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SEC to Seek Comment on Roadmap for Mandatory IFRS

The SEC unanimously approved for comment the issuance of a proposed roadmap outlining the milestones that must be met if the SEC is to mandate the use of International Financial Accounting Standards by domestic issuers. Chairman Christopher Cox characterized the roadmap as a cautious and careful multi-year plan which calls for a decision by the Commission in 2011 on whether to mandate the use of IFRS beginning with the 2014 fiscal year. It is a goal worth pursuing, he said.

Chief Accountant Conrad Hewitt noted that commenters have told the SEC that it must establish a date certain for the transition to IFRS. One of the issues that must be resolved is whether to phase in the mandatory use of IFRS, assuming that the milestones are met, beginning with the large accelerated filers. Mr. Hewitt said the proposal seeks comment on a two-year phase-in schedule beginning with the largest companies and concluding with the smallest in 2016.

The proposal also contemplates the possibility of allowing a select group of issuers to begin applying IFRS sooner than the schedule outlined by the roadmap. John White, the director of the Division of Corporation Finance, explained that early use by a limited number of eligible U.S. issuers might be permitted if it would enhance the comparability of their financial statements for investors. The proposal suggests that eligible companies must be among the largest in their industry by market capitalization and must be in an industry that relies on IFRS more than any other accounting standards.

Companies that are deemed eligible for early use of IFRS would obtain a letter of no objection from the Division of Corporation Finance. The staff estimates that about 110 U.S. companies in 34 industries would be eligible to be early users of IFRS under the proposed roadmap. If companies qualify for early use, Director White said they would continue to include three years of audited financial statements in their first year of IFRS reporting. The financial statements would be reconciled to IFRS. The proposal includes a second alternative in which unaudited but reconciled financial statements would be included on an ongoing basis in the Form 10-K annual reports.

Mr. White said the roadmap contemplates that the limited group of first users may be able to provide their financial statements using IFRS for fiscal years ending December 15, 2009. The Commission would evaluate whether the established milestones have been reached in 2011 before deciding whether to adopt a mandatory use of IFRS. The milestones include accounting principles that are crafted in the interests of investors, a standard setting process that is transparent and a standard setter that is independent. The standard setter also must be accountable. The focus on investor interests also underlies the support for the use of XBRL data tagging in financial reports.

Chairman Cox noted that the IASC Foundation is dedicated to developing a single set of high quality global standards and has recently embraced the creation of a new monitoring group to ensure its accountability. The foundation recognizes the importance of the monitoring group which should be functioning within the year, according to a member of the staff.

Commissioner Kathleen Casey asked how the staff would determine that IFRS continues to be consistently applied. The staff advised that it will monitor consistency through IOSCO, the Committee of European Securities Regulators and the Financial Accounting Standards Board. Mr. White added that the staff will be able to monitor IFRS consistency through its review of company filings.

Commissioner Elisse Walter said the proposed roadmap shows that the SEC is serious about moving to IFRS, but in the right way. The roadmap imposes real deadlines with critical milestones that must be achieved. She said the accountability and funding of the IASC Foundation must be implemented before the adoption of mandatory IFRS.

With respect to the potential early users of IFRS, Commissioner Walter said she preferred an alternative, the continuing reconciliation of financial statements until further action on IFRS is taken. The alternative also gives early adopters a way back if the SEC chooses not to adopt mandatory IFRS, she noted. Commissioner Luis Aguilar also believes that the alternative is preferable if early adoption is permitted. He also called for greater investor representation on the IASB, which currently has one investor representative.

Commissioner Troy Paredes asked whether investors would demand that early adopters provide a continuing reconciliation of financial statements. Mr. Hewitt said it is likely that the larger companies will keep two sets of accounting, at least for the first year.

The comment period will be open for 60 days.