Globalization Insider: What has the SEC (U.S. Securities & Exchange Commission) said in regards to the possible U.S. transition to IFRS? What does KPMG expect to happen?

Paul Munter: The proposed transition roadmap was published last fall, and was open for public comment through April of this year. Nothing else has been made public since then, so this has led to a lot of speculation as to whether the SEC will move forward or move in another direction.

Companies should monitor what's happening, so that they're not caught off-guard

Here's our reading at KPMG: we believe that the SEC is still proceeding in the same direction, albeit with caution. Of course, it is influenced by the current economic climate which has caused both corporate America and the U.S. government to focus on other priorities. Without question, events over the last six to eight months have slowed down the process to transition to IFRS. However, we understand that the SEC will continue to consider either permitting or requiring the adoption of IFRS by public companies. And we also think, over the next several months, that we will begin to get some signaling about their intentions and a timeline. As a consequence, it is very important for companies to continue to monitor what is going on in this area and to be active in their thinking about how they might convert to IFRS, so that they are not caught off-guard.

This being said, there could be some slippage in the timeline. However, I think it's reasonable to expect that the decision process might still be within the originally contemplated timeline for the SEC to make a decision by 2011. In other words, the timeline for a decision by the SEC could be within the next two years, give or take, in light of the current economic climate, but the time period for adoption might be stretched out beyond that anticipated in the proposed roadmap. When you couple this timeframe with the proposal calling for two comparative periods for adoption, it wouldn't leave companies a lot of time to do the conversion itself.

It is also important to understand that this transition has been under discussion for quite awhile. Here is the sequence of events: the Chief Accountant of the SEC published what was referred to as the IFRS Roadmap in 2005. That roadmap was different than the one published last fall in that it was aimed at allowing foreign private issuers to operate in U.S. markets without having to reconcile to U.S. GAAP. In 2007, the SEC ruled that foreign private issuers could use IFRS in place of U.S. GAAP. The current discussions are sometimes referred to as the "new roadmap," which focuses on whether U.S. companies should be required or permitted to use IFRS in place of U.S. GAAP.

Insider: What issues will U.S. companies face as they prepare to transition to IFRS?

Munter: The issues will be based on the complexity, global reach, size, etc. of the company in question. If it's a company of significant size, then the transition will represent a significant undertaking. It's not just an accounting activity. The transition to IFRS involves updating business processes and practices, e.g., current contracts and compensation agreements that are based on U.S. GAAP metrics. There will also be systems issues, such as capturing data that isn't currently captured, e.g., the amount of personnel time spent on development activities. And, of course, there will be tax issues that come into play.

Companies should prepare for a transition period of anywhere from 1 to 3 years, and possibly as much as 5 years

If the SEC makes its decision in 2011, this means that U.S. companies could be required to adopt IFRS by 2014/15. Therefore, if a company is not already giving some thought to the type of work streams they need to implement to support IFRS conversion, it could mean a very compressed time period for transition.

Insider: Is there a body of knowledge that U.S. companies can leverage to avoid reinventing the wheel as they plan this transition?

Munter: From a process perspective, yes, but in terms of the specific issues U.S. companies will face, unfortunately, not really. This is because a relatively small number of U.S. companies with foreign parents have actually converted. In addition, the issues won't be exactly the same, since the financial world will continue to change substantially in the short- to medium-term.

If the SEC phases in the transition over three years, this means that the largest companies will be required to go first, and their experience will be beneficial to the next tier.

Companies can use the services of firms like KPMG, but there are limitations as to what we can do for our audit clients. For non-audit clients, we can do as much or as little as they require, e.g., systems migration and integration analysis.

Insider: What have been the discussions between the two key standards bodies  - the Financial Accounting Standards Board (FASB, which is the U.S. body) and the International Accounting Standards Board (IASB) - about IFRS?

Munter: What the two boards have been doing (and continue doing) is to devote a lot of their efforts to converge IFRS and U.S. GAAP. There's an MOU (memorandum of understanding) for projects to be completed on a converged basis between now and 2011. The goal of the MOU is two-fold: (1) to improve the quality of IFRS and (2) to potentially make the transition from U.S. GAAP to IFRS a bit easier. This issue has been a big driver of their standard setting agendas over the last six years and the key driver for the last three years.

Insider: If the quality of IFRS standards doesn't measure up to current U.S. GAAP standards, why should the U.S. agree to this transition?

Munter: An excellent question that has been part of the public policy debate on this issue. There are pros and cons. U.S. GAAP is a developed body of literature that has existed for many decades. IFRS is relatively new, by comparison. I think you start first by asking whether you believe the goal to have a single set of high quality standards used by financial markets around the world is an important goal. The answer is probably yes. From the U.S. perspective, you then have to ask if the tradeoffs are worthwhile. Is increased comparability and ease of access to capital markets, as contrasted with a shared authority, worth it? What will be the one-time cost to convert?

As it turns out, a good chunk of the world, both developed (Europe) and developing (China and India) have already moved, or made a commitment to move, to IFRS over the last four to five years. This means that U.S. GAAP won't be the basis for capital markets outside of the U.S. If you want to have a single set of standards, it would appear that IFRS has the best chance to achieve this.

Insider: What should companies be doing in the meantime, while the process to adopt IFRS in the U.S. is under consideration?

Munter: Companies need to be doing some planning at this point, and I emphasize planning. They don't need necessarily to be heavily involved in conversion projects yet, though some may decide to do so. This will depend on who their peers are, who they're trying to align with, their approach to financial reporting, how significant and time-consuming their transition process will be, etc. Do they want to be at the front of the pack as first-adopters of IFRS? Or, do they prefer to move with the majority? Of course, there are pros and cons to each of these.

If there are conversion activities that can be coordinated with current IT initiative activities, consider including them!

In some cases, companies should engage in the initial conversion process, e.g., if they're in the middle of a big IT initiative that is consolidating several acquisitions, it may be wise to give consideration to building some IFRS capability into that initiative. It's also very prudent to identify the initial activities required to undertake a conversion effort, along with the internal resources that may be needed. If external service providers are required, companies should identify the specific skill sets needed, along with who can provide these. A reasoned (not a rushed) decision can then be made.

There are three risks if companies fail to do at least some initial planning:

• they won't be able to leverage the synergy of current projects
• when a conversion decision is made, they may find themselves with a very short time period to convert to IFRS
• many other companies may be competing for the same external resources

Insider: Can the IFRS conversion be outsourced to companies outside the U.S.?

Munter: There is some expertise that can be obtained from outside the U.S. in terms of IT. However, the activities that relate directly to accounting - e.g., the changing of employee benefits and contracts - would need to be done by people knowledgeable about U.S. GAAP and IFRS. Without the double expertise, it will be very hard to advise companies properly on the pros and cons of potential policies. KPMG, for example, is investing in a significant IFRS training effort in the U.S. - the LISA@Berkeley conference is part of this.

The bottom line is that the transition to IFRS may have a significant impact on reported financial performance for U.S. companies. Therefore, my advice is that companies (1) start planning early, (2) leverage current IT projects and (3) identify external skill sets and partners who can help them make the transition as smoothly and quickly as possible.

---

Paul Munter is a Partner in the Department of Professional Practice - Audit at KPMG. He serves as the Lead Technical Partner and Professional Practice Leader for IFRS activities and sits on KPMG’s Global IFRS Panel, which is responsible for establishing KPMG positions on the application of IFRS. He also participates in the development of KPMG positions in response to proposals from the IASB, IFRIC, FASB, SEC and other standard setting bodies. Munter previously served as the Academic Fellow in the Office of the Chief Accountant at the SEC where he worked on many of the Commission’s Sarbanes-Oxley initiatives and rule-making activities. He has also been KPMG Professor and Chairman of the Department of Accounting at the University of Miami. He earned his PhD in accounting at the University of Colorado and is qualified as a CPA in New York, Florida and Colorado.