US pushes button on $3.5bn convergence

SEC's Christopher Cox

Driving forces: SEC’s Christopher Cox

The US Securities and Exchange
has taken the $3.5bn plunge into International Financial
Reporting Standards, while saying the adoption of IFRS overseas may have
disadvantaged US investors.

In publishing its IFRS roadmap, the SEC said: ‘The use of IFRS in other
jurisdictions may have begun to affect US investors’ ability to evaluate
investment alternatives as their level of investment in non-US companies has
increased over time,’ the SEC said in the roadmap.

The US markets’ watchdog published the roadmap, which sets out its blueprint
for adoption of the reporting standards in the US, late last week, and said
early adoption by a minimum of 110 of the largest US companies was on the

These companies, operating in 34 ‘IFRS industries’ – sectors in which the
standards are used by the majority of the 20 biggest companies by market
capitalization – can elect to use IFRS beginning with filings for fiscal years
ending on or after December 15, 2009.

The IFRS roadmap, spearheaded by SEC chairman Christopher Cox, has seven key
milestones that have to be passed before the standards are adopted by all US
issuers. These include the SEC officially endorsing the move towards IFRS in
2011, but this could hinge on how the early-adopting US companies fare.

The SEC also released estimates predicting that US companies will spend
between 0.125% and 0.13% of their revenue on making the transition to IFRS
during the first year of filing. The collective cost of IFRS adoption for these
companies will be in the region of $3.5bn.

The document’s publication was temporarily derailed by the financial crisis
and was also damaged by the fallout from the International Accounting Standards
Board’s reclassification of hard-to-value assets, but the SEC pushed it through
to benefit US investors in the future.

However, there is still work underway to fine-tune the reporting standards on
this side of the Atlantic. Last week an IASB roundtable highlighted flaws in the
classification of some financial instruments under IAS39.

‘The IASB would need to look at the classifications. The classifications are
woolly round the edges,’ said one participant.

The SEC added that large US companies would need to get to grips with IFRS if
they wanted to be successful in securing capital in the tough economic
conditions: ‘It is likely that large US issuers that compete for capital on a
global basis will increasingly need to use and understand IFRS financial
statements in order to remain competitive.’

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