IFRS for U.S. by 2010?

by Kurt Schulzke on February 20, 2008

In a previous entry, I highlighted the SEC’s movement to require U.S. companies to prepare their financial statements using International Financial Reporting Standards (a.k.a. “IFRS”).* In that entry, I speculated that the transition to IFRS would be rapid but didn’t offer a specific timeline. Having parsed more closely some of Chris Cox’s comments at a December 17, 2007 SEC round table, I’m ready to prognosticate. But first, let’s look at a few excerpts from Chairman Cox and John White, Director of the SEC’s Division of Corporation Finance, interspersed with my color commentary.

Chairman Cox:

[A]ll of the panelists [on Dec. 13] said they agreed that there would be tremendous benefits for all stakeholders in the application of a single set of high quality globally accepted accounting standards. They also agreed that the rest of the world is already heading in this direction, and that the end point will be IFRS and not U.S. GAAP.

Where the panelists stated that they lacked agreement was on when and how the Commission should permit or require U.S. companies to transition to IFRS.

Today’s roundtable addresses this question. To frame this question properly, I should point out that we are actually already in the middle of a transition to IFRS in the U.S. market. (emphasis added)

Enough said? Apparently not because the transcript runs on for 145 pages!

Director White:

One theme we found near universal agreement on [during the SEC’s Dec 13 round table] was the possible use of IFRS by U.S. issuers would require an extremely complicated transition process, and would require a great deal of thought and consideration.

How would the “possible use” require a complicated transition? Only actual use would require a transition. The Director is prevaricating.

This process would impact not only issuers and the systems and controls and the training of personnel that they would have to engage in but would also affect other market participants, such as auditors, investors, lawyers, educators.

Right. Most people don’t realize the extent of the sub-surface differences — in law, culture, and capital markets — between jurisdictions that currently use IFRS standards (like the European Union) and the United States. Those differences will keep the playing field uneven no matter what happens to the surface-level accounting standards.

This is what brings us here today, to explore the practical details of switching to IFRS reporting in the U.S. One source of reference for us is the many other countries that have transitioned to permitting or requiring IFRS in recent years.

The most visible example is the one described by Chairman Cox, which is the European Union, which in 2002 adopted a requirement mandating the use of IFRS for all of its companies three years later in 2005.

Big timeline hint! To the aggravation of many U.S. accounting academics, Europe is clearly in the drivers seat and is being used as a role model for the United States. They did it in three years, so can we!

Our goal today will be to explore how to make the process transitioning to IFRS reporting in the U.S. — to explore how we can do that smoothly and successfully. . .

Of course, if the Commission continues down this path and ultimately allows U.S. issuers to use IFRS, the Division will be reviewing the IFRS financial statements of U.S. issuers.

Hmm. Is “if” really the right word here? How about “when”?

We are keenly interested in the Division of Corporation Finance in your feedback of how to make such a transition go smoothly, so that issuers, investors, and yes, even regulators, will not be disrupted.

Finally, some straight talk! “We are keenly interested . . . in your feedback . . . so that [the world of finance] will not be disrupted [when we make the transition.]

Here’s my prediction: Chairman Cox wants to use the three-year EU transition as a model for the U.S., but he wants this thing to happen as quickly as possible. Therefore, he’ll start counting the three years from last November when the IFRS transition began here with its acceptance for foreign issuers. Connecting the dots, we get 2007 + 3 = 2010!

*IFRS standards are promulgated by the International Accounting Standards Board, headquartered in London, England.