SEC Roadmap Herschel Mann Texas Tech University

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SEC RoadmapHerschel MannTexas Tech University
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Potential for IFRS as the Global Accounting
Standard

• 113 countries require or permit IFRS
• Market capitalization of exchange listed
  companies in the European Union, Australia, and
  Israel comprises 26 of global market
  capitalization
• Market capitalization of exchange listed
  companies in those countries plus Brazil and
  Canada totals 31 of global market capitalization
• SEC believes that the benefits of moving towards
  IFRS are attainable only if IFRS represents a
  single set of high-quality accounting standards,
  which is best accomplished through the use of
  IFRS as issued by the IASB

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Past SEC Policy Considerations Regarding IFRS

• SEC has long expressed its support for a single
  set of high-quality global accounting standards
  (e.g., SEC Release 33-6807 November 14, 1988)
• Convergence of U.S. GAAP and IFRS as issued by
  IASB (predominant approach)
• 2002 Norwalk Agreement
• 2006 Memorandum of Understanding
• SEC allows foreign private issuers to file IFRS
  financial statements without reconciliation to
  the U.S. GAAP (SEC Release 33-8879)
• 2007 Concept Release whether U.S. issuers
  should be permitted, but not required, to use
  IFRS in their filing with the SEC

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Milestones

• Improvements in Accounting Standards
• Accountability and Funding of the IASC Foundation
• Improvement in the Ability to Use Interactive
  Data for IFRS Reporting
• Education and Training
• Limited Early Use of IFRS Where This Would
  Enhance Comparability for U.S. Investors
• Anticipated Timing of Future Rulemaking by the
  Commission
• Implementation of the Mandatory Use of IFRS

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Improvements in Accounting Standards

• Norwalk Agreement 2002
• 2006 Memorandum of Understanding
• Agreed that a common set of global standards
  remains the long-term strategy of both the FASB
  and IASB
• The next phase of the joint work plan goes
  through 2011
• SEC previously had noted areas where IFRS
  provides only limited guidance on a particular
  topic
• Accounting for insurance contracts
• Accounting for extractive activities
• Current convergence projects (e.g., revenue
  recognition and financial statement presentation)

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Improvements in Accounting Standards

• Accounting standards must be established under a
  robust, independent process that
• Includes careful consideration of possible
  alternative approaches and due process that
  allows for input from and consideration of views
  expressed by affected parties, including
  investors
• Insures that accounting standards are promptly
  considered to keep standards current and reflect
  emerging issues and business practices
• Requires that accounting standards produced are
  capable of improving the accuracy and
  effectiveness of financial reporting and the
  protection of investors, and of resulting in a
  high quality of financial reporting relative to
  the standards that may be replaced
• The SEC will assess whether it believes the IASB
  continues to develop its standards, including
  converged standards though a process that
  reflects the above elements

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Accountability and Funding of the IASC Foundation

• IASC Foundation has financed IASB operation
  largely through voluntary contributions
• Funding commitments were made for the period
  2001-2005 and then extended for an additional two
  years through 2007
• In 2006, the IASC Foundation Trustees agreed on
  four element that should govern the establishment
  of a funding approach
• Broad-based
• Compelling
• Open-ended
• Country-specific

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Improvement in Ability to Use Interactive Data
for IFRS Reporting

• May 2008 SEC proposed rules to require companies
  to use XBRL (eXtensible Business Reporting
  Language)
• Under the proposal, foreign private issuers that
  prepare their financial statements using IFRS as
  issued by the IASB would be required to provide
  financial statements in interactive data format

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Education and Training

• Increased need for effective training and
  education about IFRS for investors, accountants,
  auditors and others involved in the preparation
  and use of financial statements
• Investor education would be particularly important

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Limited Early Use of IFRS

• Roadmap contemplates that the SEC will make a
  decision in 2011 with regard to the mandated use
  of IFRS for U.S. issuers
• The proposed rules would allow the limited early
  use of IFRS by certain U.S. issuers
• The early use proposal has been somewhat
  controversial respondents have proposed other
  alternatives
• Option to use IFRS should be extended to all U.S.
  issuers
• SEC should require IFRS for all U.S. issuers (no
  option for anyone even early adopters)
• Continue convergence project without mandatory
  use of IFRS

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Anticipated Timing of Future Rulemaking by SEC

• After reviewing the status of the milestones, the
  SEC would determine, in 2011, whether to proceed
  with mandatory IFRS by 2014
• Users would use U.S. GAAP during 2012, 2013, and
  the first three quarters of 2014
• 2014 financial report would show financial
  statements using IFRS for 2012, 2013, and 2014
• SEC directed the Office of Chief Accountant to
  undertake a study and report to the SEC on the
  implications for investors and other market
  participants of the use of IFRS

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Implementation of Mandatory Use of IFRS

• All U.S. issuers adopt IFRS at same time
• Staged transition
• Large accelerated filers must adopt for financial
  statements for 2014
• Accelerated filers must adopt for financial
  statements for 2015
• Non-accelerated filers must adopt for financial
  statements for 2016

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Other Issues

• LIFO
• Debt covenants
• Market indices (e.g., SP 500) currently only
  include issuers that report under U.S. GAAP
• Auditing standards
• Nonpublic entities
• Not-for-profit organizations
• State and local governments