Most executives responsible for corporate financial reporting said their firms will be ready, but likely will not move to International Financial Reporting Standards (IFRS) until mandated, even if an "early adoption" option is allowed, according to an IFRS convergence survey.
Some 75 percent of the respondents said their organizations would wait until the U.S. Securities and Exchange Commission (SEC) requires IFRS as the standard for filing financial reports before they move away from U.S. generally accepted accounting principles (GAAP).
The survey was conducted jointly by audit, tax, and advisory firm KPMG LLP, and Financial Executives International Inc. (FEI). More than 900 accounting and financial reporting executives responded to the survey.
Nearly half the survey respondents to the KPMG-FEI survey anticipate an SEC decision on IFRS in 2011, with only 15 percent of the executives saying they do not expect a vote next year on whether to incorporate IFRS into the financial reporting system for U.S. issuers. In addition, 94 percent of the respondents said their organizations could accomplish the adoption of IFRS by 2016 if a decision is made in 2011.
"This survey reflects a sense of confidence that those involved in the financial reporting process will be ready to implement IFRS when required, as long as the SEC provides sufficient time once a decision is made," said KPMG Partner Janice Patrisso, the national leader for IFRS.
Marie N. Hollein, FEI's president and CEO, said the findings indicate a readiness by some companies to achieve compliance, but adequate time is needed to make the switch. Additionally, Hollein noted that 65 percent cited cost of implementation as a concern, and a third of the executives said their companies have not yet assessed how IFRS will affect their companies, and would await a rule proposal or even the final rule from the SEC before they look at how IFRS will change accounting and other areas throughout their organizations.
"Requiring adoption of the new converged U.S. GAAP standards and later IFRS could create a significant burden on companies, and FEI would hope that the regulatory process will provide enough time for companies to understand the impact of the new standards and have the opportunity to respond to any rule proposals offered by the SEC," Hollein said. "It is important that implementation be done right the first time."
Some 88 percent of the respondents said IFRS would enhance comparability of financial statements globally, though many conditioned that response on successful completion of major convergence projects, as well as the need for other jurisdictions to improve their regulatory oversight to a level closer to that in the U.S. market, said KPMG's Patrisso.
She also noted that while still less than half would characterize themselves as IFRS-knowledgeable, familiarity with IFRS seems to be improving within the accounting function, though the financial reporting executives who responded to the survey say they need to cascade IFRS knowledge throughout their organizations.
For instance, one third of the survey respondents said they understand IFRS well, compared with just 20 percent of executives who responded to a similar survey a year ago. Yet, one-third of the executives also say the lack of knowledge elsewhere in their organization would be their biggest concern if they were required to adopt IFRS immediately.
Among other survey findings:
- A majority (57 percent) of respondents said convergence of U.S. GAAP and IFRS is the best approach to IFRS adoption, and 30 percent said they would like to see a "date certain" established for when the U.S. market would adopt IFRS.
- The availability of in-house resources (74 percent) and existing systems (68 percent) comprised the two major challenges that respondents pointed to when considering adoption of IFRS. Despite the lack of in-house resources, some 81 percent said they expect they will build knowledge of IFRS through a reallocation of existing employee time.
- A significant majority (65 percent) said the implementation cost is the main disadvantage to IFRS adoption, while 54 percent are concerned that a more judgment-based set of standards may lead to more second-guessing by the market and regulators.
"With many companies expressing some level of concern about the potential change to IFRS in the U.S. market and the importance of convergence between IFRS and U.S. GAAP, it will be important for them to monitor the periodic updates that the SEC staff has committed to providing on the progress of its work plan, as well as progress by the International Accounting Standards Board and Financial Accounting Standards Board on their key convergence projects currently underway," said Patrisso.
As company executives await an SEC decision, Patrisso noted that they should consider the implications of IFRS on the statutory reporting of their foreign subsidiaries, consider what effect IFRS would have on financial statements if a significant transaction is contemplated, and consider how the application of IFRS could affect the company's reported performance relative to its peers.
"If the SEC allows or requires the change, a little preparation can go a long way toward making sure an IFRS conversion goes as smoothly as possible," she said.
KPMG and FEI surveyed more than 900 executives involved in the financial reporting process during August 2010. The executives were either members of FEI or KPMG's IFRS Institute from U.S. publicly-held (50 percent) and privately-held companies (24 percent); with the remainder from other organizations such as foreign private issuers or subsidiaries of foreign parent companies. Company sizes varied, with 30 percent reporting less than $500 million in revenue, 23 percent in the $1 billion to less than $5 billion range and 18 percent with $10 billion or more in revenue.
About KPMG LLP:
KPMG LLP, the audit, tax and advisory firm, is the U.S. member firm of KPMG International Cooperative. KPMG International's member firms have 140,000 professionals, including more than 7,900 partners, in 146 countries.
Financial Executives International (FEI) is the leading advocate for the views of corporate financial management. Its 15,000 members hold policy-making positions as chief financial officers, treasurers, and controllers. FEI enhances member professional development through peer networking, career planning services, conferences, publications, and special reports and research. Members participate in the activities of 85 chapters, 74 of which are in the United States and 11 in Canada.