The Rose Report: What Does Convergence Mean to Your Accounting Department and Company?
When someone in the business community speaks of convergence, you may assume they are speaking of the convergence of the Internet, communication, and media. However, your accounting department needs to note a more influential convergence related to accounting standards. The United States Generally Accepted Accounting Principles (U.S. GAAP) is in the process of integrating and unifying with the high-quality, enforceable, and global International Financial Reporting Standards (IFRS), which focuses on understandability, relevance, reliability, and comparability. The convergence of accounting standards is accelerating as a result of globalization and the investment communities’ acceptance of IFRS. More than 12,000 public companies in over 100 countries have begun using the IFRS.
In November of 2007, the Securities Exchange Commission (SEC) moved to allow international firms listed on American stock exchanges to file financial statements in accordance with IFRS. In May 2008, the American Institute of Certified Public Accountants (AICPA) voted to designate the International Accounting Standards Board (IASB) in London as an accounting body for purposes of establishing IFRS. The AICPA also stated that small and mid-sized private companies in the U.S. may use IFRS as an alternative to U.S. GAAP. In 2011, Canada, England, Japan, and India plan to require IFRS for all publicly traded companies.
So what does this mean to my business?
Most likely, your business will be allowed, and maybe even required, to report financial results using the new international accounting standards. These financial reporting standards may cause material differences in how financial statements are prepared today. The use of IFRS will trigger changes that affect:
•Complexity surrounding accounting issues•The value of assets on your balance sheet•How revenue is recognized•How much taxes companies pay•How financial statement are prepared•How investors and bankers analyze companiesWhat are a few of the relevant differences?
•IFRS allows the use of fair value measurement for long-lived assets; currently, U.S. GAAP requires that companies record these assets at cost. This difference can result in inconsistencies when viewing a firm’s debt to equity ratio or return on assets.•IFRS’ guidance related to revenue recognition is much less extensive and contains significantly less industry-specific instructions.•IFRS can result in more recognition of specific types of intangible assets.•IFRS requires only two years of balance sheets, income statements, cash flow statements, changes in equity, and accounting policies and notes.What’s the good news?
The good news is that IFRS may reduce the costs of financial reporting and audits as compared to using U.S. GAAP due to its increased simplicity. The increase in simplicity is a result of IFRS being principles based. These principles carry over from industry to industry. Contrarily, U.S. GAAP is rules based and may result in similar transactions being treated differently in different industries. Further evidence of the increased simplicity is that the IFRS fits into a single book, about two inches thick, as compared to U.S. GAAP, which is contained within four books that measure over nine inches thick.
The “Big Four” accounting firms have already started studies at the largest U.S. public companies to determine the impact that changes to IFRS will have on financial results, taxes, regulatory issues, and compliance. Many experts believe that the SEC’s adoption of IFRS is inevitable due to global standardization. While the effects of Sarbanes-Oxley are currently trickling down to private companies and not-for-profit organizations, many believe that the IFRS will take the same path.
Keep in mind that as U.S. public companies convert to IFRS, they will begin to evaluate potential acquisition targets based on their results using IFRS. As a result, any private company that is looking for an exit strategy that includes M&A or an IPO will need to have adopted IFRS or have a clear understanding of how IFRS affect their financial projections and results.
Source: Ted Rose is the President of Rose Financial Services, based in Rockville, MD. If you have any comments or questions, he can be reached at info@rosefinancial.com or 301.527.1130
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