Slowly but steadily, the Securities and Exchange Commission continues on the long journey toward adopting international tax and accounting standards, with the recent release of its long-anticipated roadmap.
The proposed roadmap is nothing less than a monumental undertaking. Its aim is to facilitate the switch of all U.S. companies from the rule-based, U.S. Generally Accepted Accounting Principles (GAAP) to the principle-based International Financial Reporting Standards (IFRS) currently used by more than 100 countries around the world.
Such a conversion is comparable in scope to switching U.S. measurements from using miles, feet and inches to the universal metric system already adopted by the rest of the world. It will be painful and costly, but necessary.
This process will take time, and regulators are taking baby steps to get there.
"The proposed roadmap is cautious and careful," SEC Chairman Christopher Cox has said repeatedly.
The roadmap's 90-day public comment period ends on Feb. 19, 2009, and some of the largest U.S. companies could start reporting under IFRS as early as December 2009.
"The roadmap is careful to state that there are substantial considerations to make over the next three years," said Paul Munter, a partner in the department of professional practice, audit and advisory for KPMG. "Participants have asked the SEC to set a date certain, but this proposed roadmap does not do that. The SEC will evaluate the progress over the next three years and come back and make a decision at a later time."
As international companies expand their reach, they are finding it increasingly burdensome to do their accounting and financial reporting in multiple systems to satisfy various regulators around the world. In the grand scheme of things, a single, global standard would make it a lot easier for companies and regulators to communicate their financial information, and it would be a lot easier for mutual funds and other investors to compare international companies.
Publicly traded mutual fund companies would not be immediately impacted by a rule change, but the SEC's long-term goal is for every public company in the U.S. to eventually adopt the global standard.
"From the investor's standpoint, accounting standards should promote both clarity and comparability," Cox said. "When it comes to satisfying investors' concerns, there is no question of the attractiveness of the promise of a truly global accounting standard." The SEC's latest roadmap sets seven milestones to be reached by 2011 before the commission makes its final decision about whether to proceed. The first four are milestones to be monitored, while the last three are more akin to action steps, Munter said.
The first milestone is concerned with improvements in financial reporting, such as last month's adoption of the summary prospectus rule and the anticipated adoption of XBRL reporting language and tagging requirements, according to Glen Davison, partner in charge of the Practice Advisory/SEC Group at KPMG.
The second milestone will consider the funding and accountability of the London-based International Accounting Standards Committee Foundation and the International Accounting Standards Board, while the third milestone considers the progress of improvements to interactive data tags for IFRS.
The SEC will also consider the availability of IFRS education and training and the state of preparedness of U.S. issuers, auditors and users, according to the roadmap's fourth milestone.
Personnel of issuers, audit committees, auditors, actuaries and valuation experts will need IFRS training. Professional associations and industry groups will need to integrate IFRS into training materials, publications, testing and certification programs, and colleges and universities will need to include IFRS in their curricula, the roadmap said.
The changes in taxes and accounting will be so significant, business schools will have to change their curriculum and CPAs will have to be retrained, said Lisa Filomia-Aktas, a partner and financial services and accounting advisory services leader for Ernst & Young.
Davison said the fifth milestone initiates the limited use of early IFRS reporting by eligible companies.
Companies that are among the top 20 in their industry can choose to participate in the voluntary, early adoption period, so long as IFRS is the prevalent accounting standard.
The roadmap said 110 companies are eligible for early adoption across 34 industries, and the estimated cost per company of dual reporting in GAAP and IFRS will be approximately $900,000 a year. Should the SEC decide in 2011 to go ahead with the changes, companies will be required to have three years of audited annual 10-K forms the first time they file, even though IFRS requirements only ask for two years of financial information, Munter said.
The sixth milestone will anticipate the timing of future rulemaking to ensure regulatory harmony and promote the mandatory use - as opposed to the elective use - of IFRS.
"Because IFRS has the greatest potential to become the global standard of accounting, we believe it is in the interest of U.S. investors, U.S. issuers and U.S. markets to consider mandating reporting using IFRS in the United States as well," the roadmap said. "Additionally, we believe that over the long term, the existence of dual accounting standards in the United States may create challenges in the U.S. capital markets, such as comparability for investors and other users of financial information and professional competence of auditors. We therefore are proposing this roadmap towards the mandatory use of IFRS by U.S. issuers."
Munter said the proposed roadmap does not identify the method the SEC would use to mandate IFRS compliance for U.S. issuers, and added that the SEC does not have the authority to mandate reporting for non-SEC registrants.
The seventh and final milestone will consider the readiness for the implementation of mandatory use of IFRS for large filers, accelerated filers and non-accelerated filers, Davison said.
The gradual phase-in of the IFRS rules is likely to begin with large, accelerated filers on Dec. 15, 2014, under the premise that larger issuers will be better able to allocate resources and adapt to the transition than smaller issuers. Medium-size accelerated filers could be required to file using IFRS on Dec. 15, 2015, and non-accelerated filers by Dec. 15, 2016.
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