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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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June 23, 2008 12:01 AM ET
The all but certain transition to international accounting standards is sure to be a marquee event for public and private companies. But it looks as if the Securities and Exchange Commission is leaning toward a soft open that would give U.S. companies the option of switching to the new standards before their use is required. Although plans are not yet set in stone for the rule proposal expected later this summer, two SEC officials said last week that the agency is considering giving U.S. companies the option to switch to international financial reporting standards (IFRS) using a phased-in approach. “The road map concerns whether U.S. companies should have the option to switch to IFRS,” said SEC chief accountant Conrad Hewitt, noting the SEC will also set goals for an eventual IFRS mandate. Such a phased-in approach would mimic other SEC regulations, such as a recent rule requiring interactive data in financial filings, that focus first on large companies and eventually expand the mandate to include all registrants. John White, who heads the SEC's division of corporation finance, added that the agency is examining an “optional first” approach to IFRS, followed by more intensive rule-making for a mandate. But giving companies the option to switch to IFRS before making it mandatory has several trade groups up in arms. The CFA Institute, for example, has criticized an optional approach as being too confusing for investors and analysts. Accounting expert Jack Ciesielski has argued that for investors, “hurry-up optionality” on IFRS would make comparisons to financial statements prepared using U.S. generally accepted accounting principles (GAAP)—already riddled with accounting treatment options—even harder. Other groups, including the Institute of Management Accountants and the American Institute for Certified Public Accountants, favor a one- or two-year period in which use of IFRS is optional, but want the SEC to set a mandatory deadline as well. Both groups have said that three to five years should be enough time for all public companies to become acquainted with the new accounting rules. Many experts predict private companies would likely be given a five- to 10-year period in which to transition to IFRS, although that would likely reflect bank requirements, rather than an SEC rule. Early adoption would give companies a chance to assess and practice using the new accounting framework, according to Arleen Thomas, senior vice president of member competency and development at AICPA. “I, personally, would like a road test,” she said, noting that the SEC would likely include some kind of screening mechanism to determine which companies would be eligible to adopt IFRS early. Patrick Daugherty, a partner with Foley & Lardner who served as counsel to SEC commissioner Edward Fleischman in the 1980s, suggested that to stem the concerns over optionality, the SEC may require companies that adopt IFRS early to reconcile their filings to U.S. GAAP. Mr. Daugherty said such a requirement would pose a competitive disadvantage for the U.S. companies involved, and noted that the SEC ended the reconciliation requirement for foreign filers last year. But requiring reconciliations could be necessary to limit initial investor confusion, he said, adding that such reconciliations could be phased out within a short time. An SEC spokesman declined to comment. Experts predict the SEC road map, due out later this summer, will include a time frame for full adoption, but it seems that 2013 may be the target date. Mr. White said earlier this month that the SEC would wait for the arrival of its three new commissioners before voting on the road map. Those commissioners have been vetted but not yet approved by the Senate Banking Committee. Also expected later this summer is an updated memorandum of understanding between the Financial Accounting Standards Board and the International Accounting Standards Board, in which the standard-setters will outline further steps to converge IFRS with U.S. GAAP. IASB's foundation is also conducting a constitutional review of the organization's trustee governance and funding, which should be completed in the next few months. The IASB board will increase from 14 to 16 members, and a seven-person monitoring group—composed of the chairs of the SEC, European Commission, Japan's Financial Services Authority, as well as heads of the World Bank and the International Monetary Fund and two members of the International Organization of Securities Commissions—will be set up to vet its independence. It's not just the SEC and standard-setters that will be working to change regulations as companies move to IFRS, though; tax authorities and banking regulators also will have their work cut out for them. Frank Ng, commissioner of the large and mid-size business section of the Internal Revenue Service, said a “whole host of tax policy issues” will have to be addressed, including changes in valuation, revenue recognition and last-in first-out (LIFO) accounting. Banking regulators have noted that securitization rules in the U.S. will likely change under IFRS, although FASB recently made changes to off-balance-sheet accounting to more closely align U.S. and international standards. Mr. Hewitt said LIFO accounting is not a good measurement of inventory, and suggested U.S. tax authorities will have to work out whether or not the conformity rule should be changed to allow LIFO on tax filings but not in financial reporting. Many public companies, however, are still lukewarm about IFRS. An AICPA survey last month of 635 corporate executives who prepare financial statements found that one-third would be ready to transition to IFRS within three years and about 84% said they would be ready at some point within the next five years. Roughly 16% of the respondents would prefer being given the option of using IFRS or GAAP, compared with 11% that support a mandate, the survey found. But if a choice were given, only 20% would “probably” or “definitely” choose IFRS, with more than half of those surveyed probably or definitely picking U.S. GAAP. Public accounting firms are even less enthusiastic about moving to IFRS; the AICPA also surveyed 603 accountants, and only 13% said they would definitely or probably choose IFRS if given the option. But pharmaceutical companies and other firms that compete heavily on the international stage are more eager to make the change, Mr. Daugherty said. He expects a spike in the adoption of IFRS by big companies over the next two or three years. “It's hard to see [the process] going faster.”
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