Accounting in the U.S. will never be the same again, starting in 2009 (for some companies at least). Under a roadmap proposed by the Securities and Exchange Commission last week, companies will switch to International Financial Reporting Standards from U.S. Generally Accepted Accounting Principles by 2016, if the SEC decides the conversion is in the public interest. IFRS is already mandated in the European Community, and more than 100 countries “require or permit IFRS reporting,” according to the SEC announcement. “Approximately 85 of those countries require IFRS reporting for all domestic, listed companies.” Australia and Hong Kong are on board, and Brazil will join up in 2010. China and India are moving toward conversion.
Some U.S. companies will be able to convert as early as 2010—if they’re big enough. Market cap within specific industries will be the deciding factor as to who gets to convert when. Companies ranking in the 20 largest worldwide in their sector will be able to go IFRS for the 2009 annual reports, under the SEC’s proposed schedule.
“We applaud the SEC’s roadmap,” says Lisa Filomia-Aktas, partner at Ernst & Young. “The world is clearly moving to one set of accounting rules, and that’s IFRS.” What about the criticism that IFRS is a little bit loosey-goosey? “You hear that IFRS is principles based while FASB is rules based. Both have principles and both have rules, or interpretations. Sure, FASB has more interpretations, because they’ve been around longer. IFRS will catch up as they go forward. What IFRS doesn’t have is bright lines—50 percent required here, 90 percent there. Some accountants like that about U.S. GAAP; they can just check off the boxes. IFRS requires a lot more judgment. There’s a perception the IFRS is so much easier, but that’s not really true.”
Indeed, IFRS insists on a lot more consolidation. Exotic securitized investment products can be held off the balance sheet under current FASB rules. These qualified special-purpose entities, known as QSPEs, include the now notorious array of mortgage-backed vehicles whose Blue Book value keeps declining. Under FAS 140, companies have been allowed to keep these investments away from the their balance sheets. The furor over the role of QSPEs in the ongoing financial market meltdown forced the FASB to revise FAS 140 and remove the QSPE exemption completely. The move was postponed until 2010 when Fannie Mae and Freddie Mac shares plunged in July, partly because of anxiety about all those ugly investments showing up in 2009; now they’ll probably pop up in 2010. There is no such exemption under in the IFRS world. In fact, there are very few exemptions.
How long does it take to switch to IFRS? “Some companies take a compliance approach,” notes Filomia-Aktas. “They use spreadsheets, and it’s somewhat simpler. Others convert through a best-processes implementation, and that will take longer. And then it depends on how centralized or decentralized a company is. But generally, three years is a reasonable estimate. And companies have to convert the prior two years of financials—to run both US GAAP and IFRS—before they switch.” So the smaller institutions that expect to be in the class of 2012 or 2013 better start revving their pencils. “It sounds far way, but now is the time to really start planning.”