Editorial: How I Learned To Take IFRS Seriously, And Why You Should Too

I got scolded by the SEC’s John White once. Seriously: I got a verbal slapdown from a regulator—and I think I deserved it.

The incident occurred in May of this year. White, who is the director of the Division of Corporation Finance at the Securities and Exchange Commission, had agreed to deliver the opening keynote address at our annual conference. We were right in the middle of a pre-conference planning call, during which we were discussing the topics to be addressed in his speech.

At the top of my list for his opening comments: internal control over financial reporting. The SEC was set to unveil its guidance for management literally days before the event, and I was insistent that White spend the majority of his keynote address discussing the guidance. The remainder of the time should be spent, I argued, on executive compensation disclosure and possibly proxy access issues.

White then asked whether he should address International Financial Reporting Standards as part of his keynote address. I quickly said “no,” adding that IFRS was irrelevant and nobody cared.

It was then I got chewed out.

IFRS, I was told in no uncertain terms, is extremely relevant, and corporate executives better care about it. According to White, global accounting and securities regulators have been working diligently to harmonize standards for five years, and the SEC was about to hit the accelerator on the road to convergence.

In other words, he was basically saying, “You're an idiot. I'm addressing IFRS.”

This he did—you can watch video footage of his keynote address at http://conference.complianceweek.com/updates. (By the way, you can also watch video recordings of all other main-stage speakers from the event, including PCAOB Chairman Mark Olson; DoJ Fraud Chief John Roth; and actor, economist, and comedian Ben Stein. In fact, one keynote you may want to review was delivered by Judge Lee Rosenthal, who had chaired the committee that revised the Federal Rules of Civil Procedure; she provided a host of recommendations on how companies should address electronic discovery.)

Anyway, John White was right on two counts. First, I am an idiot, which comes as no surprise. Second, the SEC is indeed putting the pedal to the metal on IFRS—shortly after our conference, the Commission announced it would review the possibility of providing U.S. companies the alternative to use IFRS.

That’s right: You may be given the option of using IFRS instead of U.S. GAAP.

That development, paired with the elimination of an IFRS reconciliation requirement and a cluster of joint announcements by the Financial Accounting Standards Board and the International Accounting Standards Board, serves as proof that IFRS indeed needs to be taken seriously by U.S. companies.

Unfortunately, as John White mentioned during my verbal beatdown, the accounting departments at most U.S. public companies—including some large multinationals that are actively engaged in M&A—lack substantial experience and expertise in IFRS and global accounting standards; IFRS is not a standard course in most accounting schools, and—mirroring my own attitude on the topic—most companies haven’t really taken the time to get acquainted with the standard.

That’s going to change. Not only are global regulators and standard setters leaning toward IFRS, but almost every country on the planet has adopted IFRS, and not just in the EU: Australia, Japan, Israel (which has more Nasdaq listed companies than anyone outside the U.S.), China, Korea, and others are converging local standards with IFRS, and it’s commonly used in Russia and elsewhere. Even Canada shocked the accounting world last year, stating it would bail on GAAP and instead adopt IFRS. That means that most of your global competitors are using IFRS, and in a couple years they won’t have to provide apples-to-apples financials that are reconciled with your GAAP reports.

The ubiquitous adoption of IFRS (already more than 7,000 companies in nearly 100 countries) also means that it will be employed at almost any company you acquire outside of the U.S. So if you think there’s M&A in your future, you’ll likely have to get familiar with the standard at some point. Indeed, foreign acquisitions of U.S. companies may force your conversion to IFRS. And that’s not a theoretical pipe dream—it's already happening. According to IFRS expert David Schmid at PricewaterhouseCoopers, recent examples of acquisition-driven IFRS conversions at U.S. companies include Alcatel’s acquisition of Lucent, AstraZeneca’s acquisition of Medimmune, and Adidas’ acquisition of Reebok.

In addition, U.S. regulators are pushing hard for IFRS because they are convinced that there are myriad benefits to its adoption that outweigh the risks, including increased investor access to foreign investment opportunities, improved investor confidence in the market, better comparisons among investment options, lower costs for issuers, and more.

So let’s face it: IFRS is not only coming … it has already arrived.

To help educate subscribers about IFRS, Compliance Week will host a special “IFRS Primer,” on Thursday, Oct. 25, 2007. The one-day seminar will take place at The Mayflower Hotel in Washington, D.C., and will feature regulators and experts on the key differences between IFRS and GAAP when it comes to critical issues such as revenue recognition, fair value, instruments & contingencies, M&A considerations, tax accounting, and more. Space is limited to 100 executives, CPE credit is available, and all attendees will receive the official IFRS bound volume along with other resources.

I'm certainly not an expert on IFRS, so I can promise you I’ll be there—I've felt the wrath of John White once, and I'm not interested in experiencing that again.

Hope you can join us there. Details can be found at http://conference.complianceweek.com/ifrs.