Accounting & Auditing

On February 24, 2010, the U.S. Securities and Exchange Commission (SEC) issued a statement expressing its continued support of a single set of high-quality globally accepted accounting standards and for convergence of U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The SEC stated that “IFRS is best positioned to be able to serve the role as the single set of global standards.”

As set forth in its proposed “roadmap” issued in November 2008, the SEC will decide in 2011 whether to incorporate IFRS into the financial reporting system for U.S. issuers. The SEC’s February 24, 2010, statement does not change the 2011 timeline, but does outline certain factors of particular importance to the SEC as it continues to evaluate IFRS.

In connection with the statement, the SEC staff released a work plan addressing six key issues to be considered between now and 2011. The issues are:

1. Sufficient development and application of IFRS – The staff will evaluate the International Accounting Standards Board’s (IASB) efforts to improve IFRS, including completion of its joint convergence projects with the Financial Accounting Standards Board (FASB) identified in the Memorandum of Understanding between the IASB and FASB. In addition, the staff will assess the overall comprehensiveness, auditability and enforceability of IFRS, as well as the comparability of IFRS financial statements within and across jurisdictions.
2. Independence of standard setting – The work plan includes an ongoing review of IASB’s governance structure and developments to secure a stable, broad-based funding source.
3. Investor understanding and education – The staff will assess investor understanding and education regarding IFRS, including what actions may be needed to increase investors’ understanding.
4. Impact on U.S. regulatory environment – The staff will study and consider whether laws and regulations, other than federal securities laws, would be affected by a change from U.S. GAAP to IFRS.
5. Impact on issuers (large and small) – The staff will consider the impact on issuers of logistical changes involved in incorporating IFRS into the financial reporting system, such as changes to accounting systems, contractual agreements, corporate governance considerations and litigation contingencies.
6. Human capital readiness – Similar to investor understanding and education, the staff will determine whether financial statement preparers, auditors, regulators and educators are prepared for the conversion and whether there will be sufficient audit capacity.

The staff will provide public progress reports on the work plan beginning no later than October 2010 and frequently thereafter until the work is complete.

While the November 2008 proposed roadmap contemplated adoption of IFRS beginning in 2014 for large accelerated filers, the SEC’s February 24, 2010, statement indicates the first time U.S. issuers would report under IFRS would be approximately 2015 or 2016. The proposed roadmap also discussed the possibility of early adoption for certain issuers as early as 2009. The SEC has stated it is not actively pursuing rulemaking to provide for an early use option at this time but left the door open for the possibility of an early adoption option for some issuers as part of the 2011 decision.

The SEC’s ability to make a decision regarding IFRS in 2011 is largely dependent upon ongoing convergence projects between FASB and IASB. The SEC’s February 24, 2010, statement reads, “Following successful completion (emphasis added) of the work plan and the FASB-IASB convergence projects according to their current work plan, the commission will be in a position in 2011 to determine whether to incorporate IFRS into the U.S. domestic reporting system.”

If the SEC incorporates IFRS into the U.S. financial reporting system, the impact on U.S. issuers would be significant. This potential impact may be monitored by following FASB and IASB convergence efforts and looking for SEC staff progress reports beginning in October 2010.

For more information on this issue or related matters, please consult your BKD advisor.