Question

Research peer-reviewed articles that discuss the challenges of first time adoption of IFRS. Based on your research what do you see as the impact on financial reporting in the future? How has the U.S. SEC policy toward IFRS changed? Use the FASB Codification and the IFRS standards to support your position. Do not forget to include proper APA formatting.

Answer 1

This study explores the challenges of implementing International Financial Reporting Standards (IFRS) at the organisational level. Based on interviews with experts with aggregated experience relating to the transition projects of over 170 reporting entities, this paper highlights the main challenges in delivering a successful implementation of IFRS. The findings show that the problems faced in implementation include lack of education and training, securing executive-level support, identifying and responding to the wider business-related implications of the transition, and issues with capturing the necessary information for reporting under IFRS.This paper complements the existing literature and offers a qualitative alternative to considering the transition to IFRS, offering insight into the organisational context of IFRS implementation. These insights are useful not only from a historic perspective, but also for organisations and regulators in the many jurisdictions where IFRS is permitted but not required, where more reporting entities will voluntarily move to IFRS-based reporting in the future. More broadly, they are also applicable to the challenges faced in implementing new and significantly revised IFRSs.

Business Impact of IFRS Adoption:

Many researchers have studied the impact of IFRS adoption in several countries. UNCTAD secretariat (2007) found that the adoption of IFRS-based standards in Turkey was a three-step process where the first step was the early adoption of IFRS by companies whose shares were publicly traded. The second step was the compulsory adoption of IFRS by the traded companies. The third step was the mandatory adoption by all publicly-owned companies. Encouraging the traded companies in Turkey to adopt IFRS standards before 2005 led to two benefits; more transparent financial statements were introduced; and the experience of the early adopters during the transition period helped the other publicly-traded companies. They have also noticed that one of the important issues that faced the IFRS adoption in Turkey was to solve the multi-institutional structure of the accounting environment. The report indicated that training and education on IFRS in Turkey are mostly provided by universities and academic organizations. Universities already incorporated IFRS courses in their graduate and undergraduate curriculums as elective courses. Daske and Gebhardt (2006) concluded that IFRS have increased the quality of financial reporting. They also found out that there is a positive relationship among transparency, firm size, independent board membership, and public subsidiaries. It has been pointed out that implementation of IFRS and corporate governance has positive impact on transparency of financial statements and disclosure. They have also found out that among the firms that implement IFRS there is a strong relationship between liquidity and level of disclosure in banking sector. Daske (2006) investigates the common hypothesis that internationally recognized financial reporting standards reduce the cost of capital for adopting firms. They found that during the transition period, however, the expected costs of equity capital in fact appear to increase under non-local accounting standards.

The movement toward IFRS in the United States gained momentum in 2002 with the Norwalk Agreement between FASB and IASB. It acknowledged the Boards' commitment to the development of high quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. At the time, the FASB and the IASB pledged to make their best efforts to make their existing financial reporting standards fully compatible as soon as is practicable and to co-ordinate their future activities to ensure that once achieved, compatibility is maintained (FASB, 2002). Since reaching the agreement, the Boards and their staff have been researching existing differences between U.S. GAAP and IFRS, monitoring and coordinating each others' agenda and working on a series of joint long-term and short-term convergence projects.

In February 2006, the FASB and IASB issued a Memorandum of Understanding (MoU) to reaffirm the Boards' shared objective of developing high quality, common accounting standards for use in the world's capital markets (FASB, 2006). The MoU set forth the relative priorities within the FASB-IASB joint work program in the form of specific milestones to be reached by 2008, although they knew that many of the major standards level projects would not be complete by that date. Also, the Boards decided to change their original approach to convergence of standards that are in need of significant improvements on both sides. Instead of expending resources on trying to eliminate differences between such standards, the Boards decided to seek convergence by replacing them with jointly developed new standards. At their April 2008 joint meeting, the Boards reassessed their priorities again and agreed on milestones to be achieved on major joint projects by 2011. The updated MoU released on September 11, 2008, describes the priorities and milestones related to completion of major joint projects by 2011 (FASB, 2008). Exhibit 1 summarizes the ambitious agenda.

At the inception, the convergence process was envisioned to continue until the point when U.S. GAAP and IFRS achieve practical equivalence. Although the process produced some results, most notably in accounting for business combinations, share-based payment, and the fair value option, it turned out to be slower and more difficult than expected. Consequently, the progress on convergence has been limited. It became apparent that it would be very difficult, if not impossible, to replace about 25,000 pages of detailed rules, comprehensive implementation guidance, and industry interpretations with about 2,500 pages of broad and principles-based standards. Therefore, in 2008 the emphasis in the United States started to shift from the convergence approach to the conversion approach: that is, adoption of IFRS. Most recently, however, the SEC has reemphasized the convergence process as a necessary prerequisite for eventual incorporation of IFRS into the U.S. financial reporting system.

The SEC's Regulatory Decisions

In 2007, the U.S. SEC made two seminal IFRS-related decisions. In August 2007, the Commission issued the "Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with IFRS" (SEC, 2007a). The SEC issued this Concept Release to gather input on whether U.S. registrants should be permitted to use IFRS when reporting with the Commission. In December 2007, the SEC adopted a final ruling: Securities Act Release No. 8879, "Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with IFRS without Reconciliation to U.S. GAAP," with an effective date of March 4, 2008 (SEC, 2007b). The ruling indicated the Commission's confidence that IFRS, as issued by the IASB, were robust enough to provide investors with reliable and relevant financial data. These two decisions present a dramatic new idea with significant implications for U.S. companies, the U.S. capital markets, and the accounting profession.

Most respondents to the Concept Release supported the idea of allowing U.S. issuers to choose between IFRS and U.S. GAAP during an interim period with an eventual move toward IFRS for all issuers. Moreover, many respondents advocated a date-specific mandatory adoption of IFRS. The FASB, American Institute of Certified Public Accountants (AICPA), Big Four accounting firms, as well as the Financial Executives International (FEI) (4), and many multinational corporations expressed their support for IFRS in their comment letters and during the following round tables, forum discussions and Congressional Hearings. Consequently, the SEC issued the proposed roadmap for potential adoption of IFRS by all U.S. publicly traded companies (SEC, 2008). The roadmap was issued in November 2008 around the time when the G-20 Group (5) called for the implementation of a globally consistent set of accounting standards.

The 2008 IFRS roadmap indicated that adoption of IFRS in the United States would be conditional upon achieved progress towards "milestones" including the following:

* Improvements in accounting standards: The SEC will continue to monitor the degree of progress made by the FASB and IASB regarding the development of accounting standards

* Accountability and funding of the IASC Foundation (IASCF) (6): The IASCF must show indications of securing stable funding that supports the independent functioning of the IASB

* Improvement in the use of interactive data for IFRS reporting: The SEC mandated filings for public companies in extensible Business Reporting Language (XBRL) format; the mandate came into effect for the largest 500 U.S. companies for financial disclosures made after June 15, 2009

* Education and training: The SEC will consider the state of preparedness of U.S. issuers, auditors and users, including the availability of IFRS education and training.

The milestones are intended to demonstrate improvement in the infrastructure of international standard setting as well as preparedness of U.S. capital market participants. The Commission envisioned that it would measure progress against these milestones in 2011 and, based on the evaluation results, make a final decision on whether and when to go ahead with adoption of IFRS in the United States. The SEC proposed a phased-in mandatory use of IFRS beginning with fiscal years ending on or after December 15, 2014, for large accelerated filers, 2015 for accelerated filers and 2016 for other filers (SEC, 2008).

The Private Sector

In the meantime, the AICPA has also made a seminal IFRS-related decision. In May 2008, the Institute amended Appendix A to Rules 202 and 203 of the AlCPA's Code of Ethics, giving its members the option to use IFRS as an alternative to U.S. GAAP (AICPA, 2008). The decision established IFRS as an alternative to U.S. GAAP or other consistent basis of accounting to be used by private companies. This development is especially significant in light of the IASB issuing in July 2009 "International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs)." The standard is designed to meet financial reporting needs of entities that do not have public accountability and publish general-purpose financial statements for external users (IASB, 2009). Taking into consideration the long-term dissatisfaction with U.S. GAAP expressed by many private companies, some observers believe that adoption of IFRS in the United States may actually happen through the private sector, where entities are interested in meeting user needs of assessing shorter-term cash flows, liquidity and solvency while balancing costs and benefits of compliance (Deloitte, 2009). This would be a different dynamic than in most other jurisdictions around the world, where adoption of IFRS by unlisted companies has been hindered by statutory reporting requirements.

Recently, the AICPA and the Financial Accounting Foundation (FAF) established a "blue-ribbon panel" to provide recommendations on the future of standard setting for private companies. The panel will address the question whether separate, standalone accounting standards for private companies are needed (AICPA, 2009).

The FASB Accounting Standards Codification is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied to nongovernmental entities. The Codification is effective for interim and annual periods ending after September 15, 2009.

The Codification is updated via Accounting Standards Updates (ASUs). These are assigned a number that corresponds to the year of the ASU’s issuance and its sequential order (e.g., the first ASU issued in 2010 was 2010-01). ASUs replace accounting changes that historically were issued as FASB Statements, FASB Interpretations, FASB Staff Positions, or other types of FASB standards. ASUs contain a background and basis for conclusions as well as a marked draft of any changes to existing guidance. The new guidance is labeled “Pending Content” in the Codification, and the superseded guidance will not be removed until the guidance in the ASU is effective for all entities.

APA (American Psychological Association) style is most commonly used to cite sources within the social sciences. This resource, revised according to the 6^th edition, second printing of the APA manual, offers examples for the general format of APA research papers, in-text citations, endnotes/footnotes, and the reference page. For more information, please consult the Publication Manual of the American Psychological Association, (6^th ed., 2^nd printing).