IFRS Blog

Early Adoption Advantage?

The SEC has proposed amendments to its rules that would allow certain eligible issuers to adopt IFRS as early as 2009. Companies that would be eligible for early adoption would be companies for whom the use of IFRS would promote comparability among companies within a particular industry. The SEC estimates approximately 110 companies would be eligible for early adoption.

The information gathered through early adoption would help the SEC in their evaluation of decisions to be made toward requiring others to adopt IFRS. It is harder to see benefits that will accrue to a company that elects early adoption. The SEC says that some investors may find the information more comparable to non-U.S. companies in the same industry. That is sure to be the case; however, this benefit has to be weighed against the multi-million cost of conversion and the possibility that the SEC could reject IFRS in 2011.

What advantages are there for a company to elect early adoption?

If there is a strong response to the SEC's option for early adoption, this is a sign that the market truly recognizes an economic benefit to using IFRS. Unfortunately, the risk of moving early seems significant.

- Paul Parks

IFRS: Costs and Benefits

The SEC in their road map for potential use of International Financial Reporting Standards estimates that the average cost for companies eligible for early adoption of IFRS is approximately $32 million.  This means that for 110 companies anticipated being eligible for early adoption, the cost would be $3.5 billion. 

The road map also outlines benefits that will accrue to companies that adopt IFRS.  Benefits include improved comparability to other companies in an industry, a possible increased following in the marketplace and more efficiently priced capital.  Unfortunately, in cost/benefit analyses of IFRS adoption, benefits are less tangible than costs and more difficult to quantify.  In a research study released earlier this year by the Institute of Chartered Accountants of Scotland covering IFRS implementation experiences in the UK, Italy and Ireland, respondents when asked if benefits outweigh costs were either unsure or answered no. The study points out that implementation costs were tangible and immediate but benefits were intangible and longer-term. 

To understand the benefits of IFRS adoption, we have to ask what would be the ramifications of not moving forward with IFRS.  The SEC notes that while U.S. GAAP is accepted worldwide, foreign investors may become increasingly familiar with IFRS and may be more likely to make their decisions to invest in U.S. contingent on use of IFRS by those issuers. 

This point is debatable, especially in the near-term.  U.S. GAAP is high quality and recognized as such throughout the world.  Is it conceivable that continued use of U.S. GAAP would be a competitive disadvantage in competition for capital?  Proponents of IFRS believe that in the long-term, the answer is yes.  The fact is that the world is moving towards IFRS and away from U.S. GAAP. 

The immediate question, however, is do benefits outweigh the costs of mandatory use of IFRS by the year 2014.  This question is especially important given the current economic environment and challenges U.S. companies will be facing in coming months.  Do you believe benefits outweigh costs?

- Paul Parks