The Securities and Exchange Commission proposed setting a roadmap for transitioning to International Financial Reporting Standards by 2014.

The SEC plans to issue a concept release setting several milestones for the transition, with the option for some large companies to make the transition earlier if they are leaders in their industries.

Companies that are among the top 20 in their industry according to market capitalization would be able to begin filing statements in IFRS for fiscal periods ending after Dec. 15, 2009. In 2011, the commission will look at the progress on the milestones before finalizing the IFRS roadmap and examine the possibility of opening up the option for eligibility to file in IFRS to a larger group of companies.

"One of the more revolutionary developments is the quickening pace of a true lingua franca for accounting," said SEC Chairman Christopher Cox (pictured). "It would significantly improve investor confidence in global markets. They could more easily weigh investment opportunities in their own countries versus opportunities in other countries."

The SEC has been examining the transition from U.S. generally accepted accounting principles to IFRS in a series of roundtables and has received comments and advice on its proposals for allowing foreign companies to file financial statements in IFRS without reconciling them with U.S. GAAP.

One proposal on the roadmap for U.S. companies would require companies that want to be early adopters to provide an audited reconciliation from IFRS to U.S. GAAP covering three years of IFRS financial statements included in the form 10-K. Alternatively, they could follow the International Accounting Standards Board's regular standard for first-time adoption known as IFRS 1.

There will also be some leeway on the roadmap for smaller companies. "The roadmap contemplates mandatory reporting beginning in 2014 for large accelerated filers, 2015 for [smaller] accelerated filers and 2016 for non-accelerated filers," said Danita Ostling, Ernst & Young's technical leader for IFRS. "Those are the same terms they used in the Section 404 reporting" for Sarbanes-Oxley.

There will be a comment period of 60 days after the concept release for the roadmap is published in the federal register.

The SEC plans to set a series of milestones, such as seeing how well early adopters are dealing with the transition to IFRS and how much the transition costs. Another milestone is monitoring the funding mechanism of the International Accounting Standards Board and the International Accounting Standards Committee Foundation to ensure its independence. SEC commissioner Elisse Walter said an independently funded international board would be a necessary milestone.

The IASB has been working with the U.S. Financial Accounting Standards Board on convergence issues between IFRS and U.S. GAAP since the two boards signed a memorandum of understanding in 2002. Several issues are shaping up to take high priority.

"They're about ready to announce agreement on a work plan on several needed accounting standards into 2011," said SEC Chief Accountant Conrad Hewitt. "Their objective and goal is to come up with one objective financial standard such as revenue recognition. By doing it that way, the standards would be identical word for word. That's better than in the past where they were worded differently and could be interpreted differently." He added that there were about seven or eight standards that were urgently needed.

Another plateau will be setting up interactive data tagging for the IFRS financial statements. The SEC has been encouraging companies to begin filing statements using Extensible Business Reporting Language and recently introduced an update to its EDGAR system called IDEA that will allow investors to better make use of the XBRL-formatted statements.

Another milestone will be ensuring that education in IFRS is available to accounting students. "All of a sudden they are starting to add appendixes to the accounting textbooks and they will start to teach their students in the next two years," said Hewitt. "All the big accounting firms are doing training. On the investor side, there unquestionably needs to be training, especially with the smaller investors."

He added that he has asked the American Institute of CPAs and representatives in the 50 states to begin adding questions about IFRS to the Uniform CPA Examination.

“The AICPA supports one set of high-quality global accounting standards for public companies,” said AICPA president and CEO Barry Melancon in a statement. “We believe the capital markets ultimately will insist on IFRS for public companies. Today’s action by the SEC continues a robust and thoughtful debate that is critical as the transition occurs.”

He recommended cooperation between FASB and the IASB to achieve convergence and a shift toward the use of XBRL for IFRS.

The SEC will also be looking at the comments they receive over the next 60 days before finalizing the proposal, as well as other factors such as how companies are adjusting to the transition.

"They will look at not only the size of company but also other factors like do they have operations internationally," said D.J. Gannon, partner and leader of Deloitte's IFRS Center of Excellence. "It may be in an industry where IFRS is used by competitors. There may be factors that companies need to consider. I'm sure there will be lots of commentary."

The AICPA plans to provide its comments on the roadmap. “The SEC has been working on issues relating to IFRS adoption for several years,” said Arleen Thomas, senior vice president of member competency and development at the AICPA. “Today’s roadmap shows their continued commitment to a robust debate of adoption of IFRS for public reporting purpose. They did a very good job of outlining their goals, the barriers they see and how those barriers can be removed.” She added that including IFRS questions on the Uniform CPA Exam is something the AICPA is committed to addressing.

International standard-setters also hailed the issuance of the roadmap. “I welcome the SEC’s decision to consider a roadmap for U.S. adoption of International Financial Reporting Standards, developed by an independent IASB, for US companies,” said Gerrit Zalm, chairman of the IASC Foundation board of trustees and former deputy prime minister of the Netherlands. “It is important that any truly international system of financial reporting includes the United States, the world’s largest national capital market. This proposal is an important step to that end.”

IASB chairman David Tweedie said, “Following their decision to remove the reconciliation requirement last year, the SEC’s proposal is another important vote of confidence in the IASB and FASB's process of convergence. We at the IASB are committed to continuing and completing our joint work programme with the FASB. The result of our work will be an improved set of IFRSs to assist investors throughout the world.”


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