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SEC Begins Process to Move U. S. Public Companies to International Financial Reporting Standards

By Richard Levychin, CPA
Partner, KBL, LLP
Certified Public Accountants and Advisors

In a move to globally standardize accounting standards, the Securities and Exchange Commission has launched a process that could ultimately require all publicly traded U. S. companies to follow international financial reporting standards.

In announcing the launch of the process, the SEC stated that “the increasing integration of the world\'s capital markets, which has resulted in two-thirds of U.S. investors owning securities issued by foreign companies that report their financial information using International Financial Reporting Standards (IFRS), has made the establishment of a single set of high quality accounting standards a matter of growing importance. A common accounting language around the world could give investors greater comparability and greater confidence in the transparency of financial reporting worldwide.”

\"An international language of disclosure and transparency is a goal worth pursuing on behalf of investors who seek comparable financial information to make well-informed investment decisions,\" said SEC Chairman Christopher Cox in announcing the move. \"The increasing worldwide acceptance of financial reporting using IFRS, and U.S. investors\' increasing ownership of securities issued by foreign companies that report financial information using IFRS, have led the Commission to propose this cautious and careful plan. Clearly setting out the SEC\'s direction well in advance, as well as the conditions that must be met, will help fulfill our mission of protecting investors and facilitating capital formation.\"

Chairman Cox noted that over 100 countries around the globe use IFRS and two-thirds of U. S. investors currently own securities of foreign companies. Chairman Cox further noted that if nothing were done and trends were allowed to simply develop, comparability and transparency would decrease for U. S. investors and issuers. The proposal is the culmination of Chairman Cox’s push to lower global barriers for U. S. investors. It also helps greatly in addressing the concern that Wall Street was losing business to overseas competitors since some have said the U. S. accounting standards have caused the New York and other stock exchanges to be a less attractive place for non-U. S. companies to list their shares.

The SEC’s proposal would allow the larger U. S. publicly traded companies to report their earnings in accordance with IFRS commencing in 2010. The SEC estimates at least 110 U. S. companies would qualify using a variety of factors including their market capitalization. The SEC intends in 2011 to check progress on the transition, and if all is going as planned, recommend that all U. S. listed companies shift to IFRS in 2014. The SEC also created a road map by which all U. S. companies would switch to IFRS beginning in 2014.

The proposed road map will allow reporting under IFRS on a staggered basis from 2014-2016. In its proposed 2011 assessment, the SEC expects to look at, among other items, the progress of improvements in IFRS and the continued convergence process with U. S. GAAP, the funding of an international standard setting body and the state of education and training on IFRS in the U.S.

U. S. generally accepted accounting principles (GAAP) is based on complex rules which are constantly changing, many of which are very specific and unique in various industries. For example, the oil, gas, and insurance industries have GAAP standards that are specific and unique to them. International standards tend to follow broader principles. For example, under U. S. GAAP real estate is reflected at original cost and can’t be adjusted upward to reflect appreciations in fair market value. International standards require real estate to be reflected at fair market value. Under U. S. GAAP research and development costs are generally expensed when they occur. IFRS require that the costs be reflected as an expense over time once the project gets to the development stage.

There are those that feel that IFRS will provide companies with the tools that will allow them to choose a standard that presents their financial statements in the best light and will likely inflate the earnings of U. S. companies. To support this point a study of the 2006 filings of 137 foreign companies who traded in the U. S. revealed that 63% of the companies reported higher earnings under IFRS.

The shift from U. S. GAAP to IFRS would be costly and would still require companies to maintain a separate set of books based on the U. S. tax code for U. S. tax compliance purposes. Education and training for both U. S. filers and their independent auditors are important to the U. S. transitioning to IFRS and would also be costly.

Those large multi-nationals eligible to voluntarily file using IFRS in 2010 should begin their evaluation of the issues involved in their company’s transition to IFRS immediately, not only focusing on the resources needed to implement the change but also the impact on costs and their individual company’s presentation in the market place. For those companies which are not eligible, they should monitor the progress on the proposed roadmap criteria, their position in the phase-in categories, projected costs and educational and training requirements, and statements by the SEC in the intervening period to determine how IFRS may apply to them.