IFRS: No Longer If, but When

The SEC will release a time line later this year for allowing U.S. companies to use international financial reporting standards.

Securities and Exchange Commission chairman Christopher Cox, in a speech last week, quashed any doubts that the regulator will one day allow U.S. companies to use international financial reporting standards rather than GAAP. The SEC is working on a road map for transitioning U.S. companies to the global rules, he told members of the European-American Business Council.

“The expanded use of a single, high-quality accounting standard will eventually empower investors to make better-informed investment decisions by giving them information that is more easily comparable,” he said. His speech came just a few months after the SEC began accepting IFRS-prepared financial statements from some of its foreign registrants without requiring them to reconcile those filings to U.S. generally accepted accounting principles.

The SEC held two roundtables late last year to explore whether to further widen the use of IFRS by giving U.S. companies the same allowance. By introducing a dual accounting system in the United States for up to 180 of its foreign private issuers, the SEC would be hard-pressed not to do the same for U.S. companies, accounting experts say. “If [the SEC says] IFRS is a good-enough accounting standard for us, how can you say it’s not good enough for our own companies?” notes H. David Sherman, a Northeastern University accounting professor and former SEC accounting fellow.

That’s the key sticking point for critics of the quick momentum surrounding the IFRS movement: they believe standard-setters still have a lot more work to do to craft IFRS into a set of accounting guidelines that is up to par with the more time-tested U.S. GAAP. Indeed, they have deep concerns about the end date the SEC will place at the bottom of its road map, and the message that such a time line will send. “I’m afraid we’re adding complexity to an already fairly complicated system,” says Charles Niemeier, a member of the Public Company Accounting Standards Board.

Niemeier worries that the U.S. financial-reporting system is not ready to take on a second set of accounting standards. For example, American universities are not teaching IFRS, and IFRS and GAAP are still too different for investors to easily compare one company with another, he says.

Those in favor of a change say IFRS and GAAP will look enough alike by 2011, the year by which a handful of large U.S. multinationals told the SEC they would be prepared to switch their U.S. accounting systems to IFRS. Half of the 117 respondents to a survey from the Corporate Executive Board’s Controllers’ Leadership Roundtable favor the 2011 option. The three-year time frame would equal that given to companies in the European Union that were required to change from their local accounting principles to IFRS in 2005.

In addition, 2011 is the same year China, Japan, India, and Canada are following the EU’s lead, notes Margaret Smyth, vice president and controller of United Technologies Corp., whose international subsidiaries use the global standards. She is confident IFRS is already a strong set of rules. “The SEC considers it of high-enough quality to eliminate the reconciliation requirement for foreign filers,” she says. “If it’s good enough for the SEC, I would think it’s good enough for most people.”

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