The Impact of the Impending IFRS Conversion
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With the recent economic upheaval, one of the most significant announcements from the Securities and Exchange Commission seems to have been put on the back burner, or at least may no longer be in the forefront of most CEO's and CFO's minds.
On Aug. 27, 2008, the SEC announced its proposed roadmap for the eventual conversion of U.S publicly traded companies from Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS). The initial plan calls for allowing the largest of the multinational companies to adopt and report financial results in IFRS starting in 2010. It is estimated there would be approximately 110 of these companies that span multiple industries.
The international standards are more concept-driven than U.S. GAAP, which are more rules-based. IFRS provides less detailed guidance and does not have the industry specific guidance provided by U.S. GAAP. This will require accountants to use more judgment, which could mean taking on even more risk. Given the increased use of judgment, having more than one answer for the same question becomes even more likely. Depending upon who you ask, you will find preferences for each of the standards.
In addition, mandatory reporting for the remaining registrants would begin in 2014, 2015 and 2016 for large, mid-sized and small companies, respectively. The final determination on these mandatory dates is expected to occur during 2011 when the SEC will consider whether several milestones identified in its original roadmap were achieved. These milestones are expected to include:
- A requirement for the International Accounting Standards Committee Foundation (IASCF) to obtain independent funding. The Foundation currently obtains its funds in the form of voluntary contributions from accounting firms, central banks and various companies.
- Increased availability of IFRS training and education. The conversion not only will require current accounting practitioners to become informed on the differences between IFRS and GAAP, but will change the way colleges and universities set up their curriculum and how the Uniform CPA Examination is administered – once IFRS is accepted.
- IFRS financial statements capable of being provided to the SEC in its interactive data format (XBRL).
There are several factors that suggest IFRS will be made mandatory in the near future, including the SEC's expressions of continued support for a unified set of accounting standards. The proposed timeline encourages companies to assess the impact of the switch, as well as the rate at which other countries are switching to IFRS.
However, whether the original proposed times are still attainable is now the more frequently asked question. With the recent election and change in administration, the next chair of the SEC could ask for additional studies and revise the originally proposed deadline. Furthermore, the current economic instability could weaken the resolve to switch to a new set of standards so quickly.
So far, the focus has been on publicly traded companies. With that said, what will be the effect for private companies? This potential shift might not be as painful as some individuals fear. The FASB and IASB have been working toward convergence of financial reporting standards for years. Each time a new standard was released or revised, the objective was to make the U.S. GAAP and IFRS version more in line with each other, though there are still substantial differences.
To further address private company concerns, the IASB is developing IFRS for small- and medium-sized entities that would "minimize complexity and reduce the cost of financial statement preparation." Rules 202 and 203 of the AICPA Code of Professional Conduct also were amended to recognize the IASB as an international accounting standard setter. This could give private companies a choice whether to follow IFRS standards in the future by removing one barrier to implementation.
Private companies must remember that all of the current talk is for public companies only, but should be aware of how it could potentially filter down to their companies.
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