IFRS: dead in the USA?

What exactly is going on with international financial reporting standards in the United States? Will it ever happen? Depends on whom you ask

By Lawrence Richter Quinn
Illustration: Mike Constable

It takes just a couple of minutes with Mariam Morris to understand why so many finance executives around the world wonder if the us will ever become a full-fledged IFRS convert. A few minutes more, people might well walk away believing that today IFRS in the US is, quite simply, DOA.

Morris is former CFO of Sucampo Pharmaceuticals in Bethesda, Md.,a midsized company that had two international subsidiaries — one in England, the other in Japan — when the Securities and Exchange Commission (SEC) published its road map to IFRS in late 2008, so moving to one accounting regime made sense intuitively.

Because Sucampo was dealing with three different sets of standards, the company was really interested in the SEC’s early adoption program, which its chair, Christ Cox, was pushing. Looking back today, Morris isn’t entirely disappointed that the SEC is taking its time dealing with predicted revisions to the road map.

“My understanding is that there is still some resistance at the SEC, and I’m not surprised if there is ambivalence,” she says. “I think, given the level of pressure for earnings right now, I wouldn’t recommend adoption of IFRS at this point; I’d pull back precisely because of the amount of discretion and interpretation involved and because of the issues raised by cases such as [Bernard] Madoff’s. I’d wait for the markets to calm down from a regulatory standpoint. Look at fair value accounting: it can be a nightmare if markets go up or down, inflating value at one moment, deflating it the next. I’m not in favour of big overhauls anyway. With a step-by-step approach, you have a chance to gauge successes and failures, reacting accordingly. With big overhauls you can be inundated with multiple problems.”

For the moment, Canadians aren’t paying much attention to the unfolding debate in the US regarding if, when and how convergence with or adoption of IFRS will happen. But that could change overnight should the SEC decide that neither convergence nor adoption makes sense for US public and private companies.

Is IFRS in fact dying a slow death in the US? Increasingly, that seems to depend on who is asked. There are those corporate executives on the ground who already have experience with implementing IFRS either in the US or abroad for companies smaller than multinationals (a rapidly growing, increasingly disenchanted group). Then there are those who have the most to gain monetarily from IFRS implementation (the largest sell-side companies) or are global enough in presence that clinging to US GAAP intuitively makes no sense for stakeholders in an increasingly IFRS-centric world.

There is one thing both camps agree on: the SEC is moving far too slowly in clarifying its short- and long-term intentions and expectations regarding IFRS — whether it will finally re-quire adoption or convergence, and in what time frame.

AICPA calls for three- to five-year
time line for transition to IFRS

On June 16, 2008, the American Institute of Certified Public Accountants (AICPA) president and CEO Barry Melancon spoke at a Financial Accounting Standards Board forum and called for an orderly transition and reasonable time frame of three to five years for the US accounting profession to adopt IFRS. The forum’s purpose was to discuss whether and how to move the US financial reporting system to IFRS, and to broadly define the next steps in that process.

“Awareness is growing among US accountants that IFRS is coming for public companies and most believe it will take three to five years to get ready,” Melancon said to representatives from the US and international accounting and finance professions, as well as state and federal regulatory authorities, including the Securities and Exchange Commission and the Internal Revenue Service. A majority of AICPA members polled in a survey in the spring of 2008 said they believed it would take three to five years to prepare for IFRS.

On May 15, 2008, the institute launched www.IFRS.com, a website developed in partnership with CPA2Biz (www.CPA2Biz.com), to help members and financial professionals learn about and stay informed on IFRS. On May 18, 2008, the AICPA’s governing council voted to designate the International Accounting Standards Board, which promulgates IFRS, as an accounting body for purposes of applying IFRS in the US. LRQ

In fact, the SEC has been remarkably quiet about the standards since it published its proposed road map in the Federal Register on November 21, 2008, asking, as required by law, for comment from any interested parties. The agency received an unexpectedly and uncharacteristically tiny number of comment letters — roughly 200 — and just 70 or so were from nonfinancial corporations, almost all Fortune 500 companies. Since then, no speeches have been made by anyone at the SEC on the is-sue and no other official documentation released. (The agency declined to comment for this story.)

Its silence, both camps agree, already virtually promises to cost stakeholders unnecessarily, certainly monetarily — but also in terms of operational efficiencies and possible credibility in number crunching.

A major US grocery chain provides one example of how the move to IFRS is grinding to a halt. The company hired a finance executive with IFRS experience with the specific goal of implementing its new standards strategy, budgeting 40% of that position’s time for the issue; today its IFRS-related work is on hold.

Meanwhile, Codexis, a California-based manufacturer of enzymes for pharmaceutical, energy and environmental concerns, has hired IFRS expertise with the goal of switching to those standards this year if its initial public offering is successful. “We’re extremely interested in IFRS and are awaiting word from the SEC about how to proceed,” says Kristen Pan, senior revenue accountant. So the heady days when eventual adoption of IFRS in the US was considered a matter of faith — a question not of if but when and in what form — are gone.

“The No. 1 question you hear is, when will companies be required to switch from current US GAAP to current IFRS?” says Bruce Pounder, president of accounting education firm Leveraged Logic in Asheville, NC, and author of Convergence Guidebook for Corporate Financial Reporting.

“My answer is that it will never, ever happen,” says Pounder. “They will never be required to do so — not for public companies, certainly, nor the far greater number of private companies. They will not be required to do so because the reasons for the US to move in that direction are much less compelling than for other countries.”

Adds Thomas Selling, a former professor at the Thunderbird School of International Management in Glendale, Ariz. (and a former academic fellow in the SEC’s office of the chief accountant), and writes a blog called The Accounting Onion: “According to the respondents of a survey I did on IFRS adoption in the US, IFRS is not perceived to be better than GAAP, and continuing efforts to bring the two bases of accounting closer together are not expected to be worthwhile — unless you are a Big Four auditor or work at a Fortune 500 company. Bottom line: the SEC should make a U-turn on its road map proposal.”

Anecdotal evidence and survey results seem to square with the lack of enthusiasm demonstrated by Selling’s readers. For instance, in a Grant Thornton study last year, only 23% of more than 800 respondents from public companies thought an international independent board such as the International Accounting Standards Board (IASB) should be setting accounting standards for US companies.

“In my recent meetings with potential IFRS clients, many have said that no stakeholders are asking for it,” and because of this, they don’t have a sense of urgency, says Steve Lyman, a partner in advisory services at Grant Thornton LLP’s office in Atlanta. Because clients aren’t getting pressure, he says, IFRS is just not a high priority for them, given the other things they have going on. “I had one client compare the conversion to IFRS with the US conversion to the metric system. He said, ‘It sounded like a good idea at the time, and seemed to have support, but it never took hold in the US even though the rest of the world uses it.’”

Not everyone working for corporate America deplores the advent of IFRS; far from it. Some of the largest US multinationals enthusiastically support the adoption of IFRS and the continuing movement toward convergence; many moved early to get the IFRS ball rolling.

In a 2008 survey by consulting firm Accenture of more than 200 CFOs with more than US$1 billion in annual revenues, 83% viewed IFRS as providing a significant opportunity to achieve broader transformational change and drive business benefits beyond compliance. Stewart Glendinning, Molson Coors CFO in Denver, is optimistic. “Our enthusiasm isn’t diluted as we consider what IFRS means for us,” Glendinning says. “If we could report in one standard, it would allow both us and our investors to better compare ourselves to our global peer group — companies such as SAB Miller, Heineken and Carlsberg.”

Adoption of IFRS will also allow companies to manage in a more consistent, common way across geographies, he says. “As one example, now trying to recruit people worldwide with experience in US GAAP is not easy. The more proximate they are to the US, the less difficult it is, but one single standard would help eliminate the problem.”

Glendinning believes the timing is right for the conversion. “We want to reduce our costs, driving more profit to the bottom line. One way to do that is to streamline the back office, including our accounting systems,” he says. “Currently we have a separate accounting system in each of our geographies; we’d prefer to have everyone move to a single system at the same time as we move toward IFRS. My guess is that a large number of similarly sized US companies currently are set up exactly as we are.”

Thomson Reuters also saw the benefit of moving to IFRS. The company found itself dealing with three sets of standards (Canadian GAAP, US GAAP and IFRS) when Thomson merged with Reuters. Last year, it successfully completed its 18-month project to move to IFRS reporting alone. To the best of his knowledge, “TR was one of the first large US-headquartered companies to do this,” says Adrian Tannian, who spearheaded the accounting side of its efforts. “At no point did we view this as a waste of time: it was a matter of expediting what otherwise was seen as inevitable.”

Despite these upbeat stories, even at the largest companies, positive thinking about IFRS appears to be the exception, particularly because many of these companies feel they won’t have enough time to implement IFRS. It doesn’t help that some of the initial perceived promises of IFRS — for instance, that converting to a single accounting regime would significantly reduce financial reporting costs over time, producing a significant return on investment or that investors really will be able to make better apples to apples comparisons — seem unlikely to come to fruition.

For instance, new reservations can be heard at Microsoft, where the company has long had a senior executive in charge of following the evolution of IFRS and where it had been hoped that cost savings might be one of the benefits of adoption. “We’ve followed IFRS for years and have been proactively involved as the process moves forward,” says Robert Laux, senior director of financial accounting and reporting in Redmond, Wash. “Nevertheless, we’ve finished our initial assessment of what will be involved in conversion or adoption, and we just don’t see the savings. Having said that, we’re waiting until the SEC provides more guidance on the issue.”

Memphis, Tenn.-based FedEx, which has finished its initial review of IFRS, ultimately expects the SEC to push forward with mandating adoption and hopes at the very least that it will give US companies more time to comply. “I sum up IFRS this way,” says John Merino, chief accounting officer, “SOX meets Y2K.”

And even supportive executives such as Glendinning are hardly starry-eyed. “I wouldn’t want to see change for change’s sake,” he says. “I can see why a lot of US companies, particularly those with little business outside the US, wouldn’t see the benefit of IFRS. While we see lots of good potentially coming out of this, I haven’t spent a lot of time on this. Like everyone else, we’re waiting for the SEC.”

Any number of other issues have led to a lack of corporate enthusiasm about implementing IFRS, company executives and regulators agree. “Two years ago, as the SEC was coming out with its road map, there was no question that companies were somewhat more enthusiastic about the move toward IFRS,” says Tom Hood, CEO and executive director of the Maryland Association of CPAs. “At that point, there was no recession, no financial crisis; fewer things were on the CFO’s plate. Now among large, publicly traded companies, there is more skepticism, more realism about what they may be facing. In the past 24 months there has been layering on of more and more things for CFOs and their finance teams to contend with: the mandate to move toward XBRL itself has been at least as big a project as IFRS promises to be. Add to that the uncertainty created by so many public policies in play, including healthcare, employee benefits, financial regulatory reform, cap and trade and taxation.”

The result? “In a year-end survey by Financial Executives International, IFRS has moved from No. 2 in 2008 to No. 5 this year as a top challenge facing CFOs,” says Hood.

The one concern almost everyone seemed to share is the lack of time to prepare for IFRS and to get it right.

“What the SEC has said it’s looking for — and what accounting regulators everywhere have recognized as necessary — is two years of historical, comparative financial statements, both in US GAAP and IFRS,” says Chad Wekelo, founder and principal of Actualize Consulting in New York, which has worked with two money center banks interested in eliminating their current reporting in multiple sets of standards. “What most companies should be doing is starting to run two sets of parallel books rather than going back and trying to recapture that data later. The question is when to initiate this effort. Right now there’s no rush to the gate, and that will be damaging for all involved down the road.”

And here in Canada ...

Assuming the US will move toward IFRS adoption, Canadians are paying scant attention to the back-and-forth between regulators and companies regarding how Americans will get there. In fact, with or without adoption in the US, Canadian-based companies — even those with US operations — already can file financial statements using IFRS with the Securities and Exchange Commission without the need for reconciliation.

In addition, Canada’s public companies will have the option of filing US GAAP under Canadian securities proposals, in effect carrying forward existing rules. And the subsidiaries of private US-based companies may well be able to file statements using US GAAP — at least in most circumstances.

Meanwhile, Canadian regulators aren’t budging on their commitment to having this country’s companies IFRS-compliant by 2011 — and appear unmoved by the US debate regarding IFRS.

“Our accounting standards board isn’t tied to the US’s discussions about IFRS; it’s quite independent,” says Darla Sycamore, trustee at the Canadian Financial Executives Research Foundation, the research institute of FInancial Executives International Canada, an association of senior corporate financial executives.

“Last spring quite a few Canadians were in favour of deferring implementation, but the Canadian Accounting Standards Board said that no time is a good time for implementation,” she says. “It also indicated it had given plenty of notice to Canadian companies — since 2006 — to implement inter-national standards. IFRS is very much a moving target. Complacency is not an option.” LRQ

Unfortunately, possible damage being done now goes well beyond the discussion that US corporations will have to get their acts together. “Because IFRS is more principles- than rules-based,” says Hood, “many corporate executives worry that trial lawyers will have a lot more to argue about precisely because of the leeway allowed by IFRS regarding many individual standards or because IFRS is silent on specific accounting issues or treatments. Liability risk is a major uncertainty; remember, the US was once a principles-based system and evolved to rules-based, mainly driven by litigation.”

Dwayne Cook, partner and mid-Atlantic practice leader at consulting firm Tatum LLC in Washington, says, “Finally, there’s quite a bit of suspicion that we’re involved increasingly in a race to the bottom. We’re talking about fear that major compromises will be made in the rush to converge, sacrificing a single set of high-quality global standards in the process. Instead, major differences need to be thoughtfully resolved — for example, fair value — and complexity needs to be reduced. The end game should be better investment decisions.”

Meanwhile the ghost of SOX haunts corporations — soaring, unpredictable costs; the inability to be sure that they had gotten it right as consultants came and went; the moving target aspect of the whole issue. As a result, everyone is rushing to determine just what the price tag for IFRS conversion or adoption will be.

Many think it’s a fool’s errand. David Rombough, a partner at Accenture who works out of the Toronto and Calgary offices, says, “I’ve seen estimates saying [companies] expect to spend about 0.5% of their revenue. The SEC, thinking in terms of convergence, says it will be closer to 0.1%. Trying to look at it in terms of an overall percentage is hard because companies have different starting points. The quality of data and their ERP systems, each of these differs from company to company, so in terms of coming up with a formal assessment of the cost, it’s very much a rough guess.”

John J. Barry, US IFRS leader at PricewaterhouseCoopers in New York, says, “I think cost is individual to every company; it’s not really calculable. I don’t think anyone has really gotten their hands around this yet, and if they have, it’s from 75,000 feet.”

While the world waits for the SEC to step up to the plate, some companies and organizations are pressing on, such as small and medium-sized enterprises, which the IASB addressed last year with a simplified — and presumably less expensive — set of accounting standards that should ease the way into the world of IFRS. The only proviso to adopting these SME standards: ultimately, their lenders and other financial counterparties have to sign off on the change, as current loan covenants and other documents have been written with US GAAP as their basis.

It’s true, too, for privately held companies based in the US, many of which are jumping in simply because they’re so involved internationally that it makes good business sense to go IFRS.

“Back in July the IASB issued standards for so-called small and medium-sized entities that are less onerous than those for larger companies, and US companies in that size range now can use these standards if they wish to do so,” says Sean Lager, the partner in charge of international business at Atlanta-based accounting and auditing firm Frazier & Deeter. “The kicker here, though, is that if that firm wants to make the switch, it has to get sign-off from its banks and other financial partners. That’s because its loan covenants now determine what it reports in, thus the need for these financial intermediaries to give their OK for the shift.”

“Meanwhile, the American Institute of Certified Public Accountants [AICPA] has been actively promoting interest in IFRS among small and medium-sized entities,” says Paul Cherry, chair of the IASB’s Standards Advisory Council and retired chair of the Canadian Accounting Standards Board. “It has already said the IFRS is authoritative and credible and that you can get a clean audit opinion in compliance with these standards. [I stress that this is in the context of private companies.] But it’s too early to determine to what extent they’ll be used.”

Most recent update

On February 24, 2010, the Securities and Exchange Commission issued a statement that makes it clear that it still believes that a single set of high-quality globally accepted accounting standards would benefit US investors. The statement pointed out that the SEC continues to encourage the convergence of US GAAP and IFRS. The SEC is also working on a work plan that is expected to help the SEC evaluate the impact US company use of IFRS will have on the US securities market. By 2011, if the work plan and various convergence projects are completed, the SEC will decide whether to incorporate IFRS into the US financial reporting system.

In 2008, AICPA president and CEO Barry Melancon took the lead in calling for an orderly, thoughtful transition to IFRS. “Awareness is growing among US accountants that IFRS is coming for public companies and most believe it will take three to five years to get ready,” Melancon said at a Financial Accounting Standards Board (FASB) meeting. Since then, the group has been promoting a wide array of webinars, a dedicated website and other educational materials to help in the process.

Regardless of when, if or how the SEC decides to push ahead, efforts to mesh US GAAP and IFRS roll on through the many convergence projects the IASB and FASB are working on together.

“Even if FASB plans to complete all the projects discussed under its memorandum of understanding with IASB, both public and private US companies will incur significant costs to adopt the changes that will result, regardless of whether the SEC mandates adoption of IFRS,” says IASB’s Patrick Finnegan.

“These projects will create significant improvements for investors,” he says. “It would be sound to adopt these changes once, unwise to incur costs twice as they adopt US GAAP changes, then converge toward IFRS. For that reason, it makes sense to adopt IFRS directly. Bottom line: why not adopt a single language everyone can use once, and do it now?”

If US companies want to implement IFRS efficiently and cost-effectively, they must do what has been advised for years: change how they think about accounting and how it relates to their core businesses and operations, says Peter Welch, founder of consulting firms Sox International and Contractual CFO, which market IFRS training and self-study programs to executives and accountants.

“With IFRS you’ve got to look at each and every major transaction that goes through a company, asking first if it’s truly revenue, how much was economically earned and through what period,” he says.“You receive the cash: do you recognize it, treat it as revenue or as deferred revenue? And how much of that money truly is representative of economically earned income versus a contract that goes out well beyond 12 months? In the end they have to come to terms with the economics of the business. These are issues that have never been asked with US GAAP. Everything was about following the rules. If you could sell it to the auditors, that’s how you’d account for it. If we can’t change that way of thinking, we face a very long, rocky road to IFRS. That’s a mistake that none of us as stakeholders can afford.”

Lawrence Richter Quinn is an Atlanta-based freelance writer