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September 14, 2008

Ready, willing and able?

The world’s largest economy has proposed plans to require its listed companies to use IFRS by 2014. Although firms welcome the move, they warn the impact will spread far wider than public companies. Nicholas Moody and Carolyn Canham approached several firms to discuss the time line and its implications.

When US Securities and Exchange Commission (SEC) chairman Christopher Cox announced the “cautious and careful” proposal to require US public companies to file financial statements under IFRS by 2014, few firms were surprised. The move had been hinted at since last September when the commission issued a concept release allowing US issuers to prepare financial statements using IFRS.

Two months later, the SEC voted to allow foreign entities to file using IFRS without reconciling with US GAAP. This latest decision is being seen as the next logical step towards the use of one global set of accounting standards, although US firms warn the impact of the change will run far deeper than many appreciate.

The IFRS road map moves the world’s largest economy from the use of US GAAP to the international standards by 2014. The SEC said it would make a decision on whether to proceed with mandatory adoption for all companies in 2011 but has indicated some large US public companies can begin filing financial statements prepared according to IFRS as early as 2010.

The commission estimated as many as 110 qualifying companies – about 14 percent of US market capitalisation – could begin using IFRS in fiscal years ending after 15 December 2009. The multi-year road map also proposes carrying out staged mandatory adoption dates beginning in 2014 for large accelerated filers, 2015 for accelerated filers and 2016 for non-accelerated filers.

Right direction

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Dave Kaplan, the leader of international accounting consulting services at PricewaterhouseCoopers US, says the SEC is heading in the right direction with the announcement, a sentiment shared by all firms this publication approached.

“The level of complexity of the accounting standards in the US is extensive. We think this is an opportunity to bring in IFRS, which do not have the extensive details the US standards do,” he says. “This allows a bit more professional judgement, which we think is good, and provides a sound foundation on which to continue to build and improve those standards so they are the most robust standards for global capital markets and investors.”

RSM McGladrey international assurance services group leader Robert Dohrer says the proposal largely met his expectation of what the time line should be. One feature that was a little unexpected was the final decision on convergence being postponed to 2011.

“I think the popular opinion, and certainly my position, has been that we needed the SEC to make a definitive announcement. Furthermore, as opposed to their concept release, where their proposal was just to allow IFRS to be used, I was of the opinion that we needed a mandate to really make convergence happen. I had hoped that we would have had that specific mandate made now,” he says.

Grant Thornton US managing partner for international client services Carol Banford says she wouldn’t be surprised if the date for mandatory adoption was earlier than 2014.

“I think once they see how these [first 110 qualifying] companies file and the progress that has been made between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), there will be more and more interest in moving this along at a faster pace,” she says.

Dohrer says the optional use of IFRS by these qualifying companies beginning in 2010 causes him a little concern.

“It means that for certainly a number of years now, particularly in the US, we are going to need to maintain both US GAAP and IFRS technical accounting skills. So training, keeping the training current in both of those areas, will be an incremental cost to us,” he says.

Dohrer estimates the 110 figure is very much a maximum. He has already spoken to one company that falls within that category, but is in an industry where IFRS is not prevalent, and therefore is unlikely to take the IFRS option.

Firms all agree that the 2014 target provides a reasonable time frame, although several warn the transition will have wide reaching implications that many US clients are only beginning to understand.

Kaplan says the target to educate staff and clients by 2014 is “absolutely achievable”.

“Use Europe as an example,” he says. “The announcement in the UK was made in 2002 for a changeover at the end of 2005. Today, we are signalling that’s where the US is going to be going in 2014 on a mandatory basis and the underlying accounting that exists in the US is much more similar, from a conceptual perspective, to IFRS than many of the local accounting models that had to transition to IFRS in Europe.”

Changing perception

Bruce Pounder is president of Leveraged Logic, a consultancy which offers IFRS education and training to US accountants. He says the timetable is right where it needs to be because “any transition of this ilk can not happen overnight”.

The majority of American accountants he has dealt with in the past have not been concerned with international accounting matters but that is now changing.

“Many American accountants assume that IFRS has nothing to do with them,” he says. “I think the SEC has made it very clear, at least to public companies, that this does have everything to do with them.”

DJ Gannon, a partner in the Deloitte US IFRS solutions centre, says the SEC announcement has significantly heightened the visibility of IFRS.

“Most folks in the US realise where we are heading and that’s a good thing. Up until a year ago, most people didn’t follow much of this stuff and they saw it as a non-US issue. Now, I think that has completely changed – accounting firms, companies and regulators have completely changed their perspective,” he says.

The increased visibility has sparked what Pounder calls a “burning curiosity” as US accountants try to get their heads around what has captured the attention of the SEC.

Pounder says demand for information on IFRS has exploded in the US and in the past two months he has spoken to more than 2,000 US accounting professionals about IFRS and convergence.

Firms have also noticed a recent spark in interest from clients, which could create a new revenue stream.

“It certainly did put the spotlight on IFRS. I spoke to a client this morning and he said ‘we signed up for two-day training because we feel like we need to understand what some of the key issues are to be able to make some of these judgements’,” says BDO Seidman SEC director Wendy Hambleton.

Gannon says he thinks it will take between three to five years for most companies to convert to using IFRS.

“We are getting more requests from companies and I think we are at the front end of this process. I think companies have had an interest in understanding what they have to do. We are in the stage, with the road map coming out, where it will spur a lot more interest in starting to do things,” he says.

Dohrer is not aware of any RSM clients that would fall within the first 110 companies to qualify. However, he suggests second-tier firms have a significant opportunity to assist some of those companies with their conversion process as consultants.

But Gannon warns that the implications of a change to IFRS run far deeper than just understanding technical accounting.

“The biggest challenge here is really taking the effects of those accounting differences and then trying to figure out what that means in terms of systems, controls, tax – what does it mean for a [client’s] organisation as a whole? I think as companies start to understand that, and I think they are, they are realising that this is not an overnight project, it is a much more involved initiative. That’s, in part, why you are seeing a 2014 mandate because companies are going to need the time,” he says.

Dohrer says there are two aspects of convergence that will be particularly difficult – addressing the funding and structure of the International Accounting Standards Board (IASB), education and training.

Unlike the FASB, the IASB receives most of its funding from public accounting and audit firms. However, this structure is currently being reviewed by the International Accounting Standards Committee Foundation.

Dohrer says that one aspect that came out of the Enron and Worldcom scandals was the importance of public accounting and audit firms not appearing to be in a position to exert any influence on the standard-setting process.

“I think pragmatically the IASB will have some challenges in that we were able to fund our FASB in the US essentially by the SEC dictating that its filers would pay fees to fund the FASB,” he says. “I don’t think it is a situation that can’t be accomplished, but I think it will take some work to bring it around all the different regulatory bodies across the world and figure out where the money to fund the IASB will come from if you take the public accounting firms out of that picture.”

Getting ahead

Many firms are already well advanced in planning IFRS training, although several concede a full firm-wide roll-out is several years away.

Dohrer says RSM is quite well positioned, despite describing education and training as a “big hurdle” for the US.

“We need to accelerate the pace of our IFRS training and we are on track with that. We will be training a number of additional auditors in October of this year to get into the technical details of the differences between US GAAP and IFRS, so as to be able to help our clients with conversion,” he says.

Hambleton hopes IFRS preparation will not be as painful as the introduction of Sarbanes-Oxley.

“This is giving a much longer time frame to start with. So hopefully what companies will do, and I know accounting firms are going to do, is use the time to plan [and] to do training in a very logical, methodical way that will then be able to build upon itself, rather than just trying to get someone to be an expert tomorrow,” she says.

While much of the initial publicity has focused on the effect of IFRS conversion on large public companies, Gannon says the impact of IFRS conversion on private companies had “gone under the radar screen”.

“I think one of the things that is missed is what does this mean for the vast majority of US companies, which are private companies?” he asks. “I think that is a whole other issue. You are certainly going to see those companies gravitate to IFRS. This is not just about public companies; it is about private companies too. There are a fair amount of US private companies starting to ask these questions. They will have to deal with IFRS at some point too.”

Before any long-term plans are made, however, firms will be eager to see the full text of the SEC’s proposing release, which is yet to be published.

Dohrer notes that the devil is in the detail but thinks it is a real call to action.

“If we truly are looking at a 2014 mandate for the initial filings to be required, that is only really five or six years out. With so much infrastructure work and things to be accomplished in the convergence process we all need to sit up and pay attention to this and get started here in the US,” he says.

The clock is ticking.

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