Highlights of the SEC’s Proposed IFRS Roadmap
Last month the Securities & Exchange Commission (SEC) published its “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards (IFRS) by U.S. Issuers”. The release of this proposed Roadmap reaffirms the SEC’s focus on moving towards a single set of high quality global accounting standards.
The key provisions of the proposed Roadmap are fundamentally consistent with those discussed at the SEC meeting on August 27, 2008 when release of the Roadmap was approved. A copy of the proposed roadmap can be found on the SEC’s webste at http://www.sec.gov/rules/proposed/2008/33-8982.pdf.
Following is a brief summary of the significant provisions of the proposed Roadmap:
The SEC will reconvene in 2011 to make a decision on the mandatory use of IFRS by US issuers. In making that decision, the SEC will evaluate progress against several specified milestones. These milestones include:
- Improvements in accounting standards (including progress under the Memorandum of Understanding between the FASB and IASB)
- Accountability and funding of the IASC Foundation, which oversees the IASB
- Improvement in the ability to use interactive data for IFRS reporting (XBRL)
- IFRS education and training in the US (including accountants, investors, regulators, and other financial statement users)
- Experience of eligible IFRS early adopters
Assuming a decision in 2011 to mandate IFRS for US issuers, the proposed Roadmap contemplates a phased transition to IFRS beginning in 2014 for large accelerated filers, 2015 for accelerated filers, and 2016 for remaining public companies. As a result, calendar year-end companies subject to the 2014 mandatory date would have an IFRS transition date of January 1, 2012. Best practice companies will have their internal accounting processes enabled to dual report under both US GAAP and IFRS as of this date.
An issuer that either elects or is required to file IFRS financial statements may only begin reporting using IFRS in an annual report on Form 10-K containing three years of audited financial statements. As currently proposed, an issuer would not be able to file IFRS financial statements with the SEC for the first time in a quarterly report, Securities Act or Exchange Act registration statement, or proxy or information statement. This provision could end up being amended to reduce the requirement to two years of audited IFRS statements so long as the annual report also included three years of US GAAP financials.
The proposed Roadmap provides an opportunity for certain qualifying issuers to adopt IFRS as early as fiscal years ending on or after December 15, 2009. To qualify for this option, a company must be one of the 20 largest companies within its industry (as measured by market capitalization) and IFRS must be used more than any other basis of accounting among those 20 largest companies. Issuers that satisfy both these criteria and wish to early adopt must apply for and receive a ‘Letter of No Objection’ from the SEC.
As part of the SEC’s 2011 evaluation of progress made against the outlined milestones, the SEC may expand the eligibility criteria to allow additional issuers to use IFRS prior to the mandatory transition date.
The proposed Roadmap includes two possible alternatives with respect to the disclosure of US GAAP information by issuers that choose to early adopt IFRS. The SEC is soliciting comment on these alternative proposals.
- Proposal A: Issuers must comply with IFRS 1, First-time Adoption of International Financial Reporting Standards, and include a one-time reconciliation from IFRS to US GAAP in their first set of IFRS financial statements.
- Proposal B: Issuers must comply with IFRS 1, and also disclose on an annual basis certain unaudited supplemental information reconciling IFRS to US GAAP for the three years of financial information included in their Form 10-K.
