Big Four Voice Strong Support for Mandatory IFRS as SEC Roundtabe Looms

As the SEC holds a roundtable on how IFRS performed during the recent market turmoil, there is a growing consensus that the Commission should allow US issuers to use IFRS in preparing their financial statements. The SEC has outstanding a concept release to allow domestic issuers to report their financial results using IFRS. Comments on this idea from the global accounting firms that would be on the front line of implementing IFRS indicate a desire for the SEC to establish a roadmap leading to mandatory use of IFRS for all listed companies.

For example, PricewaterhouseCoopers believes that the SEC should prepare a detailed roadmap to IFRS, including a mandatory date for all domestic issuers to convert to IFRS. As part of that plan, the Commission should allow early adoption of IFRS. In the view of PwC, establishing a mandatory conversion date will provide an incentive for multiple stakeholders to address the challenges associated with a move to IFRS. This path acknowledges the progress made globally on IFRS adoption and recognizes the inevitability of the universal global standard. Currently, almost 100 countries either require or allow the use of IFRS for financial reporting by listed companies, and other countries, including Canada, will be joining that group in the next few years.

KPMG said the SEC should establish a timeline with clear action steps with the goal of requiring all domestic issuers to apply IFRS within a reasonable transition period. In the view of KPMG, IFRS refers to standards issued by the IASB and does not extend to jurisdictional variants of IFRS. This position is consistent with the SEC’s concept that US issuers would be allowed to prepare financial statements in accordance with IFRS as published by the IASB.

This may be problematic for achieving consistency since there are a number of jurisdictional variants of IFRS, including IFRS as adopted in the European Union, where use of IFRS is mandatory. But Deloitte & Touche has pointed out that the ultimate quality of IFRSs lies in having a consistent application of the standards across jurisdictions. Failure to achieve such consistency, said the firm, could diminish the usefulness of the resulting information provided to users.

In KPMG’s view, the SEC timeline should allow a short period of transition in which companies can elect to use IFRS until the point when use of IFRS becomes mandatory for all domestic issuers. KPMG rejected the idea of a mixed IFRS-U.S. GAAP regime that would result from an elective system since such would increase complexity in the financial reporting system for preparers, auditors, and users. Also, such a mixed regime would increase costs incurred by lenders, including rating agencies, and investors, because they would be required to maintain knowledge of both IFRS and U.S. GAAP.

During the transition to mandatory use of IFRS, continued KPMG, the SEC should recognize the IASB, along with FASN, as the standard setter for use by domestic issuers in preparing financial statements for SEC filing. Once the period of transition has been completed, the SEC should recognize the IASB as the single US accounting standard setter. Moreover, KPMG contended that the standards of the IASB and its interpretive body, IFRIC, should not be subject to a formal U.S. ratification or other endorsement process.

While recognizing that the transition to IFRS will require significant cost and effort, Deloitte strongly supports the ultimate goal of having a single set of globally accepted accounting standards that all U.S. issuers could use. In the interim, giving U.S. issuers the option to use IFRSs in preparing their financial statements will facilitate movement toward a single set of standards. Thus, the firm supports the SEC’s permitting this option as soon as feasible, provided that there is sufficient time for preparers, auditors, and users to be educated and trained on IFRSs.

According to Ernst & Young, there should be a clear and unequivocal recognition of the IASB as a standard setter of accounting principles that are generally accepted for purposes of U.S. securities laws. Indeed, it is imperative that the SEC, with the concurrence of the Congress, formally recognize the IASB under Section 19(b) of the Securities Act of 1933 (as added by Section 108 of the Sarbanes-Oxley Act of 2002). Otherwise, a U.S. issuer would face unacceptable uncertainty and undue cost in converting to IFRS. Section 108 allows the SEC to recognize as generally accepted for securities law purposes accounting principles established by a standard setter that satisfies listed criteria.

E&Y also emphasized that a move to the principles-based IFRS will require a change in mindset on the way that the financial and regulatory communities address accounting and financial reporting. Financial statement preparers must be willing to interpret and apply the standards within the spirit of the principles and in a manner that best reflects the substance of the transaction. Auditors must be willing to take a stand when they believe that their clients have not applied the standards in this manner. Importantly, the SEC and PCAOB must be willing to accept that good faith professional judgments by companies and their auditors to apply the standards in this manner will not always result in a single right answer. For their part, users have to make a better effort to become more involved in the standard-setting process so that they have a better understanding of accounting principles and their effect on reported earnings.