SEC Issues Proposed Roadmap For International Financial Reporting Standards (IFRS): What In-House Counsel Should Know Now


What is IFRS?

IFRS refers to International Financial Reporting Standards, a set of accounting standards used in more than 100 countries around the world. On November 14, 2008, the Securities and Exchange Commission (SEC) issued its 165-page “roadmap” for the proposed transition by U.S. public companies to use IFRS instead of U.S. Generally Accepted Accounting Principles (U.S. GAAP) in the preparation of their financial statements filed with the SEC ( As the basis for moving towards IFRS, the SEC cited the growing desire for a single set of high-quality accounting standards for global capital markets that would enhance investors’ ability to compare financial information.

The SEC’s proposed roadmap would permit early adoption of IFRS for years-ending on or after December 15, 2009 by an estimated 110 U.S. issuers consisting of the largest companies globally in given industries that primarily use IFRS. For other companies, the SEC’s roadmap outlines a timeline for voluntary and mandatory adoption with a proposed plan for all U.S. public companies being required to report under IFRS during a two-year phase-in schedule beginning in 2014. In 2011, the SEC will evaluate whether seven milestones have been achieved (such as improved accounting standards, education and training in the U.S. relating to IFRS, accountability and funding of international accounting oversight organization, and improved ability to use interactive data for IFRS reporting) before deciding whether to mandate the use of IFRS by all issuers.

The roadmap includes a discussion of potential costs and benefits as well as proposed amendments to regulations impacted by a conversion to IFRS. The SEC set a 90-day comment period for the proposed roadmap. The SEC also is seeking comment on two alternative proposals under which U.S. issuers that elect to use IFRS would provide a one-time reconciliation from U.S. GAAP or would provide an annual reconciliation covering a three-year period.

What Does IFRS Mean for In-House Counsel?

There are significant differences between IFRS and U.S. GAAP. From a conceptual standpoint, U.S. GAAP is more rule-based whereas IFRS is more principles-based. IFRS involves more application of judgment to determine how to account for a transaction and therefore, IFRS will require more disclosures to explain the accounting choices made.

The accounting differences with IFRS increase the risk that companies will experience changes in their patterns of earnings and financial position. With such risk comes the possibility that there will be litigation, including suits by investors who complain that a company did not adequately or accurately disclose the accounting changes and financial impact and/or claims by employees or other parties who allege that agreements were breached by a company’s failure to meet certain contractual financial metrics. The new proposed accounting rules already have sparked predictions of increased litigation because more accounting judgments will increase the risk of being second-guessed.

The switch to IFRS will impact almost every segment of a company’s operations. Not only will accountants in U.S. companies need to be trained in IFRS, other professionals will need to be knowledgeable about how it affects their respective areas of expertise. Below are some of the areas that will likely need the input and support of legal counsel to implement a smooth accounting conversion.

Debt Agreements. Companies will need to review and consider whether any debt covenants based on U.S. GAAP metrics need to be revised. With regards to financial information that a company is required to supply to a lender, contracts may need to be re-worded to replace U.S. GAAP metrics with IFRS metrics.

Other Contracts. Differences in accounting treatment such as revenue recognition also may impact existing contracts with vendors and customers as well as the design of future contracts. In addition, differences in computing earnings may affect, for example, any contracts that provide for payments based on earnings. Accordingly, not only must existing contracts be reviewed for any potential impact by a switch to IFRS, companies also must consider how future agreements should be drafted.

Compensation and Employee Benefit Plans. Since the conversion to IFRS will affect corporate financial statements and results, companies will need to evaluate how the accounting change will impact performance-based pay. For example, sales commission programs and bonus targets keyed to financial reporting metrics will need to be reassessed. In addition, differences in timing of revenue recognition also may affect performance-based compensation. Further, companies will need to compare and consider differences in valuations of equity grants under IFRS. Accordingly, employment agreements and broad-based compensation plans will need to be reviewed and possibly revised in light of IFRS.

Disclosures to Investors. Companies need to have clear and timely communications to their investors to ensure that they understand the potential impact of implementing IFRS. Such communications will help reduce the risk of misunderstandings and unexpected results. In order to make adequate disclosures, a company needs to assess when and how accounting changes are likely to occur and the impact thereof. Once a company understands how its own earnings and financial position may change under IFRS, the company must also be prepared to disclose how its numbers compare to its peer companies that use IFRS and those that use US GAAP.

Financial Projections. The switch to IFRS may change a company’s pattern of earnings and impact a company’s ability to project future earnings. The accounting change also will likely impact budget and planning functions. Executives will need to understand how a company’s earnings will be calculated under IFRS so that they will be able to support the company’s projections of future performance. Companies likewise will need to consider any impact IFRS may have on key performance factors used for measuring successes and trends as well as for comparisons to competitors. The federal securities laws provide a safe-harbor for forward-looking statements, such as projections, that are accompanied by meaningful cautionary statements. Accordingly, companies will need to evaluate and update their risk disclosures to include the potential impact of IFRS.

Certification of Financial Statements. Public company executives will be required to make their certifications on IFRS financial statements that companies file with the SEC. Accordingly, companies will need to develop procedures to document the support for the accounting judgments made under IFRS.

Regulatory Requirements. An analysis needs to be made whether changes in financial reporting requirements may impact compliance with any regulatory requirements, such as any foreign jurisdictions that tax based on earnings in financial statements.

D&O Insurance. Because converting to IFRS may result in changes to patterns of earnings or financial results, it is possible that companies, boards and executives will be subject to securities claims due to alleged misstatements in financial statements and/or disclosures relating to IFRS. Accordingly, the switch to IFRS should prompt a review regarding the adequacy of D&O insurance levels to protect against any increased risk.

What Can In-House Counsel Do Now?

Below are a few suggested steps for in-house counsel to take now to start the process for a smooth and successful transition to IFRS:

  • Review the resources available at the website for IFRS created by the American Institute for CPAs
    (AICPA) at
  • Obtain an understanding as to what IFRS means for your company.
  • Ask your CFO what plans, if any, are underway to approach a conversion to IFRS.
  • Be involved with your company’s planning process for the switch to IFRS.
  • Evaluate what areas of your company’s operations will need legal analysis and support for the transition.

If you should have any questions regarding the SEC’s proposed roadmap for IFRS, please contact Carrie Huff with the Securities Litigation Practice Group or Bruce Newsome with the Corporate/Securities Practice Group. 

This is an update to an article previously published by Ms. Huff in which can be found here.

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