International Accounting Standards: Why Convergence is Here to Stay

Target Audience: International Financial Reporting Standards Interest, Accounting Standards News & Updates Interest, Accounting Consulting Firm Interest, Business Owners, Chief Financial Officers

Accounting standard-setters around the world have been working on convergence — or uniform accounting standards among countries — for decades. Progress has been slow, but it has picked up speed in recent years. And, as convergence moves closer to reality, the end of Generally Accepted Accounting Principles (GAAP) may be drawing nearer.

Gaining Ground

More than 100 countries already have adopted country-neutral International Financial Reporting Standards (IFRS); another 50 — including Canada, China, Japan and India — are expected to do so by 2012. The United States recognizes both GAAP and IFRS, but the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) also continue to work diligently and cooperatively on convergence of the two.

Why the push toward global standards? When companies, including manufacturers, prepare financial reports using different standards, it’s more burdensome for investors and creditors. Convergence would allow them to compare financial statements without adjusting for national accounting differences.

In addition, universal high-quality accounting standards can make the world’s capital markets more efficient. That may lower the cost of capital for businesses and encourage global economic growth, which, in turn, may create jobs and lower the cost of goods and services.

Anti-choice Movement

How soon the change will come remains up in the air. Late last year a Securities and Exchange Commission (SEC) proposal to allow foreign firms using IFRS to stop reconciling their accounts to U.S. GAAP rules met with resistance at home and abroad.

The European Federation of Accountants and the U.S.-based FASB both asked the SEC not to implement what FASB termed an “extended period of choice” that would add complexity to the overall reporting system. Instead, the organizations urged the SEC to move more purposefully toward completing the U.S. transition to IFRS.

Key Differences

That transition has been under way for some time, but differences remain. The differences pertain to:

Balance sheets. IFRS doesn’t require a specific format. Typically, assets and liabilities are presented in a current/noncurrent format, unless a liquidity presentation is more relevant and reliable. Companies that use U.S. GAAP rules may present either classified or nonclassified balance sheets.

 

Income statements. No particular format is prescribed with IFRS, but expenditures are presented in either function or nature format. With U.S. GAAP, income statements are presented in either single- or multiple-step formats, with expenditures by function.

 

Historical cost or valuation. U.S. GAAP allows revaluations for only certain types of financial instruments. IFRS uses historical costs, but intangible assets, property, plant and equipment, and investment property may be revalued to fair value.

 

Revenue recognition. IFRS requires recognition when risks, rewards and control have been transferred and revenue can be reliably measured. U.S. GAAP includes extensive guidance for specific types of transactions, though the rules are similar in principle to IFRS.

 

Inventories. IFRS prohibits last in, first out (LIFO). Inventory is carried at the lower of the cost (determined by first in, first out or weighted average) and net realizable value. U.S. GAAP is similar, but allows LIFO.

These are just some of the differences between IFRS and U.S. GAAP. The similarities between the two continue to grow, however, and you should consult your financial advisor as to when you should change to IFRS.

When you do, you’ll be required to apply all effective IFRS standards retrospectively, with some limited exemptions and exceptions. You’ll also have to reconcile profit or loss under the last period you reported under U.S. GAAP, equity at the end of that period, and equity at the start of the earliest period presented in comparatives.

Changing Proactively

The first financial statement under IFRS will require a lot of work to complete, but it seems change is inevitable. You may want to change soon — proactively — rather than wait until you absolutely must.

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