Are You Worried?
Uncertainty and unease continue to blight IFRS adoption.
By Selena Chavis
While a proposed roadmap for adopting International Financial Reporting Standards (IFRS) in the United States was issued by SEC registrants for comment, the directions and timeline for converting to IFRS are “clear as mud,” say many CPAs and finance executives. Professionals across the field acknowledge the potential benefits of a conversion to IFRS, but are less enthusiastic about the challenges that may accompany the implementation process itself.
“Most professionals agree that there is a clear benefit to having one global set of high-quality accounting standards,” says John McGaw, Midwest IFRS leader for KPMG. “Alongside that belief, though, there is clearly a frustration out there because of a lack of a specific mandate and date certainty from the SEC, and many are reticent to make significant investments without clear direction.”
A rule was issued in 2007 allowing foreign private issuers to use IFRS in their SEC filings, without having to reconcile the financial results to US GAAP. The SEC continued the IFRS dialogue with a unanimous vote to issue a proposed roadmap for further US progress towards accepting IFRS for US public company use beginning in 2014. The comment period for the proposal ended in April 2009 with opinions running across the board.
A March 2009 Deloitte survey of more than 150 finance professionals, CFOs and finance managers found that a significant majority (75 percent) support the movement toward a single set of global accounting standards. However, 64 percent indicated that they have not allocated any budget amounts to IFRS transition.
“What we saw was a lot of activity last year after the SEC made the announcement,” notes Ben Resch, IFRS technical leader for the Midwest region at Deloitte. “Now they are a little more complacent. There’s not a lot of news on expectations and timelines. I would guess that the next thing we receive from the SEC will be much more definitive.” Resch states that there are three company types that particularly feel the pressure to move forward with IFRS: The largest, most sophisticated publicly traded enterprises, companies considering infrastructure investments that will need to comply with IFRS in the future, and smaller companies that may have an international parent.
Paul Oetter, senior partner with Blackman Kallick, says that for small to midsized private companies, the frustrations surrounding lack of information and clarity are even greater. “They don’t have the SEC telling them what to do; everything is much less clear for them,” he explains, adding that it’s in the best interests of a private company to wait and see what happens. “You can make a strong argument now that there is no clear benefit to adopting IFRS for private companies. Particularly as many companies battle the recession, the last thing they need to deal with is something that will take their focus off what they must do to stay profitable right now.”
The issue is complicated by the SEC’s apparent lack of focus for the moment on IFRS, which, according to Oetter, makes the initial target date set out by the roadmap hard to meet. That, he says, means the situation is even more perplexing for smaller entities. “It will happen at some point,” he says. “Then the question will be, ‘What is the viability of the Financial Accounting Standards Board (FASB)?’ At that point, I believe the private world will focus on the issue in much greater detail.”
Much of the current debate centers on the timeline in which USregistrants would be required to transition to IFRS, and the process by which they would achieve this goal, McGaw explains. During the roadmap’s comment period, many respondents suggested that the SEC consider giving time for further convergence of individual US GAAP and IFRS accounting standards. “Many see this as a more manageable process than a point-in-time conversion,” says McGaw. “On the other side, though, if you try to converge over a seven- to eight-year period, you haven’t achieved commonality until it’s complete. How long will it then take, and equally important, will we be fully converged once they’ve finished?”
“The desire to converge is due in part to a resistance to a full-on transition from rules-based US GAAP to principles-based IFRS,” Oetter explains. “I think the frustration in the United States has been and will continue to be that the business community expects there is a rule to account for a particular transaction. Two parties may come to a very different conclusion over an issue with IFRS. That will be one of the biggest issues in implementing the system. People are used to finding a rule; under IFRS, they will find a principle.”
Resch agrees, pointing out that accountants and finance professionals will have to apply considerably more judgment in forming an accounting decision under IFRS. “It’s hard to move from the US GAAP world to the IFRS world,” he says. “If you are applying judgment, and it turns out to be incorrect, it seems that there may be more liability.”
To compare the extent of US GAAP and IFRS guidance, McGaw explains that a full US GAAP printout is estimated at about 25,000 pages, whereas an IFRS printout would be about 2,800 pages. “There’s a large difference in volume,” he says. “Whether that’s a practitioner using IFRS or a university teaching its fundamentals, there is less application guidance and more room for interpretation.”
And while IFRS is being used in many countries, some experts point to the litigious climate of the United States as a concern, questioning whether there would be greater liability for accounting professionals. However, “I don’t know that we’ve had enough experience to know whether there is more risk with IFRS compared to US GAAP,” says McGaw.
Without a more clearly defined roadmap, many companies and firms are hesitant to make too much of an investment too fast. What’s clear, say many experts, is that there will be costs associated with implementation, and the amount and types of those costs will vary by industry and company size. “Certain companies are more likely to recoup that cost through future cost savings. For large global companies, the ability to move more closely to one accounting language stands to save them a lot of money,” McGaw asserts.
The typical small to mid-sized US company likely will not see the immediate benefit, says Resch, but over the long haul, many will breath a sigh of relief in letting go of the complexities of US GAAP. Oetter agrees, pointing out that the International Accounting Standards Board’s recently released International Financial Reporting Standards for Small and Medium-Sized Entities (IFRS for SMEs) might jumpstart the effort within the private sector. “It’s apparently available for use by any privately held company,” he says, reiterating the mounting frustrations many smaller companies are feeling with how costly it is to comply with US GAAP. “The reality is that IFRS for SMEs is a greatly simplified set of accounting standards that might percolate some interest on the part of small to mid-sized companies. Accounting complexity might be significantly reduced with the SME standards.”
A recent Deloitte survey of more than 220 private company finance professionals indicates that 51 percent support separate accounting standards for private and public companies. Fifty-five percent of smaller companies (less than $100 million in revenues) were supportive of separate standards.
McGaw acknowledges that finding a starting point for adopting IFRS is a daunting task for any company, especially in view of the relative lack of IFRS knowledge currently available in US practices. Many larger accounting firms have initiated comprehensive training programs in response.
“One advantage we have is that most of the rest of the world has converted or is converting so there is experience around the globe that can be leveraged,” says McGaw. “Conversions are a lesson in change management, and companies that handle change well are more likely to come out on the top of this endeavor. At its core, professionals should be asking, ‘What does this mean to my organization, and what measured steps can we take today to better prepare ourselves for the likely transition to IFRS?’”