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Tuesday, January 6, 2009

Ready or Not, Here IFRS Comes

Planning for the upcoming changes

The move away from U.S. Generally Accepted Accounting Principles (U.S. GAAP) to International Financial Reporting Standards (IFRS) is becoming a reality more quickly than once anticipated.

The SEC sped up its timetable by two years when, last November, it announced that it will allow international companies to file in the United States without reconciling IFRS with U.S. GAAP or even reporting that their statements are not in accordance with U.S. GAAP.

The SEC is expected to issue a timetable soon for allowing U.S. companies to use IFRS. Still, major issues have yet to be fully addressed such as whether the quality of IFRS is sufficient, whether use of IFRS in the United States will become mandatory and whether IFRS ultimately will converge with U.S. GAAP or replace it. CFOs should start thinking now about how IFRS will affect their companies so they’ll be ready when it comes.

Full Speed Ahead

The International Accounting Standards Board (IASB) was created in 2001 to develop IFRS. In 2002, the IASB and the U.S. Financial Accounting Standards Board (FASB) started trying to converge international and U.S. accounting standards. For the past five years they’ve been working to make IFRS and U.S. GAAP compatible and, where both organizations’ standards are in need of improvement, to develop new common standards. Some of the areas where there are significant differences are pensions, leases, inventory and intangibles.

Adding to the pressure — and incentive — for the United States to adopt IFRS quickly is the speed at which other economic powerhouses are adopting it. The European Union (EU) mandated IFRS use starting in 2005; other key countries including Japan, India and Canada, plan to adopt it in 2011, which means more than 100 countries would be using IFRS.

Goodbye to Dual Accounting Systems

U.S. adoption of IFRS will result in a new ease of comparability of financial information between U.S. and foreign companies. U.S. companies with foreign operations will reap another substantial benefit: They’ll no longer have to maintain dual accounting systems.

Additionally, though some naysayers still fear IFRS isn’t detailed and comprehensive enough to ensure sufficient reporting consistency, many who were originally apprehensive have found IFRS to provide more structure than they anticipated.

Another concern has been that, short term, IFRS is likely to be expensive as U.S. companies make the change: It will take most companies 18 to 24 months. But, long term, the consistency and ease of comparability that IFRS will provide should far outweigh any short-term negatives.


More Leeway

The major difference between the two sets of standards is that U.S. GAAP is rules-based, whereas IFRS is principles-based. A rules-based standard is detailed and extensive, covering a multitude of contingencies. A principles-based standard provides a lot more leeway.

Let’s say one of your son’s household responsibilities is mowing the lawn and you tell him he has to: 1) mow every Saturday morning at 10 a.m., 2) mow Tuesday evening as well if it rains Sunday or Monday, and 3) mow in east-west stripes. Then you’re setting rules-based standards. Whereas if you simply tell your son he has to make sure the lawn looks good, you’re setting a principles-based standard.

Timing is Everything

As of this writing, there is no set timeframe for U.S. companies to be allowed — or required — to follow IFRS; however, below are some dates being discussed: >

  • 2011 for large U.S. companies to opt to follow IFRS
  • 2013 to mandate that large U.S. companies follow IFRS
  • 2015 to mandate that smaller U.S. companies follow IFRS

Based on IFRS implementation in the EU (the 2005 IFRS compliance deadline was announced in 2002), this timeframe seems achievable, but full IFRS-GAAP convergence could take longer.

Opponents fear this could result in IFRS replacing GAAP rather than converging with it to a high-quality set of standards. Proponents, on the other hand, argue that having more U.S. companies using IFRS could speed up convergence.

Real-world Impact

IFRS will have a major impact on CFOs and others involved in the production and oversight of their companies’ financial statements. Here are just a few questions to consider:

  • When will your company be allowed to use IFRS and when might it be required to use it?
  • Will your company benefit from being an early adopter or will it be better off taking a wait-and-see approach?
  • What type of training will you and your team need, and who will provide it?
  • How much is conversion going to cost?
  • How might the changes affect your reported earnings?

Finally, if you’re a private company, consider what the other reporting options are — tax or cash basis.

Start Planning Now

The U.S. adoption of IFRS, whether converged with U.S. GAAP or not, is inevitable and will provide many long-term benefits. Ease the transition by becoming familiar with how IFRS differs from U.S. GAAP and how it will affect your company. Our firm has the experience and expertise to help. We’d be pleased to provide more information on IFRS and work to develop a plan for adopting it at the appropriate time and as cost effectively as possible.


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