August 27, 2008
On August 27, 2008, the SEC 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”), as published by the International Accounting Standards Board (“IASB”). Introducing the proposal, Chairman Cox emphasized the vital need to work towards a date certain for the contemplated transition. To this end, the roadmap provides that, assuming the achievement of certain milestones, transition to IFRS for at least some category of U.S. issuers could start with reports filed for fiscal periods ending on or after December 15, 2014, approximately six years from now.
A more detailed overview of the proposed roadmap and some key steps to consider in light of the proposed transition to IFRS are set forth below. This overview is based on information provided at today’s SEC open meeting, and therefore may not reflect nuances that will appear in the proposed roadmap, which is expected to be issued shortly. The SEC’s press release announcing the approval of the interpretive guidance is available at: http://www.sec.gov/news/press/2008/2008-184.htm.
The SEC is seeking comment on the proposed roadmap for 60 days from the date it is published in the Federal Register, which we anticipate will occur in the next few days.
What Is IFRS?
IFRS is a comprehensive, principles-based, and globally accepted system of accounting standards. Unlike GAAP which takes a rules-based approach and which separately addresses a multitude of possible transaction types, IFRS sets forth principles applicable to the economic substance of various transactions, and then relies on financial reporting professionals to interpret those principles and apply them to the specific economics of each transaction. Indeed, while GAAP has over 25,000 rules, IFRS consists of a mere 2,000 rules. Thus, IFRS is generally perceived to require the exercise of more professional judgment than GAAP.
Currently, over 100 countries, including all European countries, have adopted IFRS. As a result, the primary benefit of adoption of IFRS by U.S. issuers is that there would be a uniform global accounting standard, which would enhance the comparability of companies on a global basis for investors and analysts.
The SEC’s Proposed Roadmap for Potential Transition to IFRS by U.S. Issuers
The SEC’s proposed roadmap for adoption of IFRS by U.S. issuers sets forth a number of milestones. If these milestones are achieved in the relatively near future, the roadmap envisions that the SEC would be in a position by 2011 to vote on whether to require U.S. issuers to adopt IFRS. The milestones identified during today’s meeting, some of which are dependent on actions by entities external to the SEC, include: (1) independent funding for IASB; (2) increased accountability for IASB; (3) continued improvements to IFRS accounting standards; (4) adequate education and training of professionals and investors regarding IFRS; and (5) satisfactory integration of interactive data technology to allow for IFRS reporting.
Assuming the milestones are achieved and the SEC votes to adopt IFRS for U.S. issuers in 2011, the proposed roadmap outlines the following schedule for transition to IFRS: large accelerated filers would have to adopt IFRS in the first fiscal period ending on or after December 15, 2014, followed by accelerated filers in the first fiscal period ending on or after December 15, 2015, and non-accelerated filers in the first fiscal period ending on or after December 15, 2016.
The roadmap further proposes to allow a limited number of U.S. issuers to voluntarily adopt IFRS starting with fiscal periods ending on or after December 15, 2009. Specifically, the proposal would allow an issuer to voluntarily adopt IFRS if it meets two conditions: (1) the issuer has a market capitalization that is among the top twenty in its industry (worldwide), and (2) the majority of the top twenty companies (worldwide) in its industry have already adopted IFRS. The roadmap estimates that this standard would allow roughly 110 U.S. companies in 34 different industries to voluntarily adopt IFRS.
Steps to Consider Now
In order to prepare for the potential transition from GAAP to IFRS, U.S. issuers should consider taking the following steps:
- Review and consider commenting on the SEC’s proposed roadmap.
- Consider accounting treatments and policies that are most likely to be affected by transition to IFRS for your company and consider what, if any, reporting metrics may need to be modified. For example, the divergent treatment for inventory valuation under IFRS and GAAP has been identified as an area that could prove challenging for certain U.S. issuers (as IFRS currently does not recognize the last-in, first-out method for inventory valuation).
- Consider whether to consult with external advisors who have IFRS expertise regarding planning for the transition. Laying the groundwork for transition will be key.
- Develop in-house capabilities to address IFRS transition through hiring and/or training.
- Consider whether there is a need to evaluate agreements underlying your company’s debt securities. Such agreements sometimes include covenants that require financial statements prepared in accordance with GAAP as it changes from time to time or have a "frozen GAAP" provision that requires financial statements prepared applying the same GAAP used at the time the initial agreement was entered into. If the SEC adopts a transition from GAAP to IFRS, in order to avoid having to present two sets of financial statements, such agreements may need to be amended, which could be a significant undertaking.
Gibson, Dunn & Crutcher’s Securities Regulation and Corporate Governance Practice Group is available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following:
John F. Olson (202-955-8522, [email protected])
Brian J. Lane (202-887-3646, [email protected])
Ronald O. Mueller (202-955-8671, [email protected])
Lewis H. Ferguson (202-955-8249, [email protected])
Amy L. Goodman (202-955-8653, [email protected])
Michael J. Scanlon (202-887-3668, [email protected])
James J. Moloney (949-451-4343, [email protected])
© 2008 Gibson, Dunn & Crutcher LLP
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