Although there are still uncertainties about the effects of International Financial Reporting Standards (IFRS) on US companies, the path ahead is becoming clearer, thanks to a ground-breaking report released recently by the SEC staff. Entitled “Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers,” this report marks a major milestone is the history of US accounting. It represents the culmination of a multi-year effort by the members of the SEC’s Office of the Chief Accountant to sort through the unprecedented complexities of global accounting standards, and its insights reflect the dedication and hard work of an outstanding team of experts. In addition to zeroing in on the practical issues and concerns identified to date, the report presents sensible ways to mitigate the risks. These findings will help determine whether, when and how the SEC will require the use of a financial reporting system that incorporates IFRS. This Messenger highlights the key findings, along with the steps that companies can take now.

1. August 2012
MHMMessenger
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M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M
A publication of the Professional Standards Group
The SEC’s Report on IFRS: Steps Companies Can Take Now
Although there are still uncertainties about the effects Key findings
of International Financial Reporting Standards (IFRS)
on US companies, the path ahead is becoming The SEC staff considered six broad categories of
clearer, thanks to a ground-breaking report released relevant considerations, including the indirect effects
recently by the SEC staff. Entitled “Work Plan for the on private companies. Highlights of the key issues and
Consideration of Incorporating International Financial concerns in each area are provided below, followed by
Reporting Standards into the Financial Reporting a summary of the ways to mitigate the risks.
System for U.S. Issuers,” this report marks a major
milestone is the history of US accounting. It represents 1. Development, auditability and enforceability
the culmination of a multi-year effort by the members of IFRS. There are lingering concerns about the
of the SEC’s Office of the Chief Accountant to sort level of development of IFRS. One key issue is
through the unprecedented complexities of global that progress on convergence has been slower
accounting standards, and its insights reflect the than expected. The FASB and IASB still have not
dedication and hard work of an outstanding team of completed the priority projects on leases, revenue
experts. In addition to zeroing in on the practical issues recognition, and financial instruments. Adding
and concerns identified to date, the report presents to these concerns, the lower priority projects
sensible ways to mitigate the risks. have been postponed, fundamental differences
between IFRS and US GAAP remain in a number
These findings will help determine whether, when and of areas, and IFRS lacks comprehensive guidance
how the SEC will require the use of a financial reporting for specific industries. Although there are areas in
system that incorporates IFRS. This Messenger need of further development in both IFRS and US
highlights the key findings, along with the steps that GAAP, the overall perception is that the gaps are
companies can take now. greater in IFRS with the result that US standards
provide users with more relevant information.
Another key concern is that staff reviews have
found diversity in the application of IFRS and a lack
of clarity and transparency. These weaknesses
undermine comparability and reflect differences in
the enforceability and auditability of IFRS around
the world.
roots run deep
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our
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2. Independent standard-setting for the benefit of 4. Regulatory environment. Any decision by the SEC
investors. There are concerns that the standard- to incorporate IFRS into the US financial reporting
setting process for IFRS may not be sufficiently system would have a significant effect on the US
independent and may not adequately consider and regulatory environment, and the effects would be
protect the needs of the US capital markets. Some felt by both public and private companies. This
of the issues relate to funding. Currently, the IFRS raises difficult challenges, including the following.
process relies on large accounting firms to provide
funding, and it elicits relatively few comment letters • References to US GAAP. Many regulators
from investors or investor groups. The concerns require that their regulated entities provide
about investor protection are compounded by the them or others with financial information, often
fact that the International Accounting Standards prepared in accordance with US GAAP. If the
Board (IASB) does not have a mandate to SEC decides to transition to IFRS, considerable
consider the establishment of standards with a effort will be required to modify the many
focus on any single capital market. As a result, references to US GAAP to be compatible with
guidance on emerging issues may not be issued IFRS. This would likely involve revisions of
on a timely basis. Changes were made recently to federal and state laws, regulatory requirements,
address this risk, but it is too soon to evaluate their contracts (e.g., for procurement), and related
effectiveness. guidance including policies, internal manuals,
and training materials.
3. Investor understanding and education
regarding IFRS. The staff’s research indicates • Private companies. The effects on regulated
that investors are concerned about the risk of a private companies would need to be
reduction in the quality of the information reported considered. Although private companies are
and they generally are not willing to sacrifice not required to use US GAAP, many do so
quality to achieve international convergence. voluntarily. A decision by the SEC to transition
There is a risk that investors will not be prepared to IFRS might mean a de facto transition for
for incorporation of IFRS into the US reporting private companies as well, with the result that
system because many investors learn about new the Commission might need to consider private
accounting standards from company disclosures. company financial reporting in conjunction
This technique might be adequate for a staged with its decision for US issuers, and this might
transition to IFRS, but not for the dramatic increase include an evaluation of IFRS for SMEs.
in the scope and pace of potential change that
would be associated with a short-term, wholesale • Industry-guidance. The loss of industry-
conversion to IFRS. Further, investors are also specific standards could impair the ability
concerned about the possibility of early adoption of regulators to regulate certain activities,
provisions. They are generally in agreement that such as capital requirements for financial
companies should not be permitted to early adopt institutions. This can occur because regulatory
IFRS due to the risks of accounting arbitrage in accounting standards often rely on US GAAP-
which companies would choose the accounting based inputs. A transition to IFRS could
guidance that produces the most favorable cause changes to numbers relied upon (either
financial results, rather than the best disclosure for
investors. (Continued on Page 3)
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directly or as inputs), resulting in significant 6. Human capital readiness. A decision to transition
implications for these regulators. to IFRS could require significant additional costs for
both preparers and auditors. The staff’s research
• Tax implications. There would also be found that, other than the technical accounting
significant federal and state tax implications groups of large accounting firms or multinational
because many areas of tax law deal with the corporations, most accountants have only a limited
interactions between US GAAP and income tax or foundational knowledge of IFRS. As a result,
requirements. The result for many companies firms and companies would need to incur costs
could be a significant increase in the number to train personnel or employ outside expertise as
of book-tax differences they need to track and/ either consultants or new employees. If existing
or the amount of tax they are required to pay. personnel are trained, there will be opportunity
costs of not using their services for other purposes.
5. Impact on issuers. For the approximately 10,000 If outside talent is used, there are risks that the
issuers that file reports with the SEC, a key concern pool of candidates may be limited and costly. The
is that benefits of a transition to IFRS might not human capital challenges are especially acute
justify the costs, especially for smaller public for accounting firms. Larger firms tend to have
companies. There would be costs associated existing IFRS accounting manuals, US-GAAP-to-
with changes to accounting systems, controls IFRS comparison guides, and tools for identifying
and procedures. These changes may require differences, as well as formal IFRS training and
significant transition time and effort. Training of internal consultation protocols. Smaller and mid-
personnel and additional external audit costs to sized firms are less likely to have developed
evaluate and test the new processes may add similar IFRS infrastructures and might need to
yet more significant costs. In addition, contracts hire consultants, with the result that shortages of
affected by the transition to IFRS may be adversely qualified personnel could be significant. These
affected and may need to be renegotiated. These potentially uneven effects of a transition to IFRS
include contracts that require delivery of financial could fuel concerns about audit firm concentration
statements prepared in accordance with US among larger firms and the resulting constraints
GAAP and those that require achievement of on competition.
certain financial targets or ratios calculated using
US GAAP. There may also be costs and concerns Ways to mitigate the risks and concerns
related to corporate governance. US issuers must
comply with requirements for financial literacy The ways to mitigate the risks and concerns include
of audit committee members. It is unclear if an the following:
individual with expertise in US GAAP could retain
that qualification following a transition to IFRS. 1. Retain the term US GAAP, incorporate IFRS
The transition could also affect compliance with gradually by an endorsement approach, and
quantitative exchange listing standards, such as ensure the FASB has a substantive role in any
minimum listing standards based on an earnings incorporation and endorsement project, both for
test. IFRS and for private company reporting standards.
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This approach will help to overcome the challenges certain,” both of which would impose additional
associated with the US regulatory environment costs on companies and auditors. A longer
and minimize the need for companies to maintain transition will provide time for companies and their
dual accounting systems. accounting firms to leverage in-house expertise
and make the necessary adjustments.
2. Supplement the IFRS standard-setting process
with mechanisms specifically designed to consider 4. Look to the FASB, SEC, IASB, and others for
and protect the U.S. capital markets. This would additional interpretive guidance on financial
include a carefully crafted endorsement approach reporting standards and to the SEC and stock
that allows the FASB sufficient flexibility and exchanges for additional transition guidance.
authority to do the following: Establish formal co-operation arrangements with
securities regulators, audit regulators and national
• Consider the impact on preparers and investors standard-setters to obtain feedback on how IFRSs
of the remaining differences between IFRS and are being implemented and suggest ways to
US GAAP. reduce diversity in practice.
• Use its experience as a standard-setter in the Steps companies can take now
US to help maintain a focus on the needs of US
investors and help in identifying and addressing No final decision is expected before the 2012 national
emerging issues in a timely manner. presidential election. In the meantime, there are
several steps that companies can and should take
• Screen IFRS standards to ensure any standard now.
incorporated into the US financial reporting
system is of sufficient quality to maintain or • Monitor the proposals issued by the FASB and
improve the US financial reporting system. IASB as part of their convergence projects.
• Create new standards and interpret existing • Analyze the impact the proposals may have on
standards, when necessary, to protect financial and regulatory reporting.
US investors and/or require supplemental
disclosures as needed to provide users with • Obtain training in IFRS to understand the
meaningful information. similarities and differences with US GAAP.
3. Require a managed transition over time, rather • Conduct regular reviews to consider the impact of
than implementation of a large number of different upcoming changes on your company’s resources,
accounting standards at the same time. A longer business strategies, technology plans, and audits.
transition period will relieve the demands on
human capital that would accompany a “big bang”
approach and the rigors of managing a “date
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MHM’s publications and webinars provide helpful
information. You can obtain a list of the webinars
available as part of our executive education series at
http://www.mhm-pc.com/Resources/Webinars.aspx.
For more information
If you would like additional information about IFRS,
or if you have any specific questions, comments or
concerns about the transition to IFRS, please contact
Keith Peterka of MHM’s Professional Standards Group
or your MHM service professional. You can reach
Keith directly by email at kpeterka@cbiz.com and by
telephone at 610-862-2744.
The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM service provider to further discuss the impact on your financial statements.
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