SEC’s IFRS Work Plan is a Work in Progress

The Securities and Exchange Commission finally made its long-awaited decision on the IFRS roadmap, or did it?

Back in 2008, the SEC, under its former chairman Christopher Cox, proposed a roadmap for transitioning to International Financial Reporting Standards from U.S. GAAP. After a relatively short comment period, the SEC was supposed to make a decision on whether to move ahead with the roadmap. Unfortunately, the roadmap got stuck in first gear, and the date certain of 2014 or so for moving to IFRS got less and less certain after his successor, Mary Schapiro, arrived in office last year.

That was until yesterday, when Schapiro convened a meeting with her fellow commissioners to decide on finally issuing a statement and a work plan for how the financial reporting system for U.S. public companies may or may not begin to “incorporate” IFRS (see SEC Votes on Work Plan for Incorporating IFRS). However, the exact work plan is still not public at this writing.

In addition, the new plan basically reiterates the old plan in the original roadmap for delaying an actual decision on whether or not to adopt IFRS until 2011. That decision will be contingent on whether a series of milestones have been met, including convergence between U.S. GAAP and IFRS, improved governance of the International Accounting Standards Board, and education and training of companies in the U.S. about how to use IFRS. There also remain questions about the cost. The SEC staff, led by Chief Accountant Jim Kroeker, will be responsible for carrying out the detailed work plan for accomplishing these goals. Companies would be given four or five years to prepare for the transition, pushing off the date to around 2015.

Reaction was varied to the unanimous decision Wednesday by the SEC to reaffirm its support for high-quality globally accepted accounting standards and ongoing consideration of IFRS.

“The statement that’s coming out puts this commission on record as supporting a single global standard, that being IFRS,” said Deloitte partner D.J. Gannon. “Think back to the last year or so, and there has been a lot of skepticism around what this commission’s view on IFRS has been, especially in light of some of the prior statements coming out from the staff. I think today we’ve learned that the commission is supportive of this initiative. What’s also significant about today’s action is that the commission has directed its staff, the Chief Accountant’s Office, to carry out this work plan. What’s interesting about the work plan is it’s in the context of future adoption of IFRS in the U.S. and addressing the issues that have been raised.”

“I think the SEC was trying to signal its support of IFRS, but also acknowledging on the other hand that there are some issues that need to be worked through and identifying those issues,” said Cindy Fornelli, executive director of the Center for Audit Quality. “I think one of the challenges to the SEC was that when they put out the roadmap and asked for comments on it, they were asking for comments largely on whether there should be a date certain. So that’s what people answered. Implicit in the comments was people’s support for a single set of high-quality global standards, and I think logically those standards are IFRS. But that was about the only consensus the SEC got in their comments.”

“It was reassuring to hear from the SEC commissioners today that the commission would be issuing a public statement reaffirming the SEC’s commitment to working toward a goal of single set of high quality, globally accepted accounting standards,” said Bob Dohrer, national director of assurance services with McGladrey & Pullen. “Additionally, it was noteworthy that notwithstanding some of the political aspects of a U.S. adoption of IFRS, that the SEC continues to believe that at this point, IFRS continues to be the most well-suited accounting framework to meet that goal.

"Unfortunately, however, given some recent doubts about whether the Financial Accounting Standards Board and the International Accounting Standards Board can complete their agreed-upon convergence work plan by June 2011 and the importance expressed by the SEC commissioners that before IFRS would be adopted that the FASB/IASB convergence work plan be completed, the uncertainty as to timing of an ultimate decision by the SEC was not relieved," he added. "As a matter of fact, with the addition of the completion of the SEC staff work plan, perhaps more uncertainty as to “when” exists now than it did yesterday. It is comforting, however, that the SEC did indicate that regardless of the “date” that an adoption of IFRS might come, the commission would give preparers ample time to prepare for the conversion and that the commission recognizes that perhaps four to five years of preparation is required.”

“It’s definitely a step forward and closer to getting to the ultimate goal of convergence,” said Marty Lax, managing director at RSM McGladrey in New York City. “You’ve got to start somewhere and that will probably be with the SEC, and with regulatory bodies.”

However, he noted that it’s still “up in the air” for his clientele, which are mostly offshore hedge funds. He believes it will be tougher to convert private companies to IFRS. “Many of them will have things such as lease and loan obligations, which may have some type of default trigger based on a financial statement ratio or statistic,” he noted. “It is the banks, lessors and similar entities that will have to modify their computation to be in conformity with IFRS to ensure that there is not an immediate triggering of a default solely due to converting to IFRS, and I don’t believe that process has even started yet.”

American Institute of CPAs president and CEO Barry Melancon issued a statement of support. “Our increasingly global economy makes it clear that the U.S. should move toward a single set of high-quality, globally accepted accounting standards for public companies,” he said. “The AICPA supports the thoughtful and concrete steps the SEC is taking as outlined in its plan today to prepare for this transition. As we move forward, it is essential that all stakeholders in our capital markets – regulators, investors, auditors, financial statement users and preparers – have the knowledge and tools they need to successfully navigate any change in U.S. accounting rules. The AICPA is doing its part now to help our professional members, students, educators and the public to prepare for this shift. The AICPA believes that it is critical for the SEC to set a date certain for use of IFRS in the U.S. and we urge the commission, as it completes this work plan in 2011, to ensure investor confidence is maintained and key milestones lead successfully to global standards in 2015.”

However, on the other side of the Atlantic, the reaction was more skeptical. “Stakeholders across the world have been awaiting clear signals from the Securities and Exchange Commission as to how and when it is going to start the process of completing the convergence to International Financial Reporting Standards,” said Dr. Nigel Sleigh-Johnson, head of the Institute of Chartered Accountants in England and Wales Financial Reporting Faculty. “Those looking to the SEC to provide clear leadership in realizing the G20 vision of a single set of high-quality global accounting standards may feel that today’s statement from the SEC fails to provide the reassurance they sought; that the U.S. journey towards an IFRS future is well on track.

“Whilst we warmly welcome the SEC’s continuing commitment to this vision, it will only become reality once the US sets out a definitive timeline and deadline for switching to IFRS,” he added. “The current cautious approach does not offer the much-needed certainty required by U.S. companies and the many jurisdictions still in the process of making final decisions about switching to IFRS reporting.”