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U.S. Securities and Exchange Commission

Speech by SEC Staff:
IFRS and U.S. Companies


Conrad Hewitt

Chief Accountant
U.S. Securities and Exchange Commission

University of Southern California
SEC and Financial Reporting Institute
27th Annual Conference
Pasadena, California
May 29, 2008

Good morning. Thank you for inviting me to this important accounting conference. I know that USC has many important alums — such as SEC Chairman Cox, and Denny Beresford, former Chairman of the FASB. Additionally, USC has been kind enough to loan the Office of the Chief Accountant Zoe-Vonna Palmrose for the past two years. I attended USC years ago in the executive MBA program. However, I never finished because I was transferred to Hawaii — an easy decision. Having graduated from the University of Illinois — another great school, I was reminded this past Rose Bowl game that USC is a football powerhouse. I painfully experienced this when Illinois lost to USC this past Rose Bowl. You see I had a friendly wager with Chairman Cox.

With the time I have with you, I will highlight briefly some of our accomplishments during the past two years. Then I will spend the majority of my remaining time on IFRS, which I believe in and have been heavily involved.

Before I start I must give the standard disclaimer.

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. Therefore, the views expressed today are my own, and do not necessarily reflect the views of the Commission or the other members of the staff of the Commission.

I want to add my personal disclaimer. I will not create any new GAAP today.


When I interviewed with Chairman Cox — I knew who he was but had not met him — I had 3 items on which I wanted his support: revise AS 2, create management guidance and do something about the complexity of accounting and auditing standards and the financial reporting system. He agreed but wanted me to help him with Interactive Data (also known as "XBRL") and IFRS. I told him that I had not heard much about XBRL or IFRS but I was very interested in both of these.

We have been very active in OCA. In the past two years we have addressed the backdating of stock options, provided management with guidance for complying with section 404(a) of SOX, and worked with the PCAOB to issue Auditing Standard No. 5 (AS 5). Because of AS 5, management guidance and back dating of stock options, I was unable to address complexity until March 2007. I encouraged the formation of the Advisory Committee on Improvements to Financial Reporting (CIFiR) to address improvements to financial reporting including reducing complexity, and continued our work on Interactive Data.

I am really excited about the benefits that Interactive Data can provide to investors. The Commission approved a proposing release on May 14, 2008 mandating that companies file reports using XBRL under a three-year transition period. The comment period will close sixty days after the proposing release is published in the federal register. I encourage you to read the proposing release and provide us with comments. Accounting is the business reporting language of the world, and interactive data will become an easy and reliable technology to improve financial reporting worldwide.


As many of you know, we are in a global market. Economies and financial markets around the world are more connected than ever before. There are over 50 capital markets in the world — more capital competition than ever before.

It is a fact that foreign companies and nationals are the largest owners of U.S. Treasuries in the world. Also, there are many companies in foreign markets which rival their U.S. counterparts in technology, size, and growth. In the U.S., IFRS is becoming more accepted. Thus I will focus on IFRS — International Financial Reporting Standards because of the growing trend by countries around the world in adopting or accepting IFRS.

George [Batavick] and Russ [Golden] have done a good job in helping you understand the FASB's approach to convergence in the context of standard setting. I believe that when the FASB and the IASB work together to issue a truly converged standard, including using the same, identical words, all parties, investors, preparers and auditors will benefit. I have supported the FASB's and the IASB's work to date and will continue to support their efforts in the future.

The Commission has long supported a single global set of high-quality accounting standards. Before discussing what the Commission and staff are doing related to IFRS, I thought I would discuss why I believe a move to a single set of high-quality global accounting standards benefits investors. The use of a single set of globally accepted accounting standards would facilitate investor's comparison of companies reporting results regardless of where the company is located in the world. This greater comparability will allow investors to better understand a greater number of investment opportunities. Additionally, a single set of global accounting standards will reduce compliance and regulatory costs, thereby facilitating a company's access to global capital markets. Investors, in turn, would benefit from increased investment opportunities in their home markets.

So now you probably want to know what is the SEC doing on the IFRS front. In April 2008, during an address to the U.S. Chamber of Commerce Chairman Cox stated:

"Later this year …the staff will formally propose to the Commission an updated roadmap that lays out a schedule, and appropriate milestones on which the schedule will be conditioned, for continuing the progress that the United States is making in moving to accept IFRS in this country."

In a couple minutes I will try to discuss the potential "roadmap" and some of the issues associated with such approach. But in order to help you understand where we are, we need to consider everything we have done to date. Over the past fifteen months, the Commission and staff have made some significant strides on IFRS including:

  • In March 2007, we conducted a staff roundtable on IFRS.
  • In July 2007, a proposing release was issued relating to elimination of reconciliation to U.S. generally accepted accounting principles (U.S. GAAP) by foreign private issuers using IFRS.
  • In August 2007, a concept release was issued relating to the possible use of IFRS by U.S. issuers.
  • In November 2007, the Commission voted to approve elimination of reconciliation to U.S. GAAP by certain foreign private issuers using IFRS.
  • In December 2007, the Commission held two roundtables relating to the possible use of IFRS by U.S. issuers.

I inherited the roadmap created by my predecessor, Don Nicolaisen. I reviewed and studied it. I did not have to continue it. However I have always believed in international business and accounting.

Thus you can see a steady, consistent focus on IFRS by the Commission. When the Commission eliminated the reconciliation to U.S. GAAP, this represented a small, albeit a significant, step towards fostering the move to a single global accounting standard.

In December 2007, the Commission held roundtables to discuss the possibility of U.S. issuers using IFRS. There were two panels, the first of which focused on big picture type questions and the second focused on practical implementation issues. The Commission was able to get the perspectives of a wide range of panelists including individuals who had participated in the IFRS transition in Europe.

If you were unable to attend the roundtable I thought it might be helpful to share my views of what I learned from the roundtable. Panelists were largely supportive of moving to a single set of high-quality, globally accepted accounting standards. Since many countries are using or have stated their intent to transition to IFRS little consideration was given by roundtable participants to the idea that U.S. GAAP would be the single set of globally accepted accounting standards. Finally, any possible future use of IFRS by all U.S. issuers would require a multifaceted transition process and, as such, requires a comprehensive plan to make the transition to IFRS reporting successful. Also, a date certain for mandatory use was emphasized by panelists.

This is not to say that some panelists did not have differing views on the matters. We heard differing views on issues such as the appropriateness of the use of an option for U.S. issuers, the problems with jurisdictional adaptations of IFRS, the impact of the Foreign Private Issuer rule on the convergence process between U.S. GAAP and IFRS, and concerns with respect to the IASB funding and governance structure.

Now turning to the directive from the Chairman, the SEC staff has begun working on the roadmap. The comment letters from the August concept release and the roundtables have provided the SEC staff with valuable input into drafting a roadmap. In thinking about designing a roadmap, there will be certain milestones the Commission could use as a measuring stick to assess whether U.S. issuers should be allowed or required to report using IFRS. The staff is considering feedback from the concept release to assist in the development of milestones for the roadmap.

As a practical matter, the issue that seems to generate the most interest is the potential transition and timing of any use of IFRS. In feedback we obtained from the roundtable and the comment letters, people were concerned the potential transition to IFRS. These concerns included whether there would be enough time to deal with transition issues such as updating accounting policies and procedures, training their employees, and modifying systems of internal controls, including computer systems, for the change to IFRS.

As you can see we have done a lot of work on moving to a single set of globally-accepted accounting standards, but there is a lot more work to do, so please stay tuned.

Fair Value

I wanted the majority of this speech to focus on the Commission's work on moving to a single set of global accounting standards. In the next section of this conference, one of my deputies, Jim Kroeker, will be discussing fair value. However, I would be remiss if I did not mention the current discussions that are taking place regarding the use of fair value in the current financial reporting environment. The subprime mortgage crisis and the accounting for SIVs and conduits have been used by some as a basis for suggesting that fair value is the cause or a significant contributing factor to the current financial reporting environment. While I must admit that I believe the use of fair value has its limitations for certain transactions, I believe that, as it relates to the type of financial instruments that we are dealing with in the context of the current credit turmoil, fair value has better informed investors than historical cost or a smoothing method would have. We have heard from investors and many preparers that the use of fair value has provided a level of transparency that is needed particularly in the current market place. While fair value also introduces volatility, I believe that when this volatility reflects the underlying change in the economics of a transaction, investors are better informed. Now, in order to make sure the issue gets discussed in a more public setting rather than on the internet blogs, the SEC will be holding a roundtable on fair value on July 9th to discuss the issue. But I am sure Jim will give you more thoughts on fair value in the next session.

Last week, the Investors Technical Advisory Committee stated their support for the current fair value accounting to the FASB and IASB.

Consulting with the SEC Office of the Chief Accountant

I would like to encourage companies or their auditors to consult with my staff in the Office of the Chief Accountant. I believe that most companies want to get it right, and we would like to help. Guidance for resolving what in the profession some call 'pre-filing' questions with the Office of the Chief Accountant is posted on the SEC's website. Additionally, companies can request their Corp Fin reviewer to consult on specific matters during a Corp Fin review process.

Closing remarks

Thank you for your time. It is a pleasure to be here. Maybe, the fighting Illini will win the next Rose Bowl. Good luck to USC.


Modified: 07/01/2008