Conrad Hewitt joined the Securities and Exchange Commission as chief accountant in August 2006. Hewitt is charged with establishing and enforcing accounting and auditing policy to enhance the transparency and relevancy of financial reporting at the SEC. His office also aims to improve the professional performance of public company auditors in order to ensure that financial statements used for investment decisions are presented fairly and have credibility. Lately he has been much involved with planning for the transition from U.S. accounting standards to international standards. WebCPA talked with him and his department's chief legal counsel, Jeff Minton, about the convergence of U.S. generally accepted accounting principles and International Financial Reporting Standards.
Q: What is the roadmap for moving toward acceptance of IFRS in the U.S.?
Hewitt: The roadmap is kind of a starting point and has a finishing point if you want to think about it in terms of origination and destination. I inherited the roadmap from my predecessor for private issuers and reconciliation of IFRS to U.S. GAAP, which we lifted. We also, a month later, issued a concept release on whether or not to allow U.S. registrants to use IFRS on an optional basis. Our next normal step, as the chairman [SEC Chairman Christopher Cox] indicated, the commission planned on doing something this summer, in terms of a proposal and release and some kind of action by the commission on a roadmap-type approach. Obviously the roadmap will go on for a period of time, which means it goes on not the current commission action, but a commission action two years from now to finalize everything.
The concept of the roadmap is to, one, at the finish line have a date set and, again, the commission in a couple of years will have to decide what date that should be, but there has been talk about it. We had two roundtables about this subject matter, on IFRS being used by U.S. registrants, and they all indicated there should be a mandatory certain date. Otherwise people will not do anything, and I believe in that and have said that publicly. Also there should be an optional period of time that U.S. companies that may want to go and switch should be allowed to do so. There are a number of larger U.S. companies that do a large amount of business overseas, and we do know they are using IFRS, so it makes a lot of sense. The roadmap has to consider whether or not U.S. companies should have that option sometime, whether it be now or two years from now. I don't think personally that U.S. companies are ready to switch today to IFRS because there is a lot of training for people, changing to accounting systems and working out the details. I think that all this is at least a couple of years away for U.S. companies even wanting to make the switch, but they see that it will be necessary some time in the future. We do know that probably by the year 2011, three years from now, there will probably be over 150 countries using IFRS throughout the world, and we may be one of the [last] major countries not using it, so something tells me that after 2011 the U.S. probably needs to mandatorily switch to IFRS, whether it be 2014 or whenever, to give the U.S. companies time.
There are many other considerations that the roadmap would need. For example, if I were a commissioner a couple years from now, I would probably want to know, are the universities in the U.S. teaching IFRS? Is it on the CPA exam? Are people trained to do this? Are the companies ready to make that switch with the accounting systems? There's always been some concern by people that the International Accounting Standards Board needs to be independently funded just as FASB is independently funded by accounting support fees from a charge with registrants as opposed to companies and external auditors funding them. Also, whether or not IASB has enough independent oversight such as we do here in the United States, the SEC has the oversight of FASB and the PCAOB, so you have an agency that exercised the oversight and currently the IASB does not have that in place.
Q: Does the SEC staff have to issue the roadmap before it goes before the commission?
Q: How does that process work?
Minton: The chairman started saying this back in February of this year, when he was initially laying out the agenda for this year. He directed the staff to come up with a recommendation to the commission on the topic. Normally we toil away and we come up with a recommendation and present it to the commission at an open meeting and then the commission deliberates and votes. Then it goes out as a proposal or a public comment. We could be working and toiling away on it, but until the total current four commissioners vote on it, then nothing has been issued yet.
Q: How far away are you from getting the proposal out there?
Hewitt: Sometime before September 21. Some of these things get changed at the last minute because maybe a commissioner has not had enough time to study, so it gets delayed a month.
Q: So, people should just expect it to come out when it's ready?
Minton: I don't think it's something you would miss.
Q: There are a lot of variables floating out there. Can you tell me anything in terms of what substantially is going to be in the roadmap? Can you tease it out a little bit more?
Hewitt: I kind of gave you the major considerations that need to be in the roadmap. We call those things milestones.
Minton: If you're asking us to tease out and give you specifically which date and what not, I mean that's obviously, we have to work with the Commission.
Hewitt: We are still trying to finalize it. We have not finalized several things.
Q: Is adoption going to be mandatory for all public companies and, if it is mandatory, will there be a voluntary period in which to adopt it earlier?
Hewitt: I think, if you look at all the other countries, there are probably 110 countries now that have adopted IFRS and they've been doing it on a mandatory basis. Some of the countries have a very short cut-in period of one year. Some countries are using a three- or four-year phase-in approach. I would suspect, based upon our history here recently concerning XBRL [Extensible Business Reporting Language] interactive data and also the 404 adopting releases, we have been kind of having a three-year phase-in. The large accelerated filers would be the first year to go. Then, the second year, it would be the normal accelerated filers, and then the third year would be the real small companies doing it. It goes on for a period of time, which is good, because smaller companies and mid-cap companies can learn from the larger companies. That's what we did with 404 and that's what we've done with XBRL.
Q: CPAs working with U.S. subsidiaries of foreign public companies have the option to report in IFRS. Some accounting firms are being asked to adjust their clients' financial statements in order to comply with those standards. How should CPA firms deal with this, and won't making this a voluntary option put more pressure on accounting firms?
Hewitt: No, I've spoken with accounting firms more than once in the U.S. here - the six major firms - and they all are training their people to gear up for IFRS. They have even taken on engagements with clients and non-clients to help the companies prepare for the eventual use of IFRS. A lot is going on currently and will continue to go on in the next three to five years in getting ready for the mandatory use, which is good. We want everybody to be prepared for it. It will be a longer period of time to do that than what we did with XBRL for example.
Q: Will certain industries be significantly impacted by conversion of IFRS, and is the SEC planning for that contingency in any manner?
Hewitt: I think all the industries will be impacted in the U.S. Using IFRS, there is no specific industry guide. U.S. companies can continue to use what they are doing today in that regard, but no, I don't see any difference among the various industries by using IFRS at all. There isn't that much difference in the two standards anyway. There are some differences, but five years from now, there will be hardly any differences.
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