Between Letter, Spirit, Financial Reporting Faces Challenges
It is still five years away, but publicly held companies in the United States and their accounting firms are busy building multiple scenarios of how the transition to international accounting standards in 2013 will play out.
The so-called International Financial Reporting Standards, or IFRS, which aims to create a set of common financial reporting benchmarks for companies worldwide, is seeing growing acceptance within the U.S. accounting profession, according to the Washington, D.C.-based American Institute of Certified Public Accountants.
Already, the European Union, Australia, New Zealand, Canada and Israel have accepted IFRS as the standard for publicly held companies; the U.S. Securities and Exchange Commission is currently weighing whether or not the new standards should be made mandatory for U.S. companies.
The changes IFRS will bring to existing U.S. standards -- called Generally Accepted Accounting Principles, or GAAP -- will span valuation of plant, property and equipment; income taxes; revenue recognition; contingent liabilities; and inventory valuation, says Peter Bible, partner in charge of public companies practice at accounting firm EisnerAmper in Edison.
Amid all the changes, Bible expects communication to pose the biggest challenges. He says the sheer range of constituents that will be affected by the new rules make the task formidable -- company managements, board members, sales teams, shareholders, auditors, bankers and so forth.
"All the pieces will have to fall into place neatly, like in a puzzle," says Ralph Thomas, executive director of the New Jersey Society of Certified Public Accountants in Roseland. Trouble could arise if the IFRS provisions aren't made clear. "If England interprets it one way, and India interprets it another way, that's where we could run into problems."
On the other hand, Thomas sees advantages in IFRS for companies that operate across different jurisdictions, and also for accountants and other finance professionals to offer their services within and outside the U.S.
The philosophical underpinning of the IFRS -- in that it is "principles-based," as opposed to that of the U.S. GAAP, which is "rule based" -- has triggered much debate within publicly held companies, accountants and investors, Bible says. He says while the U.S. financial reporting standards operate around a set of rigid rules, IFRS allows companies more flexibility, so long as they are seen as consistent with the underlying rules.
The IFRS "requires a lot more use of judgment by the person preparing financial statements" at a company, according to Bible. "there is some concern that it could lead to a tendency for bias in allowances for bad debts, et cetera," he says.
Thomas notes, "We are rule-based because of the litigious environment we live in. Somebody is always looking to see if there is an opportunity to bring a lawsuit."