This article was first published in the June 2012 International edition of Accounting and Business magazine
As of 2011, approximately 120 nations and reporting jurisdictions in total were using International Financial Reporting Standards (IFRS) for domestic listed companies, and approximately 90 countries had fully conformed with IFRS as promulgated by the International Accounting Standards Board (IASB). However, with the goal of the use of IFRS (or standards consistent with IFRS) in all major economies close at hand, several large hold-outs remain – the most significant of which is the US.
For many, it was thought that the US Securities and Exchange Commission (SEC) would be making an official statement in 2011 regarding if, how and when the US would adopt IFRS. The year marched on and, in December 2011, James Kroeker, SEC chief accountant, announced that any decision on IFRS would ‘take a few more months’.
For those of us that have been waiting patiently through the SEC’s deliberations, a few more months may not seem like a long time. However, we must be reminded that US consideration of the adoption of IFRS (IAS) has been ongoing since 2000. Twelve years later we have to ask, has the SEC moved any further ahead in its thinking around adoption?
With the majority of the ‘fieldwork’ completed and one more ‘final comprehensive report’ to come, the US is now poised to make a final decision about the use of IFRS in America. However there are strings attached. In order to move forward, certain conditions must be met. More specifically, in his remarks at the December 2011 AICPA conference, Kroeker articulated a framework for moving forward, one which for many raised questions as to whether IFRS is a real possibility in America.
More specifically, Kroeker wants a framework that: demonstrates a high level of support for US commitment to the continued development and use of global, consistently high-quality accounting standards; provides, both in fact and in substantive operation, clear US authority over standards applicable in the US capital markets; provides for and facilitates a strong US voice in the process of establishing global accounting standards; is responsive to the economic and other impacts of change; considers whether to retain ‘US GAAP’ as the basis for US financial reporting, thereby mitigating the costs and complexity of introducing a new set of standards under regulatory regimes, contractual documents, and US laws under which compliance with US GAAP is often specifically contemplated.
The above certainly seems like a tall order, particularly during this election year, when we have to question whether the SEC will have the appetite to make any bold movements one way or another. Do these conditions foreshadow the US opting out of IFRS altogether?
Paul Cherry, chairman of the Standards Advisory Council of the IASB and former chairman of the Canadian Accounting Standards Board, suggests quite the opposite. In his view, this could be taken as the signal that the US intends to adopt IFRS outright, and sooner than later. With reference to the framework, Cherry says: ‘I think this conveys a significantly different message than what we may have heard several months ago. In fact, I believe that the SEC has shifted its view, which previously was inclined towards a condorsement/endorsement approach, or a gradual convergence of US GAAP and IFRS over time, item by item, to outright adoption.’
In that light, says Cherry, ‘you have to appreciate the significance of Kroeker’s comment about needing a framework. You need a game plan that would get the SEC and all domestic US issuers eventually using IFRS’.
As to the elements of the framework, close watchers of the SEC’s deliberations are neither surprised nor alarmed. As David Schmid, PwC’s US Convergence and IFRS Assurance Leader, explains, the framework Kroeker outlines is not unexpected. ‘The framework tells us that the SEC has come to the opinion that it would be best for US investors and the US capital markets for the US to use a globally consistent set of international standards,’ he says.
Secondly, retaining clear US authority over standards applicable in US capital markets is a legal issue, says Schmid, not necessarily a practical issue. That authority was granted to the SEC by the Securities Exchange Act in the 1930s. It still retains that authority over the accounting standards used in the US. Also, having a strong US voice in the process of establishing global accounting standards is not surprising, adds Schmid. ‘I think that’s also consistent with the point of view of the chairperson of the IASB and not inconsistent with how some of the other major users of IFRS operate today. The SEC will want to make sure that they have a mechanism where the US point of view is heard.’
Thirdly, being able to respond to local economic and market conditions makes sense in certain circumstances. ‘More specifically,’ says Schmid, ‘there were certainly actions taken by the Financial Accounting Standards Board and the IASB regarding the use of fair value when responding to global capital markets. So I think having a mechanism in the US that provides the flexibility to respond to US-centric or US-only capital market challenges or changes makes a lot of sense.’
Finally, retaining ‘US GAAP’ in name, he says, is merely a practical consideration, given the potential cost of removing references to US GAAP that currently exist.
Forward to 2012 we await the final comprehensive report of the US regulator summing up its conclusions on a variety of adoption issues and hopefully relaying a final decision around IFRS in America.
What are the implications of additional and ongoing delays in an announcement from the SEC? On the one hand, we might hear a collective sigh of relief from those who think the US should pass on IFRS altogether. Smaller companies in particular are glad for the reprieve, claiming that adopting IFRS is a human resources exercise involving extra expense, while others look forward to a date being set so they can begin to allocate the required budget to the project.
The potential costs of not adopting IFRS altogether could also be high, as Christian Leuz, Joseph Sondheimer Professor of International Economics, Finance and Accounting at Chicago Booth School of Business, explains. ‘If the US is perceived not to be part of the effort towards one global standard, I can see substantial political ramifications. For one, the US will likely lose the seat at the table. Moreover, I still remember the response of the rest of the world when the US didn’t participate in the Kyoto Protocol. So I am worried that there could be spillover effects to other areas of financial regulation for which we need international co-operation.
'At the same time,’ he says, ‘should the US back away from IFRS, this would be a loss to the process overall because America has been a tremendous force in developing reporting standards that are very high quality and are up to date in terms of how the capital markets have evolved.’
Alister Cowan, chief financial officer at Calgary-based Husky Energy, offers some advice to US regulators and US companies alike. ‘Should the SEC move towards IFRS, selecting a target date will concentrate everybody’s minds on the goal,’ he says. ‘Ambiguity just prolongs the agony.’
In commenting on the initial reaction to the Canadian Accounting Standards Board announcement that Canada would be adopting IFRS as of 2011, Cowan says: ‘Initially there was opposition against the wholesale change with a date certain. But looking back, that was definitely the way to go.'
As for companies who will go through converting to IFRS, Cowan says there’s also a need to get things done quickly and at the outset. ‘If you have system changes, you want to know what they are and do them all together.’
Arnold Hanish, chief accounting officer at Eli Lilly, echoes these sentiments, commenting on the need for a specific date for adopting IFRS in America. ‘In order for this to be done cost effectively, I believe there needs to be a definitive roadmap,’ he says. ‘If we are to adopt the convergence projects only, then that is fine; however, if there is a requirement by the SEC to adopt some or all of the IFRS standards, we need direction. For us to modify our accounting, it’s going to require going into our core systems and changing the configuration of our enterprise systems; we would like to know the direction so we can put together a definitive project plan that can be executed over a 24–36 month period.’
As to the consequences of further delays in making a decision on the use of IFRS in America, Hanish says: ‘There have been a lot of companies that have started and stopped their IFRS projects. I’d like to see the SEC finally make a decision and communicate that decision so that it takes the uncertainty away and so that we in large multinational companies, or any company, at least knows where we’re headed and when we’re supposed to get there.’
The 'final comprehensive report' of the SEC's workplan is expected shortly we think; after which time a final decision regarding the use of IFRS in America will be made.
Ramona Dzinkowski, journalist