KBL – certified public accountants and advisors

Under the proposed rule changes, in order to file under the voluntary program, a company must be one of the 20 largest companies, worldwide, in their industry group, and IFRS must be the most-used basis of reporting by those 20 largest companies. It is estimated by the SEC that at least 110 companies in 34 different industries would meet this criteria. Registrants wanting to make this election will have to make their own analysis of their eligibility and obtain a letter of no objection from the SEC. The transition rules will follow IFRS 1, First-time Adoption of International Financial Reporting Standards, with certain additional criteria and transition requirements.

The proposed roadmap requires reporting under IFRS on a staggered basis for large accelerated filers, then accelerated filers and finally non-accelerated filers and smaller reporting companies from 2014 to 2016. The required reporting under the roadmap is dependent upon an assessment by the SEC in 2011. The SEC will assess, among other items, the progress of improvements in IFRS and the continued convergence process with U.S. GAAP; the accountability, funding, and independence of the IASB; the use of interactive data (XBRL) with IFRS; the state of education and training on IFRS in the U.S.; and the experience and knowledge gained from the large U.S. multinational corporations which elect IFRS early.

As noted, the proposed roadmap lays out a timeframe for use of IFRS by all registrants, as well as steps to be taken by 2011 to allow the proposal to proceed. If the past is an indication, all users will need to remain alert to the possibility that the requirement to issue financial statements under IFRS may come sooner than 2014 or stretch beyond 2016. As an example, in 2005 the SEC adopted a roadmap to eliminate by 2009 the reconciliation to U.S. GAAP required of foreign private issuers. Because of the progress which was made, the reconciliation requirement was eliminated in February 2008, nearly two years early. Another example can be found in connection with the internal control reporting provisions of Section 404 of the Sarbanes-Oxley Act (the 404 reporting requirements). The enactment of the 404 reporting requirements was also a staggered, planned implementation, similar to that proposed in the roadmap for IFRS. The final stage of that implementation has been, and continues to be, delayed several years beyond its initial estimate.

What is the potential impact on registrants who might fall under the roadmap? When evaluating the impact, it may be helpful to look at the effects of the 404 reporting requirements. While many companies started early and successfully reported as required, many other, usually smaller, companies started much later than they should have and incurred significant costs and related headaches as a result. Since the conversion to IFRS will require restating prior periods under IFRS and the effects will be felt in all areas of the company, not just accounting, registrants will need to start much earlier than they might first think they should, or risk being unprepared to file when required.

An additional consideration involves one of the criteria to be used in the proposed evaluation in 2011, the progress of both the FASB and the IASB on the convergence of U.S. GAAP and IFRS. If both standard setters make the progress expected, in five to seven years the differences between U.S. GAAP and IFRS may be mostly inconsequential to most users. If that turns out to be the case, having to file under IFRS as proposed would result in immaterial differences for many registrants.

For those large multinationals eligible to voluntarily file using IFRS in 2010, the decision to elect to file in IFRS will be both cost-driven and market-driven, and those eligible companies will need to begin their evaluation of the issue immediately. For those companies which are not eligible, they should monitor those companies which do early adopt and their experiences, the progress on the proposed roadmap criteria, their own company’s position in the phase-in categories, and statements by the SEC in the intervening period to determine how IFRS may apply to them.

After their experience with the 404 reporting requirements, the SEC may be more sensitive to concerns of the time and cost to registrants to implement the proposal. All registrants (and those who advise or analyze registrants, or are thinking of becoming registrants) should read the proposal and consider commenting on those portions they consider critical to them. With a comment period of 90 days from publication in the Federal Register (rather than the usual 30-60 days), the SEC seems interested in getting as many comments as possible. It would also be prudent for registrants to begin discussions with their auditors sooner, rather than later, to begin their preparation for this rather large change event.

The proposal can be found at