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Prepare Now for the Implementation of International Accounting Standards

For years, participants in the international capital markets have been pushing for a single set of high-quality, globally accepted accounting standards. Their efforts have panned out as International Financial Reporting Standards (IFRS), issued by the London-based International Accounting Standards Board (IASB), is growing in popularity. In fact, there's little doubt among accounting professionals that IFRS will gain global acceptance in the near future. The only questions now are when and how it will happen.

Benefits of universal standards

The proliferation of different accounting standards has made it difficult for investors to draw meaningful comparisons among cross-border investments. Often, key financial information is lost in translation. For example, if certain assets are reported at fair value in one country and at historical cost in another, otherwise similar companies might look very different on paper.

A universal accounting language can make international investments, including cross-border acquisitions, much easier to evaluate. Other benefits of universal standards include the following:

• Improved financial reporting, 
• Greater financial statement comparability, 
• Stronger internal controls, 
• Less complexity for financial statement preparers and users, 
• Lower capital-raising costs, and
• Better cash flow management

The initial transition to IFRS could be costly. But, a single set of standards will ultimately lower accounting costs, particularly for multinational corporations now forced to keep multiple sets of books due to divergent local reporting requirements.

Momentum builds

IFRS is currently either required or permitted in some form in more than 100 countries. Late last year, the U.S. Securities and Exchange Commission (SEC) adopted new rules that recognize the role IFRS now plays on the global accounting stage.

These new rules permit foreign private issuers to file financial statements prepared in accordance with IFRS without reconciliation to accounting principles generally accepted in the United States of America (GAAP). The SEC also recently issued, for public comment, a "concept release" on allowing U.S. issuers to prepare their financial statements in accordance with IFRS.

Meanwhile, U.S. and foreign accounting rule makers are working to accelerate the transition to IFRS. The IASB and the Financial Accounting Standards Board (FASB) formalized a commitment to converge IFRS and GAAP in the 2002 Norwalk Agreement. In a 2006 Memorandum of Understanding, the boards reaffirmed their " ... shared objective of developing high quality, common accounting standards for use in the world's capital markets."

In August 2008, the SEC announced that it was considering a timetable for gradually switching public companies to IFRS over several years, beginning in 2012 (in certain circumstances as early as 2010). At press time, however, the SEC has taken no further action, and its plans remain uncertain.

Making the transition

In keeping with its objectives, FASB has issued several statements that more closely align GAAP with IFRS including Statement of Financial Accounting Standards No. 159 (FAS 159), The Fair Value Option for Financial Assets and Financial Liabilities, and, most recently, FAS No. 141R, Business Combinations, which eliminates many of the differences between U.S. and international treatment of mergers and acquisitions. See "New and Timely Guidance on FAS 157."

At press time, the IASB and SEC were expected to release an updated Memorandum of Understanding outlining their plans for making the transition. According to the IASB, the memorandum will call for the resolution of major differences between GAAP and IFRS and the potential adoption of IFRS in the United States by 2014.

Breaking the language barrier

There's nearly universal agreement that global accounting standards are a worthy goal. To reach that goal, however, rule makers and companies must contend with:

IFRS shortcomings. For IFRS to work as the global accounting language, some critical improvements are needed, including elimination of "carve-outs," which are local versions of IFRS that deviate from the IASB version.

IASB independence. The international financial community agrees that a single standard-setting body is needed, and even FASB acknowledges that the IASB will likely fill this role. However, IASB will first need to strengthen its position as global standard-setter and ensure its independence. The board, for example, will need an adequate, sustainable source of funding in place of the voluntary, private-sector donations on which it currently relies.

Transition costs. Organizations adopting IFRS will have to invest time, money and effort in retooling their information systems, implementing new internal controls, training their accounting staffs and modifying policies and procedures. The transition will also affect tax planning, cash management, corporate governance, legal compliance and other activities.

Education. Knowledge about IFRS in the U.S. is limited. Work is required to revamp accounting education and training, auditing standards and even the CPA exam.

Differences between IFRS and GAAP. Some significant differences remain between IFRS and GAAP in the areas of revenue recognition, lease accounting and financial statement presentation. One of the biggest roadblocks is inventory accounting. For tax reasons, many U.S. companies use the last in, first out (LIFO) method when accounting for inventories. LIFO, however, is prohibited under IFRS. Unless the federal tax code is changed, many U.S. companies that switch to IFRS will find themselves with an enormous tax liability.

Principles-based standards. IFRS will require U.S. companies to accept a principles-based approach instead of GAAP's rules-based standards. (See "Principles-Based Standards: Substance Over Form" for more on the differences.)

Learning a new language

There are still plenty of issues to work through before the goal of an international accounting language is realized, but it seems certain that the day will come. To ensure a smooth transition, begin preparing now by familiarizing yourself with IFRS, evaluating its potential impact on your organization and developing an implementation plan.  

Questions on IFRS?
Contact Ken McCreadie at 312-980-2984.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.