2011 US IFRS outlook survey Companies thoughts on the best timing and methods for incorporating IFRS into the US financial reporting system

Transcription

1 December US IFRS outlook survey Companies thoughts on the best timing and methods for incorporating IFRS into the US financial reporting system

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3 Table of contents The heart of the matter 4 A season of uncertainty Major themes from the survey An in-depth discussion 7 What executives have to say About the survey Survey results: How executives perceive current uncertainties Ultimate acceptance? The endorsement method and alternatives Voluntary adoption: How and when Challenges and benefits of IFRS Is convergence worth it? IFRS impact on companies What will the move to IFRS cost? How long will it take? Readiness for the big three The most common differences What this means for your business 22 The way forward December 2011

4 The heart of the matter A season of uncertainty

5 Corporate financial reporting in the US is in a period of change and uncertainty, as the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) continue to pursue the goal of converging US GAAP and International Financial Reporting Standards (IFRS). In 2010, the US Securities and Exchange Commission (SEC) stated that it would make a determination in 2011 about the way forward for IFRS in the US. As of the conclusion of our survey, the SEC had not yet made any decisions about the future of IFRS in the US, and it now appears as if that decision will be forthcoming in In the thick of this change, we wanted to gather companies views of what approaches to incorporating IFRS would best serve the interests of investors, preparers and other users of financial statements. To accomplish this, we conducted a survey of finance executives and other stakeholders. This paper summarizes the survey findings. For a host of additional resources offering more in-depth perspectives on timing, impact, and other aspects of US GAAP convergence & IFRS, please visit our dedicated website at 5

6 Major themes from the survey Several important themes emerged from our survey: Respondents had differing perspectives on the timetable for any SEC announcement as well as whether aspects of IFRS incorporation should be mandatory or voluntary. Many companies have taken a wait and see attitude. Though a majority of executives still see the transition from US GAAP to IFRS as inevitable, most haven t yet committed resources to the process. Support for the US transition to IFRS remains strong, but has declined over the past year. We attribute this to uncertainty about the timing and specifics of the SEC s plans. The endorsement approach to transition, as outlined by the SEC staff in their May 2011 staff paper, is widely seen as a viable though not necessarily the most preferred means for the US to transition to IFRS. There is still considerable debate and uncertainty in the cost-benefit analysis of moving to IFRS. Each company is different, so there is no easy way to generalize about the impacts of IFRS on US companies. The remainder of this paper reviews the context of the survey, addresses specific questions and responses, and concludes with a look at expectations for 2012 and beyond US IFRS outlook survey

7 An in-depth discussion What executives have to say

8 About the survey PwC s online survey gathered over 2,700 responses during approximately six weeks starting September 15, 2011, from a wide variety of industries and a broad range of company sizes. One sector consumer and industrial products and services represented 52 percent of respondents. 23 percent were from financial services, 17 percent were from health industries, and the remaining 8% were from technology, information/communications or entertainment. A majority (63 percent) of the respondents were financial statement preparers. Most (82 percent) were from companies headquartered in the United States, and 34 percent have subsidiaries currently using, or transitioning to, IFRS. There was a broad cross-section of respondents from different-sized companies, ranging from companies with more than $5 billion in annual revenue (31 percent) to companies with less than $500 million in annual revenue (21 percent). Survey results How executives perceive current uncertainties We began by asking respondents if they expected an SEC decision in 2011 on whether, when and how IFRS should be incorporated into the US financial reporting system. A majority still expected at least a tentative SEC decision in 2011, which was consistent with our expectations, given the SEC s statements over the past year. Do you expect a decision from the SEC in 2011 regarding whether, when, and how IFRS should be incorporated into the US financial reporting system? 40% of respondents did not believe the SEC would make a decision about IFRS in the US in As it turns out, they were right. 9% Yes, a tentative decision that will be finalized at a later date No 40% 51% Yes, a final decision However, despite the agency s statements, 40 percent believed that no decision at all would come in As these results imply, executives outlooks depend in part on how they understood the term decision (a word the SEC has not actually defined) US IFRS outlook survey

9 Even though few expected a final binding decision in 2011, others expected that the SEC could issue a proposal or simply provide recommendations or statements spelling out where the agency may be heading. Adding to many respondents belief that a firm decision would not be forthcoming was likely the fact that, at the time our survey closed, relatively little time remained in Any proposal would need to be subjected to the agency s due process procedures; thus the number of workdays left in 2011 would likely prove insufficient for that process to play out. In addition, recent feedback from the SEC indicates that its choice is more complex than simply choosing between yes and no. This is clearly evidenced in the release of the SEC staff paper in May regarding the endorsement approach. Ultimate acceptance? Regardless of timing, do you expect the SEC will ultimately require mandatory IFRS reporting in the US?" Yes 37% No 63% 63 percent of respondents believed that the SEC will ultimately require mandatory IFRS reporting in the US. However, this sentiment appears to be weakening. When we asked the same question in a survey earlier in 2011, those who expected a mandatory transition numbered 80 percent. This 17 percent drop-off is not entirely surprising. The FASB/IASB joint convergence projects were again delayed in 2011 (originally, those projects were expected to be completed by June 30, 2011). Moreover, the SEC has a full agenda with increasing political interest. The agency must respond to Congressional hearings, for example, and it is charged with a significant rule-making project mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of Uncertainty remains then about whether, when or how IFRS will be incorporated into the US financial reporting system. 9

10 The endorsement method and alternatives An endorsement approach to incorporating IFRS into the US financial reporting system was outlined in a May 2011 SEC staff paper as one possible option for incorporation of IFRS in the US. Under this approach, the FASB would lead a process by which IFRS would be incorporated into US GAAP over a period of five to seven years, so that ultimately US issuers would end up in compliance with both US GAAP and IFRS. We asked respondents whether they thought this would be a viable approach toward using IFRS in the US. The response was largely favorable: three-quarters of respondents felt that the endorsement method would be a viable method. This level of support is consistent with what we saw in comment letters on the May 2011 SEC staff paper, and with discussions occurring at SEC roundtables held in July We also believe that the endorsement method is a fair starting point for eventually bringing the US into an IFRS environment. Do you believe this endorsement method, or a variation thereof, is a viable means towards using IFRS in the US? 25% Yes No 75% However, even as 75 percent of respondents thought the endorsement approach was viable, not all of those people thought it the best method for the US to incorporate IFRS US IFRS outlook survey

11 Roughly two-thirds of respondents believed voluntary adoption should be permitted for US domestic companies. When asked Which of the following methods of IFRS incorporation do you believe would be most appropriate for the US market? only 35 percent of respondents selected the endorsement approach. Nearly as popular was a different approach: Keeping US GAAP, and moving it closer to IFRS, while allowing for enduring differences (not significantly dissimilar to the suggested endorsement approach). Only 7 percent felt the most appropriate future course would be to leave US GAAP unchanged, acknowledging the need for a move toward a single set of high quality global accounting standards. Which of the following methods of IFRS incorporation do you believe would be most appropriate for the US market? 9% 7% 35% Using the convergence/endorsement ( condorsement ) approach Keep US GAAP move it closer to IFRS, but allow differences Establishing a series of mandatory adoption dates, staggered depending on company size 20% Setting a single mandatory adoption date Keep US GAAP as-is 29% Voluntary adoption: How and when? Next, we asked respondents whether they believed voluntary adoption of IFRS should be permitted for US domestic companies, regardless of the SEC s decision regarding methods or timing for incorporation of IFRS in the US. Of those who answered yes, we asked when they believed voluntary adoption should be permitted. Roughly two-thirds of respondents believed voluntary adoption should be allowed. We also believe the SEC should allow for voluntary adoption if it decides in favor of incorporating IFRS into the US financial reporting system. Specifically, if significant progress can be achieved in standard setting and regulatory cooperation, then we believe the SEC should permit voluntary use of IFRS at a date consistent with the effective date of the proposed revenue and leasing standards. 11

12 Regardless of the SEC s decision regarding incorporation of IFRS in the US, do you believe voluntary adoption of IFRS should be permitted for US domestic companies? 34% 66% Yes No When do you believe voluntary adoption should be permitted? Response % % % % % After % It is worth noting that a significant proportion of respondents have a different perspective on timing. In fact, 52 percent felt that voluntary adoption should be permitted earlier, opting for voluntary adoption prior to By contrast, only 25 percent selected 2015, while the remaining 24 percent believed voluntary adoption should occur in 2016 or later. We also asked how many would consider adopting IFRS voluntarily in their own companies. Here, we found a significant gap: Only 21 percent said their companies would consider voluntary adoption. More than 45 percent, however, weren t sure. If permitted, would your company consider voluntary adoption of IFRS? 21% Yes No 45% Not sure/not applicable 34% In summary, the method and timing of US adoption of IFRS are significant areas of debate around which there continue to be significant uncertainty. Though there may be developments in the near future, for the moment most stakeholders are in wait-and-see mode US IFRS outlook survey

13 Challenges and benefits of IFRS We asked respondents Do you have any significant concerns about the IASB acting as the global standard setter, rather than the FASB setting US standards? If so, what concerns do you have? Despite the support for IFRS in general and early adoption in particular, 60 percent of respondents had significant concerns about the IASB serving as the global standard-setter. The top three areas of concern were, first, diminished US influence in the standard-setting process; second, structure and governance; and third, independence and funding. Do you have any significant concerns about the IASB acting as the global standard-setter, rather than the FASB setting US standards? What concern(s) do you have about the IASB acting as the global standard setter? Response % Yes 40% 60% No Structure and governance (e.g., Board composition, leadership) 64% Independence and funding 59% Standard-setting process of the IASB (e.g., issuance, interpretations) 51% Lower quality of standards 43% Decreased US influence in the standard-setting process 70% Other 10% Concerns about diminished influence are not surprising, as constituents in other countries that have moved to IFRS voiced similar concerns. Should the SEC pursue an endorsement approach, which partly preserves US GAAP and retains the authority of the FASB and SEC, that may help alleviate some worries. It is important to note, however, that existing US influence on IFRS is not negligible approximately a quarter of IASB members are from the US. The fact that respondents listed structure and governance as a leading concern also makes sense. In fact, the monitoring board and trustees of the IASB are currently conducting a series of focused reviews on this topic. The structure of the IASB is modeled after the FASB, but there have been concerns about the IASB s due process procedures, specifically whether they may be subject to increased political influence as compared to the FASB. Funding, the third leading area of concern for many respondents, is likely on the list because while the FASB has a clear and legally mandated funding source, the IASB depends largely on voluntary contributions. This difference leads some to believe that the IASB cannot protect its independence as well as the FASB does. This is a valid question that remains a consideration in the SEC s work plan. All of these are important areas to address in a potential move to a single global set of accounting standards. 13

14 Benefits of IFRS A move to IFRS offers various perceived benefits, and we wanted to know which ones stand out most for companies. Respondents were able to select multiple areas, and in short, more than 80 percent identified one or more benefits to US incorporation of IFRS. The most prevalent of these benefits was the increase in comparability of business results across the globe. We agree that this is a significant plus for many companies. However, we believe that consistency of application of IFRS globally is critical to ensure that real comparability can be achieved. We note, too, that global comparability is linked to a second benefit: improved access to capital in the global markets. Which of the following do you perceive as potential benefits of incorporating IFRS in the US? 26% 30% 70% 1 Reduced complexity 2 Overcomes the issue of diminishing global knowledge of US accounting standards 3 Increased global comparability of business results 20% 18% 31% 33% 4 Improved access to capital in global markets 5 Fewer transactions, specifically structured to meet the existing detailed US guidance 6 Cost savings/synergies, in the long run 7 No significant benefits Some respondents also saw cost saving opportunities as a potential benefit. We believe this benefit would become more apparent in the long run. Once convergence is complete, for example, a company that operates in different territories will see significantly fewer differences in financial information from various global affiliates. That may allow preparers to transfer information across borders easily, creating synergies and reducing costs (via, for instance, a shared service environment). Reducing complexity generally reduces costs, and a move to IFRS may permit companies to reduce complexity across their company accounts. Some respondents noted that moving to IFRS would help overcome the effects of the decline in worldwide familiarity with US GAAP. Previously, many international companies (foreign private issuers) were listing in the US and thus reconciled their local financials to US GAAP in their 20-F filings. That reconciliation is no longer required. As such, US GAAP knowledge today may be decreasing globally. In fact, a decrease in the need to train personnel in US GAAP is one of the anticipated cost savings involved in the transition to IFRS US IFRS outlook survey

15 Challenges of IFRS We couldn t ask about benefits without in turn asking respondents for their thoughts on the challenges associated with a potential move to IFRS in the US. Only 3 percent of respondents expected the move to be free of major challenges. Asked what problems they see, the top concerns were implementation costs, resourcing issues, and systems changes. Implementation costs may very well be significant, as the transition to IFRS will impact the entire business, beyond accounting and financial reporting. As the SEC roundtables last July revealed, many small public companies worry that they don t have the staff to convert to IFRS. Simply identifying the level of resources required for the conversion will be a challenge, as companies will need either to hire new staff, outsource, or retrain current employees. Which of the following do you perceive as potential challenges of using IFRS in the US? 66% 1 Systems changes 66% 2 Resourcing/retraining staff in the US 49% 56% 3 Increased second-guessing of management decisions by auditors or regulators 4 Increased risk of litigation due to principles-based guidance 78% 5 Implementation costs 3% 6 No significant challenges Concern about systems is also well-founded: companies will need to evaluate carefully whether their systems can handle the new measurement and disclosure requirements under IFRS. In some cases, new systems or major upgrades may be required. It is also noteworthy that nearly half of our respondents anticipated an increased risk of litigation in the move to principles-based guidance. Many preparers see a rule-based regime as a safe harbor in the litigious US environment. However, some argue that a principles-based framework with increased disclosures can offer a better defense against litigation. It s clear from our survey that opinion is divided on this point. 15

16 Ultimately, a majority of respondents thought the benefits inherent with a single set of high-quality global accounting standards outweigh the challenges they are likely to face in achieving that goal. Is convergence worth it? As a firm, our position is that the benefits of a single set of high-quality global accounting standards, consistently applied, are worth the challenges that IFRS poses. We wanted to know, however, whether respondents shared this view. A majority, 57 percent, answered yes. That represents a solid, but not overwhelming, vote of confidence. In the long run, do you think the potential benefits of incorporating IFRS into the US are worth the anticipated transition challenges/costs? Yes 43% No 57% IFRS impact on companies We also wanted to assess the current level of companies preparedness for IFRS, when and if the change occurs. Strikingly, a majority of respondents had taken action, or were planning action, on IFRS. That being said, approximately one-third of respondents had done some learning and fact-gathering at this point. If there were a decision to change, which of the following best describes your company s current state of readiness for IFRS? 13% 12% 22% Not sure/not applicable Nothing done to date Doing some learning, fact gathering 8% 11% Planning to do an impact assessment Have done an impact assessment Have moved beyond an impact assessment 34% US IFRS outlook survey

17 We continue to believe that companies should take a measured approach to preparing and working on IFRS. Each company will differ with respect to its IFRS needs. In most circumstances, large one-off projects are not necessary at this point. The limited activity we have seen in the market has been driven by unique circumstances (for example, in certain large multinationals with significant international subsidiaries already reporting on IFRS or moving to IFRS). Further, IFRS has increasingly become a fact of life for certain companies including those involved in cross-border M&A activity, companies seeking capital outside the US, and subsidiaries of non-us companies. Again, every company s circumstances are different, so each company s approach differs, but it is important to monitor regulatory activity and consider potential impacts of IFRS in the context of longer lead time decisions. What will the move to IFRS cost? Given the uncertainties and variability of the cost of IFRS incorporation, we asked our respondents to estimate their company s total expected investment to incorporate IFRS into their business. We know that the answer isn t easy; as with the previous question, it will depend heavily on facts and circumstances unique to each company. The diversity of responses to this question confirmed that belief. What is your company s total expected investment to incorporate IFRS (convergence/conversion)? 10% 4% 9% Greater than $5 million $3.1 million $5 million $1 million $3 million 56% 6% $500,000 $1 million Less than $500,000 15% Not sure/not applicable The responses reflect significant uncertainty (56 percent noted that they were not sure or that the question doesn t apply to their situation). Of the rest, estimates were widely distributed between those who expected their costs to be greater than $5 million and those who thought they would spend less than $500,000. We found the more than $5 million answer selected by both big players (more than $5 billion in revenue) and smaller companies (less than $500 million in revenue), further emphasizing the uncertainty surrounding the actual costs of any transition to IFRS. 17

18 How long will it take? More than 40 percent of respondents thought their company s transition to IFRS would take less than 2 years. This is somewhat surprising, given that a transition could affect systems, internal controls, tax planning strategies, training, contracts, and many other areas of a company s business. If the SEC decides to incorporate IFRS into the US financial reporting system requiring mandatory adoption at a specific date, how long do you think it would actually take your company to transition to IFRS? 21% 9% Less than 1 year 1 2 years 4% 32% 3 5 years Greater than 5 years Not sure/not applicable 34% When it comes to cost and timing, many respondents were not sure what to expect US IFRS outlook survey

19 Ready for the big three? Because an endorsement approach would rely upon the completion of the big three, or priority, convergence projects (revenue recognition, leasing, and financial instruments), and due to the importance of those projects in and of themselves, we asked how well prepared companies are for them. The survey found that many were still in the very early stages of preparedness. Given that the endorsement approach relies to some extent upon completing the priority convergence projects, where does your company stand in terms of preparedness on those initiatives? 4% 51% 21% 14% 5%5% 1 Insurance 30% 17% 25% 11% 11% 7% 2 Financial instruments 25% 11% 26% 16% 14% 7% 3 Leasing % 26% 13% 29% 14% 10% 7% 4 Revenue recognition Not applicable/not sure Have done an impact assessment Nothing done to date Planning to do an impact assessment Doing some learning, fact gathering Have moved beyond an impact assessment The project that has triggered the most debate between IASB and FASB, and which is therefore likely to be the last big three project completed, is financial instruments. While the boards are trying hard to converge in this area, they have not had much success so far. At the most recent G20 global summit, the leaders released a statement that specifically asked the IASB to focus on the financial instruments standards. We saw this as a sign that G20 leaders see the boards diverging and have asked that they get back on track towards convergence. The leasing project has seen good convergence progress. While many areas of the original leasing exposure draft have been reconsidered and simplified, there is still work to be done. Accordingly we do not expect a revised exposure draft until the first half of Our survey results show that two-thirds of respondents are already preparing to some degree for the leasing project s potential impacts. The revenue project exposure draft was re-exposed on November 14, 2011, shortly after our survey closed. The amount of preparation companies have done to prepare for the changes coming due to this project was slightly lower than for leasing. The number of companies that have actually committed resources to complete and move beyond an impact assessment on all projects remains low, at under 10% across the board. This is understandable, given the number of significant changes within the projects and uncertainty around what ultimately will be included in the final standards, and when they will be finalized and become effective. 19

20 The important differences Finally we asked respondents to rank differences between US GAAP and IFRS, as they related both to the impact on their companies financials and to the effort that will be required to convert to IFRS. Impact to your company s financialstatements Topic Rank First-time adoption of IFRS (IFRS 1) 1 Income tax accounting 2 Inventory (LIFO) 3 Financial instruments 4 Componentization of property, plant and equipment Share-based compensation 6 Impairment of long-lived assets, including goodwill Research and development costs 8 Provisions Effort needed to convert for your company Topic Rank First-time adoption of IFRS (IFRS 1) 1 Income tax accounting 2 Componentization of property, plant and equipment Inventory (LIFO) 4 Financial instruments 5 Share-based compensation 6 Research and development costs 7 Impairment of long-lived assets, including goodwill Provisions Responses seemed to indicate that estimates of impact correlate with estimated conversion effort. For example first-time adoption and income tax accounting ranked first and second, respectively, in regards to both impact and effort. We agree that in certain circumstances this correlation between impact and effort makes sense. However, there are multiple circumstances where the two factors are not directly related situations in which large efforts may lead to low impact, or small efforts can have a big effect. For example, on the subject of impairments: IFRS and US GAAP models are different, and performing an impairment test under IFRS may take considerably more effort than under US GAAP. However, that test may not result in any significant changes from what would have been the result under US GAAP. Next, consider LIFO. LIFO can have a very significant financial impact and it is number 3 on the impact chart, but from what we ve seen, most companies already know what their LIFO adjustment would be in a transition to IFRS, thus the conversion effort may be minimal. While first-time adoption topped the list of expected impacts, the endorsement method mapped by the SEC could result in fairly substantial carve outs for the US, or minimize the applicability of this area of guidance, thus reducing the impact and conversion effort of first-time adoption US IFRS outlook survey

21 What this means for your business: The way forward 21

22 We hope these survey results have been enlightening as you consider the impact of US GAAP convergence and IFRS on your organization. The timing and final details of the priority convergence projects remains uncertain, but these projects could be effective as early as Further, it is possible that voluntary adoption of IFRS in the US could well be under way by then. Therefore, there is work that can be done in advance of the effective dates given the sheer amount of change as well as the impact it will have on comparative reporting periods. That being said, most companies need not embark upon a full-blown project right away, but there are measured steps they can take in the near term, while awaiting the significant forward steps we expect to see in the next year. Each company is different, and therefore the impact of the proposed standards and IFRS will differ from one company to another. Industry segment, business complexity, and other environmental factors will play a role in determining the level of impact and the timing of companies approaches. All US companies should remain aware of the SEC s activity as well as the changes proposed from the Boards joint projects. If your company has strong views on a topic, you might consider participating actively with the standard-setting process by responding to requests for comments or taking part in supplemental outreach activities put forth by the standard setters. Companies should also start to assess, at least at a high level, how the proposed changes will impact their business, and form a point of view on the level of impact. Those companies that are impacted more heavily by the proposed changes should consider taking further steps to better understand the requirements and effectively begin to manage the change process US IFRS outlook survey

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24 To have a deeper conversation about how this subject may affect your business, please contact: James G. Kaiser US Convergence & IFRS Leader PricewaterhouseCoopers LLP james.kaiser@us.pwc.com PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 163,000 people in 151 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See for more information. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PwC. All rights reserved. PwC and PwC US refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. DT