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Introduction
Developments in capital markets around the globe in recent years have led the Securities and Exchange Commission to become increasingly interested in considering the adoption of international financial reporting standards (IFRS) as issued by the International Accounting Standards Board (IASB) for U.S. issuers. As part of that consideration, in November 20081 the SEC proposed a road map that could require the use of IFRS by U.S. issuers with requirements phased in by issuer size beginning for years ending on or after Dec. 15, 2014, under the milestones set forth in the road map and a conclusion by the SEC that requiring such a change from U.S. generally accepted accounting principles (U.S. GAAP) is in the public interest and consistent with the SECs investor protection mandate.
Although many perceive benefits to the global marketplace in having a globally accepted, high-quality set of accounting standards, a transition from U.S. GAAP to IFRS presents challenges and could have implications for many multinational companies' tax positions. This article examines from a transfer pricing perspective the potential impact of this transition between two financial reporting standards on a company's intercompany pricing policies and on the methods used to test whether the policies comply with the arm's-length standard widely adopted by most tax jurisdictions.2
Reasons for Considering Convergence
Among the reasons given by the SEC in considering mandating the use of IFRS by U.S. issuers was the potential of IFRS to "become the set of accounting standards that best provide a common platform on which companies can report and investors can compare financial information."3 According to the SEC, the increased acceptance and use of IFRS in major capital markets throughout the world over the past several years was one indication of the potential of IFRS to provide a common platform for comparing company financial information. Further, the November 2008 release appears to represent a willingness to consider whether convergence has been sufficiently achieved to warrant a change-over by U.S. issuers to IFRS.4 A road map outlined by the Chief Accountant at the SEC in April 20055 for eliminating the IFRS to U.S. GAAP 20-F reconciliation requirement by no later than 2009 was conditioned on continued convergence6 between IFRS and U.S. GAAP, but did not specify the level of convergence...