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US Continues to Drag its Heels with Regards to a Decision on the Move to IFRS

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In spite of the noises made last year by US regulators with regards to moving towards adopting International Financial Reporting Standards (IFRS), the US regulatory community has thus far failed to commit to a timeline for adoption or even indicate whether it is likely to move to the international accounting standards at all.

In June last year, Securities and Exchange Commission (SEC) chairman Mary Schapiro indicated that the regulator would be kicking off research efforts into how best to move the US from Generally Accepted Accounting Principles (GAAP) to IFRS over the next few years. She also stated that that the regulator would commit to a timeline for migration this year: “I am confident that we continue to be on schedule for a Commission determination in 2011 about whether to incorporate IFRS into the financial reporting system for US issuers.” However, all is currently quiet on the Western front.

SEC staff is still working on executing a work plan, the results of which it said will aid the regulator in its evaluation of the impact that the use of IFRS by US companies would have on the US securities market. Included in this work is consideration of IFRS, as it exists today and after the completion of various “convergence projects” currently underway between US and international accounting standards setters.

The European Commission, however, is looking for more of a commitment from the SEC and has recently been suggesting that this uncertainty with regards to convergence with the rest of the world could impact the US’s international standing. The costs for European firms dealing with the US’s different reporting requirements has been cited as a problem in the past and sticking with GAAP is not in keeping with the G20 goals of closer cooperation and coordination.

The move to IFRS by the US will have a significant impact on the pricing and valuations functions of internationally active financial institutions and, in the short term, on US firms that must adopt the new standards. It could also have an impact on data standardisation work going on around tracking systemic risk, such as the adoption of a new legal entity identification code, and vice versa. The introduction of cost basis accounting, the concept of revaluation and an emphasis on fair value as part of IFRS are likely to compel the US government to take the next step of validating an entity’s cost basis revenues and the introduction of identification standards. It will not be cheap in the short term for those required to adapt their systems to meet the new requirements, but it could certainly bring down costs for international firms in the long term.

After all, global harmonisation would allow for a more consolidated approach to this function, however such a change would take time. The US regulator has said that it expects US companies would need approximately a four to five year timeframe to successfully implement a change in their financial reporting systems to incorporate IFRS. Therefore, if the regulator determines in 2011 to incorporate IFRS into the US financial reporting system, the first time that US companies would report under such a system would be no earlier than 2015.

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