Opinion: SEC IFRS support not all it's cracked up to be

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By Bruce Pounder

On February 24, 2010, the U.S. Securities and Exchange Commission (SEC) formally announced its continued support for a single set of high-quality, globally accepted accounting standards as well as its support for the ongoing convergence of U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). So what does the SEC's announcement mean for U.S. accountants?


That's right, nothing – as in "nothing new here." The SEC hasn't required or allowed its domestic registrants to use IFRS for purposes of fulfilling SEC reporting requirements. The SEC has merely said that they'll make a decision about IFRS when they're good and ready, and they made it very clear that they're not ready right now. And as much as they expect to be ready sometime next year, they've cleverly declared upfront that their readiness to make a positive decision with regard to IFRS will depend on the actions of others over whom the SEC has no direct control.

If that's all you wanted to know, I won't be offended if you stop reading now. But if you'd like to know why the accounting media are devoting a lot of ink (and pixels) to an announcement that's really a big nothing, read on. I especially encourage you to continue reading if you want to know how the SEC's announcement confirms what I've been telling my clients and students for years: There are changes coming that are far more certain to have a far greater impact on U.S. accountants than a possible conversion from U.S. GAAP to IFRS ever will. And the three particular changes I have in mind are ones that most U.S. companies and accounting professionals are woefully unaware of and unprepared for.

First, the process of standard-level convergence between U.S. GAAP and IFRS, which the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been executing for many years, will result in profound changes to both sets of standards at the standard level. That's because the Boards are not content to simply pick and choose a best standard from among their existing standards. Instead, the Boards are in most cases developing entirely new standards that will be unlike those found in either U.S. GAAP or IFRS today. With the SEC's announcement expressing strong support for the Boards to continue working to converge U.S. GAAP and IFRS at the standard level, U.S. companies will certainly find themselves challenged to keep up with everything that's going to happen to U.S. GAAP within the next two years irrespective of any decision that the SEC might ultimately make with regard to IFRS.

Second, the likelihood of private U.S. companies migrating toward financial reporting standards that are neither current U.S. GAAP nor current IFRS is increasing, thanks to (1) the IASB's issuance of the IFRS for Small and Medium-sized Entities last year; (2) trends toward the development of separate standards for private companies in major countries like Canada; and (3) the recent establishment of a "blue ribbon panel" by the Financial Accounting Foundation (FAF), the American Institute of CPAs (AICPA), and the National Association of State Boards of Accountancy (NASBA) to study whether private U.S. companies should have their own set of financial reporting standards. Because there are about 1,000 private companies for every public company in the United States, a large-scale shift away from U.S. GAAP by private U.S. companies would be just as earth-shaking, if not more so, than if the SEC were to require public U.S. companies to shift away from U.S. GAAP.

Finally, U.S. companies that participate in the global economy are increasingly finding that they must adopt IFRS in addition to – not instead of – U.S. GAAP. This is because an increasing number of the world's countries are requiring foreign parent companies having local subsidiaries to use IFRS for statutory reporting purposes. Having to adopt a dissimilar set of standards in the short-term without abandoning current standards brings the burden of having to keep another set of books as well as the need to reconcile one set of books to the other. And as both U.S. GAAP and IFRS undergo profound change in the short term as a result of the FASB's and IASB's continued convergence efforts (as well as the SEC's clear support for those efforts), multinational companies based in the United States will find themselves in the worst of all worlds for many years to come.

So if you've been worried about being forced to switch from current U.S. GAAP to current IFRS, the good news is that's not going to happen. The bad news is that U.S. GAAP is going to change rapidly and profoundly in the short term, and multinational companies based in the United States are going to have to ride not one but two wild horses as the FASB and IASB converge U.S. GAAP and IFRS together with the SEC's blessing. By the time the Boards are done with their convergence projects, there will be more stability in each set of standards and few substantive differences between the two. And at that point, any decision by the SEC to require public U.S. companies to use future IFRS is more likely to come as a relief rather than as a burden.

About the author:

Bruce Pounder, CMA, CFM, is president of Leveraged Logic, a professional service firm that provides education and consulting services to accounting and finance professionals. He holds a Bachelor's degree from Syracuse University and an MBA from Rice University. Pounder is a member of the AccountingWEB Bloggers Crew. He currently resides in Asheville, North Carolina, where he can be reached by phone at (828) 254-4812 or by e-mail at [email protected].

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