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08/03/2010  - Participant News: Moss Adams - IFRS Advisory 


 

The IFRS Delay: What Does It Mean?
On February 24, 2010, the Securities and Exchange Commission formally announced its continued support for a single set of globally accepted accounting standards and for the ongoing convergence of U.S. GAAP and International Financial Reporting Standards (IFRS). In unanimously approving a new timeline that sets 2015 as the earliest possible date for the required use of IFRS by U.S. public companies, the SEC is clearly trying to find a critical path forward on its original road map for adoption.

The commissioners have expressed concern about the lack of investor input into the original plan and have given themselves more time, and more ways, to opt out of mandatory conversion. They’ve also urged continued convergence efforts between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to bring U.S. and international standards closer together and reduce the impact and cost of adoption if, and when, it happens.

From our perspective, the good news is that the SEC has reaffirmed the importance of one global standard and is better positioning itself to decide adoption in 2011, keeping pace with its initial road map. The not-so-good news is that it has introduced enough conditions that companies may find little new guidance useful for concrete planning.

How Should Companies Respond?
Small public companies should actively monitor the joint projects under the memorandum of understanding between the FASB and IASB. They should continue to increase their understanding of IFRS, participating in training and making sure they get ahead of the curve by learning the fundamentals of the international standards and how they might eventually affect their reporting procedures. Unless a company is listed on a foreign exchange or has very substantial foreign operations, that’s probably all that’s prudent to do right now.

Private companies should also monitor the joint projects, especially if they have plans to seek foreign capital or are owned by a foreign company, because convergence will have a direct impact on their accounting and reporting. A blue-ribbon panel has been established by the American Institute of Certified Public Accountants, the Financial Accounting Foundation, and the National Association of State Boards of Accountancy to address how U.S accounting standards can best meet the needs of users of private-company financial statements.

The Consequences of the SEC’s Delay
By and large, U.S. domestic companies will be pleased not to have to deal with adoption of a new accounting standard for the time being. For their part, multinational companies may find that their financial reporting costs will grow as our principal trading partners—China, Canada, Mexico, and others—complete their own adoptions of IFRS. Indeed, the SEC has made it pretty clear that it doesn’t see its mandate as protecting the competitiveness of U.S. multinationals; instead, it appears to view investor interests as its primary concern.

In the short term, investors may benefit (on the margins) with the one-year delay. In the long run, however, the cost of compliance with multiple standards may negatively affect U.S. company competitiveness, in terms of both operating and capital costs, and this will hurt U.S. investors. In the meantime, U.S. companies have an opportunity to leverage greater efficiency—and potentially reduce costs associated with financial reporting—by overseeing the rollout of a consistent reporting standard across all their foreign subsidiaries.

As mentioned above, U.S. investors were noticeably absent among the 200 or so authors of comment letters received by the SEC on the original road map. Yet this is the primary constituency the SEC really wanted to hear from—although they came to this conclusion only after the fact. It now appears that the SEC is prepared to be a bit more proactive in soliciting input from investors. Hopefully, the commissioners will also encourage input from Certified Financial Analysts and other professionals who advise investor interests as well as the investors themselves.

Only time will tell whether the SEC’s IFRS delay makes sense, but in the meantime farsighted companies should remain focused on the possibility of one global accounting standard—most likely IFRS, because there are no other clear alternatives.