United States: SEC Proposes Adoption Of IFRS Financial Reporting For U.S. Issuers

The SEC recently issued for comment a proposed roadmap for initially allowing and eventually requiring U.S. issuers to report financial results in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") rather than generally accepted accounting principles in the United States ("U.S. GAAP").

Converting to IFRS will impose special demands on issuers in the areas of governance, employee training, internal controls, contract fulfillment, and disclosure. It will also create opportunities for issuers that understand early on what IFRS requires of them. Management and boards should begin to consider the impact of IFRS conversion. The timeline to conversion may be shorter than anticipated, especially in the case of U.S. issuers eligible for early adoption.


IFRS is a set of principles-based accounting standards published by the London-based IASB. The SEC has encouraged the development of IFRS as a uniform accounting framework to facilitate cross-border offerings. It has also encouraged the convergence of U.S. GAAP and IFRS standards. Since 2002, the Financial Accounting Standards Board ("FASB") has been working with the IASB to harmonize U.S. GAAP and IFRS with the goal of producing a single, high-quality set of accounting standards.

Despite the movement toward convergence, differences between U.S. GAAP and IFRS remain. Key areas of divergence include accounting for pension liability, taxes, financial instruments, and business combinations. In addition, IFRS and U.S. GAAP are fundamentally different in that U.S. GAAP standards are primarily rules-based, whereas IFRS standards are primarily principles-based. Rules-based standards typically offer more detailed application guidance. Principles-based standards require management to exercise more judgment in determining how to account for transactions. As a result, IFRS reporting demands more significant time and input from management.

IFRS has quickly become the lingua franca of accounting. More than 100 countries now permit or require IFRS reporting. Since 2005, all companies incorporated and listed in a member state of the European Union have been required to use it. Other significant countries allowing or requiring IFRS reporting include Russia and Australia.

In some of these countries, accounting oversight bodies have issued standards modifying IFRS as issued by the IASB. The SEC has resisted this trend on the ground that it would undermine the uniformity that was the primary purpose of IFRS. In the past year, for example, the SEC has begun permitting foreign private issuers to file audited financial statements prepared in accordance with IFRS without a U.S. GAAP reconciliation, but it has required them to use IFRS as issued by the IASB rather than home-country variations of IFRS. The SEC's support for a uniform IFRS is evident in its current proposal for U.S. issuers as well.

The SEC's Conversion Proposal

The SEC has proposed allowing and eventually requiring public U.S. issuers to report financial results in accordance with IFRS as issued by the IASB.1 The SEC's proposal envisions a period of voluntary conversion beginning with fiscal year 2009, followed by mandatory conversion beginning with fiscal year 2014. In either case, issuers converting to IFRS would begin IFRS reporting in their Annual Reports on Form 10-K. The Form 10-K would include audited IFRS financial statements for the transitional year as well as the two preceding fiscal years. Thus, an issuer adopting IFRS in 2014 would need to file audited IFRS financial statements for fiscal years 2012, 2013, and 2014 in its Form 10-K for the fiscal year ended 2014, while an issuer voluntarily adopting IFRS in 2009 would need to file audited IFRS financial statements for fiscal years 2007, 2008, and 2009 in its Form 10-K for the fiscal year ended 2009.2

Voluntary Conversion. The SEC proposes to allow voluntary conversion on a limited basis for fiscal years ending on or after December 15, 2009. A U.S. issuer would be eligible for voluntary IFRS reporting if (1) the issuer is among the 20 largest public companies in its industry worldwide as measured by market capitalization and (2) IFRS as issued by the IASB is used as the basis of financial reporting more often than any other basis of accounting by those 20 companies. Under this test, IFRS must be used by a plurality, though not necessarily a majority, of the issuer's industry peers. The test ensures that voluntary IFRS reporting enhances comparability of the issuer's financial statements.

For purposes of determining the scope of an issuer's industry, the proposal allows the issuer to look to a range of industry classification systems, including SIC codes at the two-digit level. A company is deemed to use a particular set of standards as the basis of financial reporting if it has published audited annual financial statements prepared in accordance with those standards. The Commission estimates that at least 110 U.S. companies in 34 industries would be eligible under these criteria.

An eligible U.S. issuer interested in voluntary conversion to IFRS must obtain a no-objection letter from the SEC's Division of Corporation Finance before proceeding. Once issued, the no-objection letter would be effective for three years. During that period, the issuer could begin filing IFRS financial statements in any Annual Report on Form 10-K for a fiscal year ending on or after December 15, 2009.

All early adopters under the SEC's voluntary program would need to reconcile their IFRS financial statements to U.S. GAAP. The SEC has sought comment on two alternative reconciliation proposals. Under "Proposal A," issuers would follow IFRS 1, which requires issuers to include an audited footnote in their financial statements for the transitional year, setting forth a one-time reconciliation from U.S. GAAP to IFRS. Under "Proposal B," issuers would provide the information required by IFRS 1 but would also provide, on an ongoing and indefinite basis, an unaudited reconciliation from IFRS to U.S. GAAP for the three years of audited financial statements included in each Form 10-K filed.

Mandatory Conversion. The SEC has stated that it will decide in 2011 whether IFRS reporting should be mandatory for U.S. issuers. The SEC has indicated that its decision will depend on, among other factors:

  • the development of improved IFRS standards in certain areas (such as accounting for insurance contracts and extractive activities) where the SEC believes IFRS currently provides "limited guidance";
  • the resolution of questions relating to the funding and accountability of the IASB;
  • the development of an interactive data format (such as the eXtensible Business Reporting Language, or XBRL) for reporting IFRS financial data at a greater level of detail than is currently available;
  • the education and training of U.S. investors, auditors, and others in IFRS; and
  • the results of the voluntary conversion program described above.

The SEC has proposed to phase in any program of mandatory conversion on a size-of-issuer basis. Under the proposed scheme, large accelerated filers would be required to file their first IFRS financial statements with their Annual Reports on Form 10-K for fiscal year ended 2014. Accelerated and nonaccelerated filers would be required to file their first IFRS financial statements with their Annual Reports on Form 10-K for fiscal years ended 2015 and 2016, respectively.

Additional Consideration. The SEC has proposed not to permit investment companies, "smaller reporting companies," or employee stock purchase, savings, and similar plans to adopt voluntary IFRS reporting.

IFRS Challenges

Conversion to IFRS will pose several challenges for a company accustomed to reporting in accordance with U.S. GAAP:

Governance. Under the Sarbanes-Oxley Act, the chief executive officer and chief financial officer of every public company filing Exchange Act reports must attest to the accuracy of the financial statements in each annual or quarterly report filed by the company. Rules of the NYSE, Nasdaq, and AMEX require members of each listed company's audit committee to possess financial sophistication, and the audit committee must have one member who qualifies as a "financial expert." If a company adopts IFRS, its management and board may need additional training in order to meet the level of financial expertise necessary for them to carry out these functions and satisfy these requirements.

Employee Training and Systems Overhaul. Because the need for financial literacy extends beyond corporate leadership, companies must ensure that their accounting departments and outside auditors are properly prepared for conversion to IFRS. Conversion may require software upgrades or other adjustments to ensure that data necessary for IFRS reporting are properly being gathered. Accounting staff must be prepared to record transactions in accordance with IFRS as early as January 2007 (in the case of voluntary adopters) or January 2012 (in the case of mandatory adopters).

Internal Controls. The Sarbanes-Oxley Act requires management to assess the effectiveness of the issuer's internal control over financial reporting. It also requires the issuer's independent auditor to attest to management's assessment of the issuer's internal controls. Because U.S. GAAP and IFRS standards may vary, management will have to reassess the effectiveness of internal controls in anticipation of IFRS conversion. It may find that controls must be modified or added. Management will also need to ensure that the issuer's independent auditor is satisfied with management's reassessment of controls.3

Contractual and Other Third-Party Commitments. The extent of a company's contractual and other commitments often depends on its reported financial results. Performance-based compensation, dividend policies, debt covenants, and regulatory capital requirements are just a few examples of commitments that may hinge upon a company's reported financial results. Such commitments may be formulated in terms of a company's U.S. GAAP results and may not envision or permit reporting in IFRS. Even if IFRS reporting is not forbidden, the company's financial results may be more or less favorable under IFRS than under U.S. GAAP, and conversion may consequently facilitate or impede the company's ability to meet its commitments. Companies that convert to IFRS should consider whether renegotiation, waiver, or other adjustment of their commitments is necessary.

Disclosure Changes. While management may enjoy more discretion in crafting accounting policies under a principles-based accounting regime, it should carefully evaluate the disclosure of how it exercises that discretion. Good disclosure is the antidote to the liability risk that comes with less prescriptive accounting standards. Management should explain clearly why it accounts for transactions as it does and how different accounting policies would affect the issuer's results. An issuer that converts to IFRS reporting should pay close attention to its MD&A disclosure, especially as it relates to critical accounting policies.

IFRS Opportunities

While IFRS conversion is not without challenges, U.S. issuers may find that conversion offers opportunities:

Accounting Efficiencies. Foreign subsidiaries of U.S. issuers may already be using IFRS to prepare their statutory accounts. Converting the issuer's financial reporting to IFRS may significantly streamline the preparation of consolidated financial statements.

Competitive Advantage in Global Capital Markets. U.S. issuers that convert to IFRS reporting may find that it enhances their ability to compete for global capital by making their financial results more widely accepted and comparable. In particular, U.S. issuers may find that IFRS conversion makes it easier for them (i) to list their securities in foreign jurisdictions, (ii) to make employee offerings or private placements to foreign investors, (iii) to use their securities as acquisition currency for buying foreign-listed companies, and (iv) to attract foreign analyst coverage. Early IFRS adopters may thus enjoy a temporary advantage over their U.S. GAAP competitors in the global capital markets.

Investor and Analyst Relations. Management should view IFRS conversion as an opportunity to give interested investors and analysts a clearer picture of how the business really works and how its operations are translated into reported financial results. An attractive, but candid, explanation of the company's story can build the company's reputation with these important stakeholders.

Improved Accounting and Controls. An issuer can make a virtue out of necessity by using the reevaluation of its accounting systems and controls to improve them. The results that management gleans from its IFRS conversion may allow it to reduce organizational inefficiencies and other costs.

Convergence Without Conversion

Issuers should not resist IFRS out of fear that the SEC will abandon its conversion proposal down the line. As noted above, the SEC has encouraged the convergence of U.S. GAAP and IFRS accounting standards, and the FASB has recently issued or revised accounting statements with a view toward eventual convergence. The commitment of domestic authorities toward convergence ensures that U.S. GAAP and IFRS will continue to gravitate toward one another even if IFRS never supplants U.S. GAAP. The rise of IFRS is thus best viewed as another step in the gradual globalization of financial regulatory regimes. As with this broader process, the adoption of IFRS (whether through conversion or convergence) should streamline compliance for multinational issuers and should be regarded as a salutary event. If management and the board resolve at an early date to confront the challenges posed by IFRS, they will be in a better position to reap its rewards in the future.


1. The SEC's proposal was initially announced at its open meeting on August 27, 2008. It was formally confirmed in a notice-and-comment release issued on November 14, 2008.

2. Under the SEC's proposal, an issuer preparing its financial statements in accordance with IFRS for the first time would only be required to disclose three years of IFRS selected financial data in its transitional year. In each of the two subsequent years, the issuer would disclose an additional year of IFRS selected financial data until it was disclosing the full five years of selected financial data typically required.

The SEC has also sought comment on a proposal that would allow an issuer to file only two years of audited IFRS financial statements in its first Form 10-K following conversion, provided that the issuer also provided three years of audited U.S. GAAP financial statements. The SEC has indicated that it is "not inclined" to adopt this latter proposal.

3. Management should bear in mind that the accounting firms that audit the issuer's financial statements cannot advise the issuer on the design of internal controls. The Sarbanes-Oxley Act prohibits an issuer's independent auditor from offering nonaudit services of that kind.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
13 Dec 2017, Seminar, Cleveland, United States

Jones Day partners Harold Gordon and Tony Dias, and Associate Courtney Snyder will explore the significant role New York's Attorney General and its Department of Financial Services (DFS) play in the financial services industry and why these two state-level agencies will continue to exert significant power over the financial services industry, especially with federal oversight potentially shrinking.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions