An Update to the Roadmap Toward Global Accounting Standards

On February 24, 2010, the Securities and Exchange Commission (“SEC”) issued a statement for their continued support and consideration of converging a set of global accounting standards with International Financial Reporting Standards (“IFRS”) published by the London based International Accounting Standards Board (“IASB”) and the Financial Accounting Standards Board’s (“FASB”) U.S. Generally Accepted Accounting Principles (“GAAP”). Since 2002, the FASB and the IASB have been working together with the goal of producing a single set of high quality accounting standards. The opportunity for the investor to have comparable information to make decisions about investment opportunities and to have protection with standards of a high quality nature is the ultimate goal of the commission. The SEC has been promoting a single set of global accounting standards for approximately 30 years. Although the SEC supports a set of globally accepted accounting standards that would ultimately benefit investors in the United States, a number of concerns were raised specifically to the investor who would ultimately rely on these converged reporting standards in their business making decisions.

Currently, GAAP is approximately 25,000 pages of accounting guidance, updates to the accounting guidance have evolved over the years due to the economic environment of the time and the need for better transparent financial reporting arising primarily from complex transactions and opportunistic accounting treatments. Although GAAP is often at time criticized, GAAP is the standard that we all refer to for accounting and reporting requirements. IFRS on the other hand is relatively new, was implemented in the European Union on January 1, 2005, and will be adopted and take effect in Canada in January 2011. IFRS is permitted and or required in more than 100 countries and has approximately 2,000 pages of accounting guidance. IFRS is generally based on accounting concepts and principles. This concept approach to reporting provides management of the issuer more discretion to capture the substance of the transaction. IFRS is also conceptually considered less cumbersome and complex for the issuer to understand and apply when compared to GAAP. GAAP is a rule based accounting system with prescriptive guidance on how transactions are to be accounted for and disclosed. IFRS also generally allows the issuer greater use of non-GAAP measures.

The SEC has instructed its staff to develop a work plan to document the commissions’ purpose and public transparency in this area. The execution of the work plan combined with the completion of the convergence projects of the FASB and IASB will provide the SEC insight to make a determination regarding the convergence of IFRS into the financial reporting system of issuers in 2011.

On November 18, 2008, the SEC issued “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Reporting Standards by U.S. Issuers” describing a road map for the adoption of IFRS by U.S. Issuers. Subsequently, a period of commenting resulted from investors, issuers, accounting firms and regulators generating concerns for the incorporation or convergence of IFRS by U.S. financial issuers. The SEC stated that it would take into consideration these comments when evaluating the incorporation and convergence of IFRS by U.S. Issuers.

The SEC noted from its work plan that the following points of concern will need to be addressed prior to a decision being made to incorporate or converge IFRS as the standard for the financial reporting of U.S. issuers:

• Due to IFRS limited history, the sufficient development and consistency in application for use as the single set of accounting standards for U.S. issuers.
• The introduction of the accounting standards process and the independent nature of the process for the benefit and protection of the investor.
• The education and understanding of the Investor regarding IFRS, and how it differs from the standards of GAAP reporting.
• Determining and understanding the change in the accounting standards to IFRS and the results of the impact to tax laws and regulatory reporting of certain industries.
• Understanding the impact on companies both large and small including changes to accounting systems, changes to contractual arrangements, corporate governance considerations and litigation contingencies.
• Determine whether the individuals who prepare and audit financial statements are sufficiently prepared through education and experience, to make the conversion to IFRS.

The IFRS Foundation is governed by twenty two trustees with geographically diverse backgrounds and are appointed for a term of three years that is renewable once. IASB is composed of fifteen full time members who serve five year terms and are subject to one re-appointment and the second term is limited to three years. The SEC expressed the need to obtain a further understanding of the monitoring function of the IASB. The IASB is currently monitored by the IFRS Foundation and the SEC believes that the independence of the standard setting process needs to be further analyzed and clarified. In addition the operations of IASB may need more permanent sources of funding to further promote the independence of the standard setting process.

Over the next year, the SEC will be analyzing the comprehensiveness of IFRS with GAAP by reviewing areas that are limited in guidance or have no guidance when compared to GAAP and which areas where issuers, auditors and investors will benefit from additional accounting guidance. The auditability and enforcement of IFRS when compared to GAAP is also a concern as IFRS is based on concepts and principles. This may impair an auditor’s ability to limit potential opportunistic financial reporting of an issuer and may ultimately put the investor at risk having a potential byproduct of increased litigation by shareholders of U.S. issuers challenging the application of a concept based system. The timeline to bring auditors, the personnel of issuers, regulators and others to have a working understanding IFRS is also a key point to be addressed by the SEC. The incorporation of IFRS into the financial reporting system for U.S. issuers may strain company and firm resources if sufficient training and time to implement are not adequately provided. In addition, colleges would need to begin expanding IFRS in their curricula to business students. The end result is that converging reporting standards will impose special demands on U.S. issuers in the area of governance, training, internal controls, contract fulfillment and disclosure. A significant concern is the implication to federal and state regulators who have relied on GAAP as the underlying basis for their regulatory requirements and for federal and state tax reporting and the book to tax differences. Lastly, IFRS does not have industry specific standards that address accounting and reporting of investment companies and broker-dealers. In addition, the PCAOB may need to consider reviewing its standards to conform to the International Standards on Auditing.

In the coming year, we will look forward to the periodic updates from the SEC beginning in the fourth quarter of 2010. Management and Boards should begin considering the impact of IFRS conversion and the resources involved complying with the future reporting regulation. Under the current proposed guidance large accelerated filers would be required to file their first IFRS financial statements with their annual Form 10-K for fiscal year ended 2014. Accelerated and non accelerated filers would be required to file their first IFRS financial statements with their annual reports on Form 10-K for the fiscal years ended 2015 and 2016, respectively.