A popular term coming out of Washington today is “kicking the can down the road.” While this refers to what our politicians have been doing for many years with budgetary matters, the same words could be used to describe the activities of the US accounting rule makers on the topic of International Financial Reporting Standards (IFRS). Since the early 1970s, some form of international reporting standards have been in place, studied, considered, assigned to another task force, etc. While most of this activity has occurred in Europe, clearly the US has had its own studies, considerations, and task forces well in place and active since the mid 1990s.
Perhaps it might be good to review a brief history of IFRS is and how we got to where we are today. IFRS is an accounting framework not that dissimilar to US generally accepted accounting principles (US GAAP). The goal of IFRS is to result in a “true and fair view” of the related financial statements it intends to present. IFRS is basically a product of a rulemaking body known as the International Accounting Standards Board (IASB), a group similar to the Financial Accounting Standards Board (FASB) in the US. The IASB dates itself to 1973 with the formation of the International Accounting Standards Committee, the IASB’s predecessor.
The drive toward IFRS really began in earnst in the mid 90s, culminating in 1999 when the current IASB came into existence. In 2002, European Union (EU) listed companies began to prepare consolidated financial statements in accordance with IFRS. That same year, the Norwalk Agreement was executed, which essentially drew the US deeper into the discussions. The Norwalk Agreement was an agreement between the IASB and the FASB to begin convergence of the various accounting principles falling under each party’s jurisdiction.
In 2006 the IASB and the FASB prepared a Memorandum of Understanding which further spelled out how such convergence would occur. Also, in 2006 the Committee of European Securities Regulators and the Securities Exchange Commission (SEC) issued a plan to work jointly toward a common set of accounting principles.
Since then, there have been continued studies, considerations and task forces which resulted in numerous roadmaps, preparedness surveys, etc., or in essence, further “kicking the can down the road.” The most recent activity was a meeting held by the SEC on July 7th, 2011, which included users, regulators, academics, preparers, etc. The main agenda was to hear arguments for and against the US formally adopting IFRS for public filers, and if adopted, how such transition to IFRS should occur. As part of this process, a key staff member of the SEC had introduced a concept which has come to be called condorsement. Under condorsement, the FASB would continue to set the rules as before under US GAAP, but would consider each new international standard, with a goal of moving the US GAAP rules to be as consistent as possible with international standards so such differences would eventually be inconsequential.
As expected, the results of that meeting produced some interesting commentary. Some key investors/users favored the condorsement approach, although others questioned the timing and costs involved in adopting and implementing any form of IFRS. Some indicated that the US GAAP was generally preferable and that the FASB shouldn’t be just a means to import international standards into the US.
To get into all of the differences between IFRS and US GAAP would be beyond the scope of this article. In essence, the high level difference is that IFRS is more of a principle-based accounting framework, differing from the stricter rules-based framework in the US. Specifically, those differences include:
- last-in, first-out inventory accounting is not allowed for IFRS;
- fixed asset accounting, particularly related to the componentizing of fixed asset categories;
- allowance in some cases for the reversal of previously recognized impairment losses; and
- other measurement and disclosure items.
Studies are underway in areas like lease accounting, revenue recognition and financial instruments which, if adopted, could result in major changes in the way such items are currently accounted for under US GAAP.
So where is the US in all of this and how does it impact your business? The accounting rules currently allow for the use of IFRS for small and medium sized entities in the US, and have for a few years. The rules for such entities, generally referred to as SMEs, are a bit less complex than a full implementation of IFRS. Some SMEs in the US have adopted IFRS, specifically those who are doing more business internationally, and may be wishing to access the international capital markets for funding. Large public companies in the US are most likely preparing for the day when IFRS will be either allowed or required. Some mid-size public companies have done some sort of preparation, but based on a recent survey of CFOs by the American Institute of Certified Public Accountants, much of their preparedness activity has been on hold for the past year awaiting some decision by the SEC as to the eventual approval of IFRS.
The implementation of IFRS would have a significant impact on all business entities. Certain IT systems, which have been developed to accommodate US GAAP reporting, will need to be revised. Additionally, personnel will need to be trained, and depending on the size and degree of centralization of an entity, or if it has been put together with numerous acquisitions using different systems, that training could go deep into the organization. Loan documents, covenants, compensation and dividend practices and many other business metrics and drivers may need to be revisited and ultimately revised. The key is to begin to consider if IFRS makes sense for your company, and if so, who in the organization and which areas of the business will be impacted if it is either required to be implemented, or if it makes good business sense to do so.
In a speech on July 1, 2011, Hans Hoogervorst, who took over as chairman of the IASB that day, said he anticipates the US will ultimately adopt IFRS. He seems to have drawn a line in the sand when he stated, “It’s really hard to fathom the possibility that they (the US) would want to relinquish their leadership role in international accounting. A negative decision is almost impossible to think about. It’s fine they take their time as long as we have a clear decision.”
So, what will happen with IFRS in the US? Yes! No! Maybe? The developments over the next few months should be fairly interesting.
Frank Farris, CPA
Partner
