There has been much anticipation in the accounting and financial world regarding the possible adoption of IFRS to replace U.S. GAAP. While some people may not have even heard of IFRS, the adoption of this new accounting standard could affect you.
For those of you who are not familiar with the International Financial Reporting Standards (IFRS), they are “a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements” (www.ifrs.com).
Many people wonder what the advantages and disadvantages are in the possible adoption of the IFRS. Those who will benefit the most from this conversion will be the public and private companies with foreign operations and subsidiaries, those that perform significant international transactions, or companies that are looking for foreign capital. Through the adoption of IFRS, a business can present its financial statements on the same basis as its foreign competitors and the adoption will allow for easier comparisons between local and foreign entities.
U.S. public and non-public companies that do not have a significant international customer base or foreign operations beyond the U.S. borders may resist the IFRS movement because they may not have a market incentive for IFRS preparation. These companies believe that the increased costs associated with the adoption of IFRS outweigh the benefits.
How will these two standards differ from each other? One of the major differences between U.S. GAAP and IFRS is that IFRS provides less overall detail and contains very little industry-specific instructions. “Probably the best evidence of how much less detail IFRS contains is that IFRS fits into one book, about two inches thick. By contrast, U.S. GAAP contains approximately 17,000 pages of detailed rules and guidance” (www.ifrs.com). A comparison between a few U.S. GAAP and IFRS accounting standards follows:
| |
U.S. GAAP |
IFRS |
| Accounting for Inventory |
Permits LIFO |
Does Not Permit LIFO |
| Impairment Write-Downs |
Two-Step Method |
Single-Step Method |
| Contingencies |
Different probability threshold and measurement |
| Debt Covenant Violations |
Non-current |
Current* |
*Unless a lender waiver is obtained before the balance sheet date.
What role does the Securities and Exchange Commission (SEC) play in the decision-making process of this possible future conversion? On November 14, 2008, the SEC issued a roadmap that proposed the transition for the adoption of IFRS by U.S. public companies, but the new SEC Chairwoman Mary Schapiro has indicated she is not necessarily committed to the roadmap. The financial regulatory reform proposals President Obama released on June 17 called for a single set of high-quality global accounting standards by the end of 2009.
With the possibility of the SEC designating a future date for voluntary or even mandatory adoption of IFRS for U.S. public companies, will the IFRS be mandated for private and not-for-profit organizations? The simple answer is no. Currently, there are no standards or regulations requiring private and not-for-profit organizations to adopt the IFRS, but it is a possibility in the future that the IFRS may be the new reporting standard for private and not-for-profit organizations.
As you can see, the possible adoption of IFRS versus U.S. GAAP will be the dawn of a new era in accounting and financial reporting and it can feel a bit overwhelming!
We at Chapman, Hext & Co., P.C. have the ability to consult with our clients on U.S. GAAP to IFRS conversions due to our experience with various international transactions and IFRS reporting issues.
If you have any additional questions or feel these changes may have an impact on you or your business, please feel free to contact Ardi Setiadi, Financial Services Manager, or Sarah Hancock, Tax Services Director, at 972-644-7112. We look forward to hearing from you!
|
