Giving International Financial Reporting Standards One Voice
Imagine a world where there is no Tower of Babel and that all inhabitants speak the same mother tongue. Though I dreamt this as a small boy, I certainly never imagined that finance people would lead the way! That, however, seems to be the case.
From 1973 to 2001, the International Accounting Standards Committee (IASC) issued 41 accounting standards known as IAS, of which 29 are in effect today, and 32 interpretations, or SIC, of which 11 are still in place. In 2001, the International Accounting Standards Board (IASB), assumed the role of the International Accounting Standard-Setting Body and has subsequently issued eight standards (IFRS) and 12 interpretations (IFRICS), 11 of which are in effect today.
The United States via the Financial Accounting Standards Board (FASB) currently has a joint convergence project with the IASB which commenced in 2002. As of today, more than 100 countries have or soon will be adopting IFRS as adopted by IASB in some similar manner with Canada, Brazil, India, Japan and Korea adopting within the next few years. Many countries have or are considering IFRS as adopted by the IASB as the sole financial reporting model replacing that country’s existing generally accepted accounting principles (GAAP).
For investors, analysts and other users, comparing the financial statements of two companies in the wholesale distribution industry, one in Buenos Aires, Argentina and one in Amsterdam, Netherlands would be easier with a singular high quality financial reporting model.
What, then, is the United States’ role with IFRS? Currently, all United States public companies report under US GAAP and many privately held US companies use US GAAP or Other Comprehensive Basis of Accounting (OCBOA), which can be the modified cash basis, the income-tax basis or the cash basis which is a deviation from US GAAP. Recently, the US Securities and Exchange Commission (SEC) has agreed to allow foreign private issuers who file Form 20-F to prepare financial statements using IFRS as adopted by the IASB without providing a reconciliation to US GAAP. There is a proposal to allow US public companies the option to utilize IFRS as their basis for reporting rather than US GAAP.
Why would US-based public companies desire to adopt IFRS? As an example, a multinational public company headquartered in New York and having operations in Colorado, France, India, Canada, China, South Africa and Chile, will be reporting its financial information in US GAAP, IFRS, Canadian GAAP and maybe the local GAAP. When each of the foreign locations finally adopt IFRS as adopted by the IASB, financial reporting will then be in two languages - US GAAP and IFRS with the company’s accounting consolidation group needing to be familiar with all the different types of GAAP. To alleviate the need for additional training and costs it would benefit a US company to formally adopt IFRS and have one international reporting standard for the entire entity. Many large multinational companies are and have already explored the utilization of IFRS and its effects.
Recently we have become aware of many private companies located in small towns throughout the US which, because they are subsidiaries of foreign parent companies, are required to report under IFRS. The US auditor, therefore, may have to report under IFRS to the parent.
In the US privately-held company arena, IFRS is in its infancy but those companies and auditors that embrace this new standard will now be on the cutting edge.
What are some of the major differences between US GAAP and IFRS?
- Property and Equipment
US GAAP - use historical cost
IFRS - use either historical cost or revalued amounts
US GAAP - cannot reverse previously written down inventory
IFRS - allows entities to reverse previously written down inventory
US GAAP – can use LIFO method
IFRS – does not permit LIFO
- Financial Statement Presentation
US GAAP - established specific captions
IFRS - balance sheet and income statement minimums but no specific format
- Borrowing costs
US GAAP - capitalization of borrowing costs for qualified assets
IFRS - can either capitalize or expense
- Deferred Taxes
US GAAP - deferred taxes are always provided and if necessary a valuation allowance is required where the realization of those assets is not "more likely than not"
IFRS - requires deferred tax asset only in situations where recognition is "more likely than not"
US GAAP – Two-step process
IFRS – One step process – recoverable amount/discounted cash flows
There are many other differences but these are some of the more prevalent ones.
The US Financial Accounting Standards Board and the IASB have been undergoing a joint convergence project since 2002. I firmly believe that in the not too distant future, the US will converge with the rest of the world and gladly embrace IFRS as the one and only global financial reporting model. This will be the first chapter of my childhood dream as to the world being able to speak one language. Stay tuned for the rest of the story.