The Accounting Standards Change from GAAP to IFRS While some U.S. organizations are already dealing with IFRS filing requirements related to their global operations and subsidiaries, many others have IFRS on their radar as regulatory developments emerge. We understand the practical issues in addressing IFRS from both a U.S. and global perspective. Our experienced professionals work with organizations to help them address IFRS in the areas of accounting, tax, systems, and valuation. Based on a multi-functional approach, we assist organizations in evaluating and preparing for IFRS conversions, providing support with technical accounting research, implementation activities, training and communication, and project management. IFRS reporting considerations are already impacting business decisions, and not simply through non-US subsidiaries. The SEC is considering measures that could lead to retiring US GAAP and adopting IFRS in the US. However, the effects of global reporting on US companies will accelerate over the next few years, regardless of how the SEC proceeds. Understanding IFRS and its business implications is a competitive imperative for US companies. Conversion is much more than a technical accounting issue. IFRS may significantly affect any number of a company’s day-to-day operations and may even impact the reported profitability of the business itself. One key difference between U.S. GAAP and IFRS is how you account for certain types of assets on the balance sheet, such as inventory. For example, a popular inventory valuation method in the U.S. called LIFO is not allowed under IFRS. Currently, more than 100 countries have adopted or accepted IFRS, including the European Union. In 2007, the U.S. moved to accept, but not adopt IFRS; that is, they allow companies headquartered in countries where IFRS are used to be listed on the New York Stock Exchange without restating their financials in accordance with GAAP, but U.S. firms must still use the American standards. Companies reporting under IFRS are now facing a wave of new and amended standards and interpretations that came into effect on 1 January 2009. There are also several further changes that become applicable in 2010, but may be adopted earlier. In some cases, these changes are significant and could have an impact on many areas including financial reporting, information systems and business processes.
In August 2008, the Securities and Exchange Commission announced a timetable that would allow some U.S. companies to report under IFRS as soon as 2010, with total adoption by 2014. Under the new presidential administration, however, this timetable is being questioned, partly due to cost: adoption of these new standards could add substantially to already burden companies in the challenged U.S. economy. According to an Aug. 27 story on CFO.com, an online business magazine, only the top 20 companies in approximately 30 industries would be able to use IFRS in 2009. Eligibility would be “based on market capitalization and whether the largest of their foreign counterparts also use IFRS.” Under the current proposal, the SEC would evaluate the process in 2011 and decide whether to mandate the change to IFRS for all publicly traded companies by 2016.The impetus behind the proposed change is the widespread use of IFRS overseas. Requiring all U.S. publicly traded companies to use international standards levels the playing field, which should make U.S. markets more attractive to foreign investors. A lot of IFRS is pretty close to GAAP, which has been the gold standard for accounting principles. What has been adopted by IFRS comes from the guidance of U.S. GAAP. But any time there’s more judgment involved, making sure everyone is applying the standards consistently is more difficult. One company may take the same accounting principle and apply it in a different way.
The challenge will be making sure it is applied in the way it was intended. The possible changeover would have wide-reaching effects on a variety of businesses. Some companies will have to consider the expense and the time needed to make software changes, and universities will have to make changes to classes and textbooks; there currently aren’t any IFRS textbooks. Not only will accountants and accounting students be affected by a change to IFRS, but banks, regulators, actuaries, and investment specialists will also have to be IFRS-fluent. According to French, the switch will affect anyone who relies on financial statements, which is one of the reasons the SEC’s proposal is spread out over several years. While it’s difficult to predict all of the factors and costs associated with the potential switch to international standards, French adds that most accountants would probably prefer a more principles-based approach because no two transactions are alike, particularly complicated ones that are often made by large or multinational companies.