On August 27, 2008, the SEC proposed allowing (and possibly later requiring) U.S. registrants to file their financial statements with the Commission using International Financial Reporting Standards (IFRS), which are promulgated by the International Accounting Standards Board (IASB). IFRS are used in over 100 countries for official filings by listed companies. Although IFRS does contain similar concepts to U.S. GAAP, it does not have the same extensive body of literature, nor the same level of detailed implementation guidance. Thus, companies must exercise judgment in many cases in implementing IFRS.

 

The above action follows several roundtable discussions during 2007 where the SEC considered allowing non-U.S. registrants to file their financial statements with the SEC using IFRS without reconciliation to U.S. GAAP, and whether U.S. registrants should be allowed to use IFRS instead of U.S. GAAP. The discussions concluded with a vote in December 2007 on the first of these issues. Foreign private issuers are now allowed to file with the SEC using IFRS without reconciliation to U.S. GAAP (SEC Release No. 33-8879).

 

During its August 2008 meeting, the SEC also adopted three rule amendments (SEC Release No. 2008-183). First, the SEC shortened the deadline for annual reports filed by foreign private issuers from six months to four months. Second, the SEC simplified procedures for foreign private issuers to have securities traded in the over the counter market without registration under Section 12(g). Third, the SEC provided for cross border exemptions that will enable U.S. investors to participate in business combinations, tender offers and rights offerings on the same terms as non-U.S. security holders.

With respect to IFRS, the SEC proposed a “roadmap,” commencing with a 60-day comment period (to begin as soon as the August proposal is published in the Federal Register). Over the course of the next three years, the SEC will then determine whether certain milestones are met before requiring IFRS adoption by all U.S. registrants. These milestones include: continued improvements to IFRS; independent funding of the IASB; progress on XBRL’s ability to accommodate IFRS; and progress on IFRS training in the U.S.

The SEC’s target for making a determination about requiring IFRS is 2011. If it decides to proceed with the requirement, the adoption would be phased-in. Large accelerated filers would commence in 2014, with accelerated filers and remaining filers to commence in 2015 and 2016, respectively. The SEC may also allow for early adoption, and a decision on early adoption would be made concurrently (in 2011) with the decision about whether to make IFRS mandatory.

 

More immediately, the SEC also proposed optional IFRS adoption as early as 2009 by a limited number of larger companies. Specifically, these firms would be required to come from an industry in which the majority of peers use IFRS. Peers would be the 20 largest companies (based upon market capitalization) in the industry. The industry would be determined from an industry classification scheme, such as SIC code. The U.S. company must be one of the 20 largest companies. The SEC estimates that just over 100 U.S. companies would qualify to begin using IFRS in 2009. Companies that qualify to commence using IFRS would first be required to receive clearance from the SEC.

 

The below matrix summarizes the timeline:

 

 

J.H. Cohn recommends that firms consider offering a comment on the proposal to the SEC, once the comment period begins. If the proposal stands, companies would want to determine whether they would have the option of adopting in 2009. Since this is unlikely for all but a few companies, the majority of companies therefore would want to determine what year they would likely be required to adopt, and possibly, whether to adopt earlier than the designated year, if allowed.

 

Using a recent analogous situation, partner Kenneth Nielsen Goldmann notes that many smaller companies adopted a wait-and-see approach before spending the resources to tool up for the regulatory changes required by the Sarbanes Oxley Act (2002). The provisions of Sarbanes Oxley did accommodate smaller companies by allowing delayed implementation, and a similar strategy of wait-and-see may be appropriate with respect to IFRS implementation. However, since it does appear that the SEC will give a green light to IFRS in 2011, J.H. Cohn recommends that companies not stand completely idle, but rather at a minimum devote resources to determine the major relevant differences between current U.S. GAAP and IFRS and to monitor IFRS implementation that is undertaken by their larger counterparts.