In August 2008, the United States (US) Securities and Exchange Commission (SEC) unanimously approved a proposed roadmap for conversion to International Financial Reporting Standards (IFRSs).
The roadmap’s first step is to allow for the early adoption of IFRSs by 110 of the largest publicly held companies in the US; companies that represent 14% of the total US market capitalisation. The SEC’s proposal would allow these companies to begin using IFRSs at the end of 2009 for their 2010 filings.
As a second step, the SEC would, in 2011, determine whether to mandate the transition to IFRSs by all US companies in 2014. Although the proposed roadmap will establish milestones to be achieved before fully mandating IFRS, it has left open the possibility of sequencing the IFRSs rollout based on the size of the company.
The SEC has yet to decide whether to allow other companies to adopt IFRSs early prior to the mandatory date.
This decision by the SEC follows an announcement in 2007 that foreign companies could prepare their financial statements in terms of IFRSs without the need to reconcile to US GAAP. South African companies that have dual listings in the US have already reaped the benefits of this reporting relief.
The profound significance of the roadmap is its evidence of the US’ commitment to one set of global accounting standards.
As the world’s largest national capital market, it is vital for the US to buy into IFRS in order for one set of accounting standards to be a reality for the world. The SEC’s decision is a huge milestone for global investors, because it facilitates the ready interpretation of financial results for any company, no matter where it is listed, as all financials will be prepared on the same basis.
South African companies have been applying IFRSs for a number of years and have a great deal of experience in their application. The SEC decision vindicates the South African standard setter’s decision to adopt IFRSs a number of years ago.
The Financial Accounting Standards Board (FASB) develops the American accounting standards (US GAAP), while the International Accounting Standards Board (IASB) is an international body with the goal of providing the world’s integrating capital markets with IFRSs – a common language for financial reporting.
In September 2002, a Memorandum of Understanding called the Norwalk agreement was struck between the FASB and IASB. The agreement stated that:
1. The financial standards would be fully compatible as soon as practicable; and
2. The IASB and FASB will coordinate their future work programmes to ensure that compatibility, once achieved, would be maintained.
The SEC had already highlighted the need for one set of globally accepted accounting standards to assist the strong expansion of capital markets across international borders. It acknowledged that financial statements prepared using a common set of accounting standards would help investors understand investment opportunities and it might, in addition, lower costs for issuers.
The primary driver behind the expansion of IFRS for the US was a decision made by the European Parliament and the Council of the European Union that all listed European Companies had to prepare their consolidated financial statements in accordance with IFRSs from 2005 onwards. The US manifestly realised the benefit of one set of international accounting standards.
Details of the proposed roadmap
The proposed roadmap has seven milestones, which, if attained, could lead to a decision for the mandatory use of IFRSs from the fiscal years starting on or after December 2014.
Milestones 1-4 discuss issues that need to be addressed before mandatory adoption of IFRS:
1. Improvement in the accounting standards: The SEC is expecting the FASB and the IASB to continue their convergence project to align the various accounting statements.
2. Accountability and funding of the International Accounting Standards Committee Foundation (IASCF): The IASCF has been funding the IASB operations through voluntary contributions, but is now expected to become a stand-alone, private-sector organisation that will function on its own.
3. Improvement in the use of interactive data: The SEC wants to use eXtensible Business Reporting Language (XBRL) to evaluate IFRS data. For this the IASCF has released an IFRS taxonomy to be evaluated by the SEC.
4. Improvement in IFRS education and training: The SEC evaluates the state of IFRS preparedness of US issuers, auditors and users, as well as the availability of training and education. This would include universities as well as training institutions.
Milestones 5-7 discuss the transition plan for the mandatory use of IFRSs:
5. Limited early use: The roadmap suggests that certain US companies meeting specified criteria will file IFRS statements with the SEC for the years ending on or after 15 December 2009.
The US issuer must meet the following criteria:
a. Be one of the 20 largest companies (based on global market cap) in its industry; and
b. Participate in an industry where the use of IFRS is more prevalent than any other basis of accounting.
6. Timing of proposed rule-making: In 2011 the SEC will make a final decision on whether the use of IFRSs will be mandatory, based on the progress of milestones 1-4 and experience gained from milestone 5 – early implementation of some companies. The SEC will also decide on whether the adoption of IFRSs would be in the public interest and for the benefit of investors.
7. Potential implementation of mandatory use: The SEC anticipates mandatory use of IFRSs, depending on its decision, for 2014 for large accelerated filers, 2015 for accelerated smaller filers and 2016 for non-accelerated filers.
Based on a preliminary assessment, the roadmap would allow for early adoption of IFRSs for some 110 companies over 34 industries. For companies that meet these requirements, the SEC is also expected to require:
• either a one-year reconciliation of the issuer’s financial statements from IFRSs to US GAAP in accordance with IFRS1, first-time adoption of international financial reporting standards; or
• an unaudited three-year reconciliation of the issuer’s financial statements from IFRS to US GAAP until such time as the use of IFRSs becomes mandatory.
Tighter monitoring of the IASB proposed
The SEC’s August 2008 announcement follows the recent proposals by Trustees of the IASC to amend its constitution to establish a formal link to public institutions with the setting up of a Monitoring Group (MG), which will be outside the IASCF’s formal organisational framework. This MG is in response to the Trustees recognising the need to demonstrate the organisation’s public accountability.
The MG will consist of representatives of organisations, including the SEC, IOSCO, the European Commission, the International Monetary Fund (IMF), the World Bank and the Japanese Standard-Setter.
Since 2001, more than 100 countries have required or permitted the use of IFRSs, and with Brazil, Canada, Chile, India, Japan and Korea all establishing timelines to adopt or converge with IFRSs, the US decision is setting the stage for achieving the IASB’s goal of providing the world’s capital markets with a common language for financial reporting.
Juanita Steenekamp CA(SA) is Project Director: Governance, SAICA.