IFRS Overview

The most important change to take place in accounting and financial reporting in years is the convergence (adoption) around IFRS by over 100 countries worldwide. These countries have abandoned what was referred to colloquially as “National GAAP” (Generally Accepted Accounting Principles) for IFRS. Here, we, of course, refer to our system as U.S. GAAP or just “GAAP.”

The U.S. Financial Accounting Standards Board (FASB) is engaged in a significant program of work with the International Accounting Standards Board (IASB) to converge IFRS and U.S. GAAP. IFRS is likely to be permitted in the U.S. perhaps as early as in 2009 for some companies, according to the Securities and Exchange Commission (SEC). The others may be phased in around 2014.

Background

IFRS are standards and interpretations adopted by the IASB. [Many of the standards forming part of IFRS are known by the previously existing name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the board of the International Accounting Standards Committee (IASC). In 2001, the IASB adopted all IAS and continued to develop standards and calling them IFRS.]

Fewer than 40 countries worldwide prohibit the use of IFRS, but upon closer inspection, one finds that this simply means that several of them have convergence with IFRS slated for a future date. Albeit with some uncertainty, China, Canada and the U.S. are among these countries for which IFRS is now prohibited, but is on a path toward accepting them.

Accounting Principles and Applicability of IFRS

The IASB has the authority to promulgate IFRS and interpretations. IFRS are intended to be applied by profit-oriented entities to their financial statements in order to provide information financial position, operating performance and cash flow that is useful to decision makers such as shareholders, creditors, employees and the general public.

Just as in U.S. GAAP, a complete set of financial statements includes:

• Balance sheet
• Income statement
• Statement presenting all changes in equity or changes in equity other than those
  arising from capital transactions with owners and distributions to owners
• Cash flow statement

The accounting policies and notes to the financial statements are considered an integral part of the presentation (the same as in U.S. GAAP).

Similar to FASB concepts, IFRS underlying accounting practices are laid out in the IASB’s “Framework for the preparation and presentation of financial statements.”

U.S. Convergence with IFRS

In 2002, the IASB and FASB agreed to coordinate to reduce the differences between IFRS and U.S. GAAP (referred to as “the Norwalk Agreement;” Norwalk, Conn. being the location of the FASB headquarters). In 2006, FASB and IASB issued a “Memorandum of Understanding” (MoU) that included a program of topics on which the two bodies would seek to achieve convergence by 2008.

U.S. companies registered with the SEC must file financial statements prepared in accordance with U.S. GAAP. Until 2007, foreign private issuers who did not file financial statements with the SEC utizling U.S. GAAP were permitted to use “local accounting principles” or IFRS provided that they included a footnote with a “reconciliation” from local principles or IFRS to U.S. GAAP.

This reconciliation resulted in additional costs on foreign corporations that listed themselves on U.S. exchanges. Beginning in 2008, the SEC voted to allow foreign private issuers to file financial statements in accordance with IFRS as issued by the IASB without reconciliation to US GAAP.

In August 2008, the SEC announced a “roadmap” to IFRS that would allow some companies to report under IFRS as soon as 2010 (2009 in instances of “early adoption”). The roadmap outlines a series of milestones that must be met before the SEC requires some public companies to file in IFRS by 2014. The SEC will meet in 2011 to decide if those milestones have been achieved and to continue with the roadmap to IFRS.

SEC Speaks—IASB Acts

The IASB intends to make improvements to IFRS deliberately in a continuing promulgation of standards to improve reporting.

• International Accounting Standards Committee Foundation (IASCF) & IASB will be accountable and independently funded
• Issues related to Extensible Business Reporting Language (XBRL)—the language for the electronic communication of business and financial data—compatibility will be explored
• Re-educating and training U.S. professionals will be necessary

Nothing is final, but a sense of inevitability is being felt by regulated companies and being portrayed by regulators and authoritative bodies. As the onset of IFRS adoption seems to near, the accounting profession ought to let advance concern give way to advance planning.

Costs and Benefits

As with any change, the move to IFRS has it advantages and disadvantages. While it might prove to be moot, these are some of the most frequently touted:

Pros

• IFRS is less detailed than U.S. GAAP
• IFRS is easier to use and will result in better reporting
• Investors prefer IFRS
• IFRS is a “global” approach; comparability to financial statements from other countries that have already adopted IFRS

Cons

• IFRS is less detailed than U.S. GAAP
• IFRS fails the cost/benefit analysis
• Transition periods will cause disconcerting results
• U.S. GAAP is superior to IFRS in theory