If experience guides their actions, smaller U.S. companies probably won’t do much to prepare for a transition to international financial reporting standards. They’ve been through this drill before — in 2002 when the Securities and Exchange Commission issued the Sarbanes-Oxley Act rules — and this time, the SEC proposal is not yet a foregone conclusion.
On Wednesday, the SEC announced that sometime soon it would be issuing a proposed “roadmap” to move American companies off of U.S. accounting rules and onto IFRS, the standards currently being used by more than 100 countries. The proposal includes a phased approach to the transition, starting with the largest corporations being given the choice to test out IFRS beginning with 2010 financial statements, and ending with adoption of IFRS by the smallest public companies by 2016.
But the move to IFRS is contingent on the progress companies make reaching several milestones laid out by the SEC in its timetable, and the regulator has decided to wait until 2011 before it decides whether to implement the timetable and mandate IFRS for U.S. companies. As a result, smaller companies may just sit tight and wait.
“I think the deadline is probably further out than most people expected,” said Jay Hanson, national director of accounting, McGladrey & Pullen, noting that participants at the last SEC roundtable on the subject, held in June, batted around 2013 as an adoption deadline. “I’m not sure the SEC moved the ball along very far” with this most recent announcement, added Hanson. “My fear, with the date out so far, is that [IFRS] will be out of sight, out of mind,” especially as the timeline relates to smaller companies.
“I think there is going to be a tendency among smaller companies to postpone the inevitable and not spend resources now,” said J.H. Cohn partner Kenneth Nielsen Goldmann. Those corporations “will be drawing on their experience with Section 404″ of Sarbox,” adds the audit partner.
He points out that small companies — those with a market capitalization of less than $75 million — were granted compliance extensions with regard to Section 404(a), the internal controls rule, and they still don’t have to comply with Section 404(b), the rule that requires larger companies to provide an auditor attestation report. There are about 5,000 smaller public companies that fit into the Section 404(b) exemption category, according to the SEC.
Goldmann, whose clients are mainly small and mid-size companies with revenues in the $10 million to $1 billion range, reckons that companies will take a risk-based approach to IFRS, which is how they dealt with 404 “in the end.” His feeling is that CFOs will first identify the greatest differences between IFRS and U.S. generally accepted accounting principles with respect to their companies, and then plan how to approach the transition.
But procrastination may pay off for smaller companies, mainly because both U.S. GAAP and IFRS literature will be “evolving” over the next few years as the two standard-setting groups — the Financial Accounting Standards Board and the International Accounting Standards Board — work to iron out differences in the rules. In fact, the SEC’s chief accountant Conrad Hewitt noted at Wednesday’s meeting that FASB and IASB are getting ready to release a revised agenda of major projects and priorities for the next few years.