U.S. investors expect the country will eventually support International Financial Reporting Standards, but the process will take time and require substantial investment in staff and training, according to new research from the Association of Chartered Certified Accountants.
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Fifty-seven percent of investors anticipate the SEC will one day require reporting under IFRS, with more investors agreeing than disagreeing that the long-term benefits of adoption would outweigh the costs, 41 percent compared to 29 percent.
The SEC already allows over 400 multinational companies based abroad to file their financial reports in IFRS without first reconciling it with U.S. GAAP. However, despite a decade-long convergence effort between the U.S. Financial Accounting Standards Board and the International Accounting Standards Board, many differences remain between the two sets of standards and the SEC has held off on making a decision on whether to allow U.S. companies to report their financial results in accordance with IFRS.
It appears more likely that even if the SEC decides to allow IFRS to be incorporated into the U.S. financial reporting system, it will continue to call it U.S. GAAP because of the many references to U.S. GAAP in legal documents and loan covenants.
ACCA’s research was published in a report, IFRS in the U.S.: An investor’s perspective. The research was conducted for ACCA by Forbes Insights, surveying 493 U.S.-based investors.
“The ACCA’s findings are consistent with anecdotal feedback we hear from the US investor community,” said IASB chairman Hans Hoogervorst in a statement. They also lend further credence to the argument that the USA is well prepared for a successful transition to IFRS.”
The most significant challenges identified by investors are the one-off transition matters, while longer-term concerns are rated less highly. The most informed investors polled believe it will take U.S. corporations some four and a half years to get ready for IFRS. They believe that convergence plans should aim for full convergence, allowing adequate time for investors and industry to adjust. Awareness of IFRS among U.S.-based investors is modest: when asked, only 34 percent of investors felt able to cite specific differences between U.S. GAAP and IFRS.
However, 38 percent of investors said they were comfortable comparing statements prepared under IFRS with statements prepared under U.S. GAAP. Investors saw marginal differences between IFRS and U.S. GAAP, with 22 percent of investors claiming that the quality of disclosures under IFRS is higher, versus 25 percent who favored U.S. GAAP. Among investors with a solid understanding of IFRS, however, the balance shifts to 40 percent to 21 percent in favor of IFRS.
“More investors believe the eventual adoption of IFRS in the USA will result in a net benefit to the American economy than not,” said ACCA technical director Sue Almond in a statement. “In ACCA’s view, U.S. adoption of IFRS would give a tremendous boost to the cause of globally comparable financial reporting, and more importantly, the US and world economies. ACCA has repeatedly called for putting investors at the heart of the standard-setting process globally, and this is why we commissioned this research, to understand what American investors thought about the future of IFRS in the USA.”
“While there are clearly challenges and reservations highlighted in the survey, attitudes to IFRS appear to be changing in the U.S., irrespective of any action by the SEC,” she added. “The more familiar investors are with IFRS, the more confidence they have in the standards, which echoes the experience in countries that have already adopted IFRS.”
Questions remain for the future, as looking ahead ACCA’s report also identified the issues that are most responsible for shaping U.S. investors’ attitudes towards IFRS. By order of significance, these are:
• Will IFRS adoption lead to reduced complexity for U.S. corporations?
• Is IFRS adoption going to lead to a dangerous loss of U.S. influence over the standard-setting process?
• Are U.S. corporations likely to see cost savings and synergies emerging as a result of IFRS adoption?
• Will IFRS adoption make it easier to compare the performance of U.S. corporations with that of other companies overseas?
• Are U.S. auditors likely to second-guess management more frequently as a result of IFRS adoption?
“A better understanding of global standards produces greater assurance—and it will also prompt more investors to learn about the International Accounting Standards Board and the work they are doing on convergence,” said Almond. “The accountancy profession—on the global stage as much as in the USA—will have a significant role to play in educating the business community about global standards and needs to prepare for this.”