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International Reporting Standards Face Uncertainty

SEC Extends Comment Period For Roadmap Until April 20

NEW YORK - The Securities and Exchange Commission has given U.S. companies more time to comment on its proposal to adopt international financial reporting standards (IFRS), but this extension may be creating uncertainty among those who thought the conversion was a done deal.

Extending the deadline another 90 days, from Feb. 19 to April 20, for comment has many worried that the SEC may delay implementation. With the SEC not scheduled to vote on the switch for a full two years after the close of the now-extended comment period, accounting executives said they would rather know sooner than later so that they can prepare for the standards. The current roadmap requires companies to keep two sets of books-one for Generally Accepted Accounting Principles (GAAP) and one for IFRS-for three years. Certainly, switching from GAAP to IFRS will be a monumental undertaking.

A limited number of companies with a significant amount of international business will be allowed to start filing under IFRS as early as this December, but with the start date uncertain, no large U.S. financial services companies have opted to take on the added expense.

"Generally, everyone believes a single set of global standards would be beneficial for the global economy," said Lisa Filomia-Aktas, a partner at Ernst & Young, at the accounting firm's Manhattan office in Times Square, but "some people believe there are some disincentives to early adoptions."

If in 2011 the SEC votes to implement the changes from the proposed roadmap, the largest U.S. companies will be required to comply with IFRS by 2014, with accelerated companies following in 2015 and everyone else by 2016.

Extending the comment period will give companies more time to share their concerns, but most of the largest companies have already commented, and the general theme of the letters was telling the SEC to hurry up and set a date, Filomia-Aktas said.

"Our view is that it's not a matter of if, but when," she said. "If companies start planning now, they can spread out their resources and prevent a lot of surprises. There is enough time for companies to get there, but it gets a lot harder if you wait."

GAAP is rules-based and IFRS is principles-based, although fair-value accounting doesn't differ much between the two systems, she said.

Mutual funds and other entities under the Investment Company Act have not been included in the roadmap, but "that doesn't mean they are excluded; they just haven't been considered yet," Filomia-Aktas said.

Mutual funds already use fair-value accounting and shouldn't be affected, but private equity uses specialized accounting rules, which aren't allowed under IFRS, she said.

Former SEC Chairman Christopher Cox championed the IFRS conversion throughout his tenure, making sure the roadmap was well on its way before his term ended last year, even as the global financial crisis worsened.

New SEC Chairman Mary Schapiro's comments during her January confirmation hearing weren't exactly encouraging for IFRS, but they weren't discouraging, either.

"I think we can all agree that a single set of accounting standards used around the world would be a very beneficial thing, allowing investors to compare companies around the world," Schapiro said. "That said, I have some concerns about the roadmap that's been published by the SEC and is out for comment now, and I have some concerns about the IFRS standards generally."

Schapiro said worried the high cost of switching reporting standards comes at a time when U.S. companies are already struggling. The cost of switching reporting standards has been estimated at anywhere between $900,000 and $30 million for each company.

"We have to think carefully about whether imposing those sorts of costs on U.S. industries really makes sense," she said. "I will take a deep breath and look at this entire area again carefully and will not necessarily feel bound by the existing roadmap that's out for comment."

Filomia-Aktas said the cost of converting to IFRS depends on a lot of factors, such as how many different entities a business has, how centralized or decentralized the company is, how current their processes are and whether they use one system or dozens of different systems.

"A lot of people are doing spreadsheets with add-ons," she said. "They may see initial savings, but spreadsheets are not sustainable. There are many cost benefits to planning early. Companies should start early and get the buy-in from top management."

Companies that are among the top 20 in their industry can choose to participate in the voluntary, early adoption period, so long as IFRS is the prevalent accounting standard. More than 100 countries have already adopted IFRS, and many multi-national companies are currently reporting under both IFRS and U.S. GAAP.

"A lot of financial services firms have a global presence," said Gary Hwa, a partner at Ernst & Young. "Companies are beginning to realize because of the global presence, this is impacting them. You can't be insular. If 50% of your business is outside the U.S. and using IFRS, you should consider converting."

In addition to cost savings, having everyone on the same system will level the playing field, he said.

"We need one consistent standard across the world," echoed Filomia-Aktas. "Every country should be part of the process in developing an international standard."

IFRS isn't perfect, but its requirements are continually being revised and improved to incorporate the best ideas from other countries, including the U.S. The U.S. is also changing its GAAP, bringing it ever closer to becoming more like IFRS. "By the time we get to 2014, a lot of these differences may go away," she said.

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