More than 15,000 companies listed overseas use IFRS
In 2011, India and Canada, among others, will convert their financial reporting systems to IFRS
This will add at least 12,000 additional companies to the list of companies reporting under IFRS
In the past, companies who wished to list securities in the US had to reconcile their financial statements to show the nature and cause of differences in earnings based on their reporting standards and US GAAP on a Form 20-F
As of 2007, the SEC removed this restriction for companies using IFRS and now allows foreign registrations to use IFRS without reconciliation
The SEC is in the process of publishing a proposed roadmap (more on this later) that is moving toward allowing or requiring U.S. companies to use IFRS.
This could mean that U.S. GAAP is no longer used…and we are talking about a timeframe from 2009 – 2016..
The FASB, SEC, AICPA, and the Big-4 Accounting firms (KPMG, PWC, Deloitte Touche, and E&Y) all favor the adoption of a set of high quality international reporting standards, and the consensus is growing that IFRS will be that standard.
“ The AICPA supports one set of high-quality global accounting standards for public companies,” said Barry Melancon, AICPA president and CEO. “We believe the capital markets ultimately will insist on IFRS for public companies. Today’s action by the SEC continues a robust and thoughtful debate that is critical as the transition occurs.”
Why Global Accounting Standards?
Enhanced worldwide comparability for investors
Enhanced quality of reporting
Some national GAAPs are week
Possibly a lower cost of capital
More company-friendly US securities market for foreign listings
Reduced reporting costs
No need to develop and maintain national standards
For audit firms and companies:
Easier movement of auditors and accountants across borders
The International Accounting Standards Committee was founded in 1973. At that time, it was composed of volunteers who met three times a year. They issued statements called International Accounting Standards (IASs); they issued 41 such standards.
As the demand grew for international reporting standards, IOSCO (The International Organization of Securities Commissions, of which the U.S. SEC is a member) issued a mandate that the IASC develop a core set of standards, and determined that if they were successful, the SECs of member countries would consider pursing international standards for their jurisdictions.
To meet this mandate, it was necessary to restructure the IASC
In 2001, the first restructuring occurred
Full time IASB based in London
Issue IFRS (old IASs remain in force unless superseded or revised)
USE OF IFRS WORLDWIDE
For domestic LISTEC companies
IFRS required for all: 85
IFRS required for some: 4
IFRS permitted 24
IFRS are used by UNLISTED companies in over 80 jurisdictions
EU, EAA, and Switzerland
IFRS is used by all listed entitites (about 8,000) in consolidated statements.
In the EU, IFRS must be “endorsed” by the Union
One modification with respect to reporting on derivatives (IAS 39) so the audit report reads “IFRSs a adopted by the EU”
The modification affects just a few companies (less than 100)
The endorsement mechanism in the EU results in time lags.
(NOTE: The SEC only accepts IFRS as published in English by the IASB for U.S. filings without reconciliation)
Nearly word-for word convergence: Australia, New Zealand, Hong Kong
Modifications, time lags, some not adopted: Singapore, Thailand, Malaysia, Philippines, China
Own standards: Japan (convergence program in place), Taiwain
2011 adoption of IFRS planned: India, Korea
Canada, planned conversion to IFRS in 2011
Permitted for foreign SEC registrants since March 2009
Proposed roadmap for US adoption
IFRS required in Brazil by 2010 for all listed companies, banks
IFRS phased in from 2009-2011 in Chili and over a dozen smaller jurisdictions
Middle East and Africa
Many countries require IFRS, although there are often country-specific idiosyncracies
Financial Reporting Environments
US – strong enforcement by SEC
Long traditionof strict, detailed accounting standards
Publication of audited financial statements by publicly traded companies
Many other countries
Strong company laws with moderate to weak enforcement by regulators
Diverse auditing cultures
Private as well as public companies must often publish financial statements, often audited
CANADA, UK, US
Public sector has long accepted private sector accounting standards
Public sector is suspicious of private-sector accounting standards, questioning if they are in the public interest
Its ever-lengthening endorsement process detracts from worldwide comparability
IFRS as adopted by the EU may foreshadow further deviations from IFRS
Most countries converge national GAAP with IFRS.
Some adopt IFRS as published by the IASB
IFRS is becoming more rules-based (1,200 pages in 2000; 2,700 pages in 2008)
IFRS vs US GAAP
IFRS: Principles-based standards with limited application guidance
US: Rules-based standards with specific application guidance
Disclosure of segment liabilities
Basis for consolidation
Deferred tax assets
Revaluation of PP&E and quoted intangibles through equity
Gains on sale and leaseback
Investments in real estate
Actuarial gains and losses
Vested past service cost
Reversals of write-downs
SEC to Propose Roadmap for Potential Mandatory IFRS Filings
On August 27, 2008, the SEC decided to issue a proposed IFRS Roadmap.
The SEC proposed specific rule changes that would permit the use of IRFS for certain U.S. issuers.
The Roadmap proposal will be published in the Federal Register within 60 days.
The proposal acknowledges that IFRSs have the potential to become the global set of accounting standards
A timetable for adoption in the U.S. is proposed.
Assuming certain milestones are achieved, the SEC is considering a mandatory transition to IFRSs starting in 2014.
The proposed roadmap would commit the SEC staff to monitor the progress toward achieving milestones.
IF, in 2011, the SEC deems there has been adequate progress toward achieving the milestones, they would consider adopting final rules requiring U.S. public companies to use IFRS.
The proposed roadmap includes a potential phased transition over three years beginning with large accelerated filers in 2014, followed by accelerated filers in 2015, and concluding with non-accelerated filers in 2016.
IFRS continued improvement. IFRS would be improved largely through continued efforts b the IASB and the FASB to converge IFRS and U.S. GAAP.
Funding and accountability of the International Accounting Standards Committee Foundation. Accountability would be strengthened by establishing a “monitoring group’ and its funding process would be stabilized by basing int on shared obligations undertaken by jurisdictions using IFRS.
Improvement in the ability to use interactive date (e.g., XBRL) for IFRS reporting. That is, the technical capability to communicate financial information in the XBRL computer language based on the coding terms specified in a ‘taxonomy’ would have to be available.
Education and training in IFRS in the United States.
Limited early use by eligible entities. This milestone would give certain U.S. issuers the option of using IFRS for fiscal years ending on or after December 15, 2009.
A majority of peer-group companies report using IFRS as issued by the IASB
The U.S. company is one of the top 20 peer group companies
(potentially more than 110 companies representing approximately 14% of total U.S. market capitalization.)
On the basis of the progress toward meeting milestones 1-4, and the experience gained from milestone 5, the SEC will determine in 2011 whether to require mandatory adoptoin of IFRS for all U.S. issuers. If so, the SEC will determine the date and approach for a mandatory transition to IFRS.