based on the premise that larger issuers would be better able to allocate resources to the transition to IFRS more quickly than smaller issuers, and a staged transition also may help manage resource demands on auditors, consultants and other market participants,” according to the proposal. “Reliance on the existing definitions of accelerated/large accelerated filer also is expected to facilitate an orderly, predictable transition to IFRS because an issuer would already need to ascertain its status as an accelerated filer for other reporting purposes and allow it to predict when it would be required to adopt IFRS.”
The SEC also notes that while a staged transition may help avoid some costs and could encourage voluntary adoption of IFRS, it would also result in some non-comparability of financial information due to application of the IFRS transition provisions at differing dates.
“Further, a staged transition would, temporarily, create a dual system of reporting for U.S. issuers that would require investor familiarity with both IFRS and U.S. GAAP,” states the proposal.
The roadmap sets forth seven milestones that would influence the SEC’s final decision on whether to move forward with IFRS, which it expects to make in 2011. They are:
1. Improvements in accounting standards
2. Accountability and funding of the International Accounting Standards Committee (IASC) Foundation
3. Improvement in the ability to use interactive data for IFRS reporting
4. Education and training related to IFRS
5. Limited early use of IFRS, where it would enhance comparability for U.S. investors.
6. The anticipated timing of future rulemaking by the Commission
7. Implementation of the mandatory use of IFRS, including considerations relating to whether any mandatory use of IFRS
should be staged or sequenced among groups of companies based on their market capitalization
The roadmap also lays out two alternative proposals under which U.S. companies electing to use IFRS would disclose U.S. GAAP information. Under Proposal A, a company would provide the reconciling information from U.S. GAAP to IFRS called for under IFRS 1, First-time Adoption of International Financial Reporting Standards, in a footnote to its audited financial statements.
Under Proposal B, companies would provide the reconciling information from U.S. GAAP to IFRS required under IFRS 1, and would also disclose on an annual basis certain unaudited supplemental U.S. GAAP financial information covering a three-year period.
“Any decision we may take to expand the use of IFRS to U.S. issuers would necessitate our evaluation of whether global developments support the assertion of IFRS as the single set of high-quality globally accepted accounting standards that is applied consistently across companies, industries and countries," states the proposal.
The roadmap also provides estimates of the potential costs companies may incur in making the transition to IFRS. Specifically, the SEC estimates the costs for early adopters would be approximately $32 million per company and relate to the first three years of filings on Form 10-K under IFRS. Total estimated costs for the approximately 110 issuers estimated to be eligible for early adoption would be approximately $3.5 billion.
The road map is available at www.sec.gov/rules/proposed/2008/33-8982.pdf. The comment period ends 90 days after the document is published in the Federal Register.
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