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Impact of IFRS on Automobile Dealerships

February 01, 2011
By Rick Parmelee, CPA
International Financial Reporting Standards (IFRS) have been discussed in financial circles for years. In November 2002, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) entered into a memorandum of understanding to develop consistent worldwide accounting standards. As economies have globalized, accounting standard setters and financial professionals have increasingly felt the need for one set of global accounting standards. 

As a result of the collaboration between FASB and IASB, a number of United States Generally Accepted Accounting Principles (GAAP) standards have been modified to conform with IFRS. The intention of these changes is to streamline the inevitable conversion from US GAAP to IFRS for financial reporting. 

It is believed that a single set of accounting standards will produce more comparable and reliable global financial information, which will in turn be good news for all parties involved.

U.S. companies currently utilize GAAP for financial reporting purposes. Internationally, however, more than 110 countries have adopted IFRS, and numerous additional countries plan to adopt it over the next few years. The Securities and Exchange Commission (SEC) is requiring large accelerated filers to convert to IFRS in 2014 and is phasing in compliance for other filers thru 2016. While no conversion deadline exists for privately held companies, it is widely anticipated that privately held companies will eventually adopt IFRS. 

During 2009, the IASB released IFRS for Small and Medium-sized Entities (SMEs). IFRS for SMEs is intended to ease some of the burdens of compliance and reduce the number of required disclosures. Most privately held automobile dealerships will qualify for reporting under this simplified method. 

Automobile dealers will most likely be impacted by the following areas of IFRS:

  • The Last In First Out (LIFO) method of accounting for inventory is prohibited under IFRS. This has created a sub-issue for US companies, as the Internal Revenue Service only allows LIFO to be used for tax purposes when it is also used for financial statement purposes.
  • Many leases currently treated as operating expenses will be required to be capitalized and depreciated.
  • Goodwill and indefinite-lived intangibles will be amortized over their useful lives or ten years if the useful cannot be determined.  Impairment will only be required to be tested when an indication of impairment exists.
  • There will be a lower threshold for determining when to record a contingent liability.
  • Companies will be required to cure debt covenants prior to their year end.

As world economies move to a global set of accounting standards, your automobile dealership must be aware of these impending changes. 


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