Implications of IFRS for Audit Committees

Background and Growing Momentum

Since 2002, the FASB has been collaborating with the International Accounting Standards Board (IASB) on a joint convergence project in an effort to increase the international comparability of financial accounting and reporting. The movement toward International Financial Reporting Standards (IFRS) has gained momentum due to its increased global acceptance with more than 100 countries currently requiring or allowing the use of IFRS. Additionally, the continued globalization of the capital markets (which increases the importance of comparable financial reporting around the globe) has motivated regulators and standard setters to achieve a single set of high quality globally accepted accounting standards.

SEC Perspective

In 2007, the SEC issued Final Release No. 33-8879 to allow foreign private issuers to file, in their filings with the Commission, financial statements prepared in accordance with IFRS as issued by the IASB without reconciliation to generally accepted accounting principles (GAAP) as used in the United States.

In November 2008, the SEC released a proposed Roadmap for transitioning U.S. registrants to reporting in accordance with IFRS as issued by the IASB and included the following key elements:

1. A list of milestones that must be met before the SEC will consider requiring U.S. filers to report in accordance with IFRS
2. Voluntary early adoption of IFRS by a limited number of large U.S. registrants beginning in 2010
3. A Commission decision in 2011 as to whether the milestones have been met and reporting in IFRS should be mandated
4. If the decision in step 3 is yes, adoption of IFRS by U.S. registrants beginning in 2014[1]

On February 24, 2010, the Securities and Exchange Commission voted to unanimously issue a Statement regarding its continued support of a single set of high quality global accounting standards and for the convergence of U.S. GAAP and IFRS. The Statement included a Work Plan, which the staff will execute, to assist the Commission in gaining further understanding related to key issues about incorporating IFRS into the current financial reporting environment for U.S. issuers. The Work Plan addresses issues raised in comment letters on the Commission’s proposed Roadmap discussed above. The Statement emphasizes the significance of the FASB and IASB successfully completing the current convergence projects scheduled for completion in 2011. Assuming the completion of the convergence projects and the Work Plan, the Statement reaffirms 2011 as the date the Commission believes it will be in a position to determine whether to incorporate IFRS into the U.S. domestic reporting system.

The Statement also indicates that the first date U.S. issuers would report under IFRS would be no earlier than 2015, which is later than the initial adoption date in the proposed Roadmap in bullet 4 above. As was emphasized by one of the Commissioners, the Statement does not envision early or voluntary adoption of IFRS as the proposed Roadmap had included (see bullet 2 above). The Statement also emphasizes the expectation that the FASB will continue to play a substantive role if the Commission decides to incorporate IFRS into the U.S. domestic reporting system.

The Statement is the next step in the SEC’s journey toward the use of IFRS for domestic companies. Completion of the key projects on the joint FASB-IASB agenda is another key step.

In June 2010, the IASB and FASB issued a joint statement indicating a modified work plan that would focus on completion of convergence for the following projects for which the need for improvement is considered most critical: financial instruments, revenue recognition, leases, presentation of other comprehensive income and fair value measurement. Prior to this statement, many stakeholders had voiced concerns about the their ability to provide high quality input on the large number of major exposure drafts that were planned for publication in the second quarter of 2010. The SEC responded to the joint statement with its support of the modified workplan and SEC Chairman Mary L. Schapiro expressed confidence that the SEC would remain on its schedule: “… I am confident that we continue to be on schedule for a Commission determination in 2011 about whether to incorporate IFRS into the financial reporting system for U.S. issuers.”[2]

Refer to the IASB and FASB websites, respectively, for current status of joint projects at http://www.iasb.org/Home.htm and http://www.fasb.org/home.

Audit Committee Considerations

The transition to IFRS in the U.S. promises to be a significant undertaking based on conversion experiences of other countries that have adopted or are in the process of adopting IFRS. In light of the targeted timing included in the SEC Commission Statement, management and audit committees of U.S. companies should begin considering the impact that such a transition could have on the company and its operations as well as the oversight responsibilities of the audit committee. Initial questions to consider include:

• What is the size and scope of the transition project? How will it impact systems and functions other than accounting and financial reporting (e.g., taxation, IT, legal, treasury, contracts, covenants)?
• Are there synergies to take advantage of in considering implementation (e.g., standardization/centralization of financial and/or transaction reporting)?
• What is the company’s current exposure to IFRS (e.g., statutory requirements, foreign subsidiaries, acquisition targets, significant competitors that currently report on IFRS)?
• What is the company’s current level of IFRS knowledge? Does the company have adequate resources currently to begin to formulate a transition plan?
• Is management monitoring the status of IFRS standard setting?
• Has management and the audit committee begun assessing risks to the company associated with application of IFRS throughout the organization?
• How might transactions being contemplated by the company be impacted by adoption of IFRS?
• What are the significant accounting and presentation differences between U.S. GAAP and IFRS for the company, especially those that are not part of the convergence projects?
• Will the transition have a significant impact on the way shareholders and others evaluate the financial position and operations of the company? How will changes be communicated to those external to the company?
• How will the audit committee’s oversight role be impacted by the convergence to IFRS?
• What is the audit committee’s current level of expertise with respect to IFRS? How will it educate itself further? Is there a need for external advisors?

The SEC Is Seeking Comments on Incorporating IFRS Into the Financial Reporting System for U.S. Issuers

Following up on its public support of the IABS’s and FASB’s Work Plan for convergence of International Financial Reporting Standards (IFRS)[3], the SEC has issued the following releases:

• Release No. 33-9133, Notice of Solicitation of Public Comment on Consideration of Incorporating IFRS Into the Financial Reporting System for U.S. Issuers; and
• Release No. 33-9134, Notice of Solicitation of Public Comment on Consideration of Incorporating IFRS Into the Financial Reporting System for U.S. Issuers.

These releases seek public comments on topics derived from the SEC staff’s Work Plan[4] described in the Commission Statement in Support of Convergence and Global Accounting Standards (issued in February 2010). Specifically, these releases seek comments via a series of questions on the effect that incorporating IFRS into the financial reporting system for U.S. issuers would have. The first release focuses on the U.S. investors’ knowledge and education regarding IFRS and asks about:

• The U.S. investors’ current knowledge of IFRS and their preparedness for the incorporation of IFRS into the financial reporting system;
• How investors should educate themselves on the changes in accounting standards (and the timeliness of such education);
• The extent of the logistics and the estimated time required to undertake changes to improve investor understanding of IFRS; and
• The education process required to ensure that investors have a sufficient understanding of IFRS prior to the potential incorporation.

The second release focuses on U.S. issuers’ considerations with respect to:

• Issuers’ compliance with contractual arrangements that require the use of U.S. GAAP with respect to application, interpretation and enforcement of such arrangements[5];
• Issuers’ compliance with corporate governance and stock exchange listing requirements, including consideration of IFRS expertise and the composition of the audit committee / designated financial expert; and whether the provision of a transition or phase-in period might mitigate impact of convergence to IFRS
• Application of certain legal standards tied to the amounts determined for financial reporting purposes (e.g., company’s ability to declare dividends or make stock repurchases and investors’ expectations of such actions) and consideration that to the extent legal standards do not change based upon changes in financial reporting requirements, companies may need to maintain two sets of records.

These releases were issued on August 12, 2010 and comments are due 60 days after publication in the Federal Register. For further information on the SEC’s activities with respect to IFRS, refer to: http://www.sec.gov/spotlight/globalaccountingstandards.shtml.