The State of International Financial Reporting StandardsSeptember 21, 2011
Christopher Ernest, CPA
By the end of this calendar year, the Securities and Exchange Commission (SEC) should come to its long-awaited decision as to whether or not it will require publicly traded companies in the U.S. to report in accordance with International Financing Reporting Standards (IFRS). The debate over IFRS in the U.S. has been whether or not the SEC should permit or require a switch to IFRS for U.S. public companies. This change would ultimately trickle down and affect privately owned entities. Originally, the SEC set 2014 as the target date whereby public companies would be required to submit all reports using IFRS. However, concerns over the time and cost required to implement the changes successfully, the need to educate financial statement users and whether or not IFRS are sufficiently developed have delayed the earliest implementation to 2015 and could cause the SEC to either drop the requirement altogether or permit companies to choose between reporting in accordance with Generally Accepted Accounting Principles (GAAP) or IFRS. The SEC understands that establishing an IFRS requirement will have a significant impact on issuers, both large and small, as it requires changes to accounting systems, contractual agreements, corporate governance considerations and accounting for litigation and contingencies. Furthermore, the SEC is concerned about the independence of IFRS considering that one of the primary advantages of their adoption is to standardize reporting for the benefit of investors.
While the SEC deliberates over the future of IFRS in the U.S., the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) are working diligently this summer and fall to complete their convergence projects. The goal of these projects is to align the conceptual frameworks and remove the differences between the two sets of standards, which could make the SEC’s decision much easier. The convergence projects include, but are not limited to:
- The issuance of accounting standards (address current financial statement presentation and consolidations)
- Revenue recognition
- Lease accounting
- Financial instruments
While many of the standards drafted out of these projects to date are still in the early stages of the adoption process, and the two boards are struggling to compromise in certain areas, eventual change is inevitable.
Generally, GAAP and IFRS are similar when it comes to basic accounting concepts; however, there are some key differences (in addition to those being addressed by the convergence projects) such as:
- IFRS is principles- and judgment-based while GAAP is based on specific rules
- IFRS does not allow the use of the LIFO (last-in, first-out) inventory accounting method
- IFRS uses a single-step method for impairment write-downs rather than the two-step method used in GAAP, making write-downs more likely
- IFRS does not permit debt for which a covenant violation has occurred to be classified as non-current unless a lender waiver is obtained before the balance sheet date
So, with the questions surrounding IFRS at the SEC level and a plethora of convergence projects monopolizing the efforts of the FASB, you may ask “why even bother with IFRS”?
In a world of incredible technology and infrastructure, doing business and initiating credit beyond borders has become the norm. In addition, mergers, acquisitions and capital raising activities are no longer limited to a company's home country. As a result of these and other global transactions, the need for standardized reporting has become increasingly important, and IFRS and/or the convergence standards create more comparability between companies, which will level the playing field and make U.S. companies better understood in the global marketplace. Finally, some companies are already maintaining accounting records on two separate standards, particularly if they hold or are subsidiaries of entities in foreign countries who require or have committed to the use of IFRS. For example, Mexico and Canada will require the use of IFRS in 2011 and 2012, respectively, therefore, transitioning to a single set of standards may present eventual cost and time savings.
Whether through adoption of IFRS by the SEC or the eventual convergence of the standards as a result of the joint IASB and FASB projects, the future of financial reporting, for both public and private entities, will be affected. The bottom line is to stay up-to-date on the happenings surrounding IFRS and the convergence standards and be sufficiently prepared for the changes as they occur.