Getting to IFRS With Wisdom, Not Expediency

In my first column this year, I wrote that I hoped the Securities and Exchange Commission would soon give us some clarity on its thinking in regard to moving U.S. reporting companies to International Financial Reporting Standards to calm some of the anxiety regarding that potential move. My wish was fulfilled in February when the SEC issued its “Commission Statement in Support of Convergence and Global Accounting Standards.”

As I hoped, the SEC indicated that a 2014 mandatory adoption of IFRS is off the table, even for large U.S. companies. The statement also indicated that the SEC now foresees at least a four- or five-year period between a decision to move to IFRS and the first required IFRS-based filings from U.S. companies. Largely as a result of these clarifications, U.S. public companies are decidedly less anxious about an impending move to IFRS.

With nerves thus calmed, and new information available about the SEC staff’s “work plan” (which replaces the less detailed “roadmap”), we can now start to consider again the various issues and hurdles that lay ahead as the United States considers a move to IFRS, as well as the possible costs and benefits of such a move.

While U.S. public companies have reacted largely as I expected, other interested parties have had widely varying—and sometimes surprising—reactions to the SEC’s statement. For example, some of my European colleagues were disappointed in the SEC statement, seeing it as a delaying tactic that raised questions about the SEC’s continued interest in IFRS. Some, in both the United States and Europe, seemed to be hoping for an actual decision on IFRS adoption at the SEC’s late-February meeting, and were disappointed that the uncertainty about whether and when the United States will move to IFRS remains.

Still others have suggested that the SEC’s continued interest and efforts toward IFRS adoption, as laid out in the work plan, show that the SEC is not listening to its constituents and moving too quickly toward IFRS, without giving adequate time for capital market participants to understand and study the implications of such a move, particularly on the consistency of application of accounting standards.

Others, including former SEC Chairman Harvey Pitt (as expressed in his Compliance Week column last month), believe that a move to IFRS will be necessary eventually, and the work plan may delay the decision until the move must be made, for defensive reasons. This camp worries that the SEC may delay its decision too long, leading to a loss of United States influence on IFRS standards and, potentially, less robust capital markets.

All of these groups are reading too much into the SEC’s actions. All seem to want the SEC to make a quick decision (either to push toward conversion to IFRS or drop it) that really shouldn’t and needn’t be made quickly.

So What Does It Mean?

While the SEC’s statement should have come sooner than it did, the position it stakes out is very much in the interests of the U.S. capital markets. Like Harvey Pitt, I believe that a move to IFRS at some point in the foreseeable future will be the right move. But I don’t believe that such a move is inevitable, nor do I believe that the SEC must move quickly to IFRS to defend the U.S. position in the global capital markets. Our markets are strong, deep, and robust, even though our accounting standards are different. U.S. companies generally do not feel the need to raise capital outside the country, and foreign companies may already use IFRS financial statements to access our markets. As such, there is no need to go to IFRS as a defensive move, now or in the future.

The SEC statement does not outright suggest a change in the anticipated date of a decision on moving to IFRS, but it may portend one, by linking the decision to completion of several significant standard-setting projects currently scheduled for 2011. Of course, delays in these projects might delay the SEC’s decision beyond 2011. Coupled with the longer planned transition period between the final decision and the first IFRS filing, the likely use of IFRS by U.S. companies now seems too far off to some. Both of these points, however, respond to some of the more frequent comments on the proposed roadmap. These actions don’t indicate reduced interest in IFRS at all; they only show that the SEC understands that a decision to move to IFRS can’t be a hasty one—which it would have been, had the SEC made a final decision in February.

Instead, the SEC’s pace will allow a few things to happen that will make any move to IFRS easier. First, the completion of the major joint projects between the Financial Accounting Standards Board and the International Accounting Standards Board will both reduce the differences that would be faced in changing to IFRS and also stabilize the platform of IFRS that U.S. companies would adopt.

Also, as each year passes, we gain more and more experience in interpreting, applying, and enforcing IFRS. The more experience with IFRS that we have, the more we’re likely to identify any significant divergence in the application of IFRS. By 2015, the world will have had 10 years’ experience in using IFRS. That’s a far cry from the 70 years of experience with U.S. Generally Accepted Accounting Principles, but it’s far better than the five years of experience we have now.

Hurdles and Challenges

The continued study will also allow further development in IASB’s funding scheme, which, while headed in the right direction, is still a work in progress. The European Union Internal Markets Commissioner recently commented that continued funding of IASB could depend on whether sufficient governance changes happen; statements like that reduce confidence in the stability of IASB’s funding. If funding comes under threat annually until EU demands are met, the independence of the board will truly be in peril.

For now, U.S. companies don’t need to begin large-scale preparations for a move to IFRS. There will be time enough for that work if and when the SEC makes a decision on an adoption date.

This issue, as well as the EU endorsement process for new standards, highlights a difference between U.S. and European thinking regarding the role of a standard setter. The EU made a bold move in 2002 when it decided to move to IFRS by 2005, when the body of standards was both changing and untested. Part of what allowed the EU to make that decision was a standard-by-standard endorsement process, and an intention to mold the board to Europe’s liking.

The SEC, however, is contemplating a move to IFRS without requiring a vote by some U.S. regulatory or political body to make each IFRS standard authoritative. If and when IASB is recognized as a standard setter, its output will be authoritative as issued, and only a huge unforeseen development would lead to a demand for changes under the threat of withholding funding or reversing the recognition.

This difference in approach is part of the reason that some in Europe are impatient with the SEC. Unfortunately, just as observers in the United States often don’t give the EU enough credit for the huge leap of faith it took in 2002, observers in Europe often don’t understand the SEC’s attempts to ensure that the structure of IFRS and IASB is right before moving forward. Instead, voices in Europe call for U.S. influence at IASB to be curtailed absent a commitment to mandatory adoption for U.S. companies—and those voices grow louder as each day passes.

While I believe cooler heads will continue to prevail, the SEC must continue to remind people that its interest in IFRS is genuine. This will be particularly important if, as seems likely, FASB and IASB do not keep to the official schedule for their many joint standard-setting projects.

What Do We Do Now

For now, U.S. companies don’t need to begin large-scale preparations for a move to IFRS. There will be time enough for that work if and when the SEC makes a decision on an adoption date, and there will be plenty of developments in U.S. GAAP to deal with during that time anyway. Happily, these developments will also move us closer to IFRS, making the eventual transition easier if and when it comes.

But ignoring what is happening with IFRS is also unwise. Although I don’t think U.S. adoption of IFRS is inevitable at this point, it is likely. For a prediction, I’ll stick with the one I made in 2007: that the most likely date for the first mandatory IFRS filings for U.S. issuers is 2017. A lot can happen between now and then to change things, but at this point, I’m happy with how the SEC is handling the issue. Hopefully, with more time and progress, others will come to that view as well.