Corporate Governance

SEC Proposes Roadmap Toward Global Accounting Standards

By JP Thibeault

On August 27^th, 2008, in a long anticipated move, the U.S. Securities and Exchange Commission voted unanimously to issue a proposed roadmap for the potential transition by U.S. issuers from U.S. Generally Accepted Accounting Principles (“ GAAP ”) to International Financial Reporting Standards (“ IFRS ”).  The proposed multi-tiered plan sets out several milestones that, if achieved, could lead to the use of IFRS by U.S. issuers in their filings with the Commission.

Under the SEC’s current rules, U.S. issuers are required to prepare financial statements in accordance with accounting principles that are generally accepted in the United States. The increasing integration of the world’s capital markets has, however, resulted in roughly two-thirds of U.S. investors owning foreign issued securities that report their financial information using IFRS. Increasing integration has made the establishment of uniform global accounting standards a matter of growing importance. Currently, over 100 countries have adopted IFRS, a common accounting language aimed at giving investors greater comparability and transparency of financial reporting worldwide(a complete, detailed explanation of the differences between GAAP and IFRS can be found here ).

The proposed roadmap lays out a timeframe for use of IFRS by all registrants, anticipating mandatory reporting under IFRS beginning in 2014, 2015, or 2016 depending on the size of the issuer. The roadmap also articulates a number of milestones that must be met by 2011 to allow the proposal to proceed. Some of the milestones include requiring independent funding and greater accountability from the International Accounting Standards Board, which is responsible for the integrity of IFRS. Domestically, the roadmap requires satisfactory integration of interactive data technology to allow for IFRS reporting, as well as adequate training and education of professionals and investors regarding IFRS.

IFRS may not be welcomed by some companies initially, as its conversion is much more than a technical accounting issue. According to the international accounting firm PricewaterhouseCoopers, IFRS may significantly affect any number of a company’s day-to-day operations and may even impact the reported profitability of the business itself. The Conversion experience in Europe, as well as Asia and Australia has been more time consuming than expected, causing some companies to rush and risk mistakes or outsource more work than necessary, driving up costs and hindering the embedding of IFRS knowledge within the company.

The Commission will make a determination in 2011 on whether adoption of IFRS is in the public interest and would benefit investors. A roundtable to discuss potential accounting changes was held on October 29, 2008. More information can be found here.

The SEC’s press release can be found here.

Full post as published by The Race to the Bottom on November 06, 2008 (boomark / email).