October 29, 2009
The Securities and Exchange Commission has established a "roadmap" with 2014 as the year when companies that currently issue 10-K reports must convert to International Financial Reporting Standards (IFRS).
A universal accounting language around the world is expected to provide investors of publicly traded companies with comparable information and greater transparency in financial reporting.
However, as with most changes of this magnitude, the effective date may be delayed, but ultimately, the adoption of IFRS is inevitable.
What could this mean for your business? Here are some differences between IFRS and U.S. GAAP (Generally Accepted Accounting Principles):
IFRS does not allow the use of the LIFO (last-in, first-out) inventory method. (See right-hand box for information about a possible repeal.)
By design, IFRS contains very limited guidance and places the onus on management to appropriately record and report financial performance. In contrast, U.S. GAAP is detailed and there is industry specific guidance.
IFRS requires that a minimum of one year of comparative information is presented in financial statements. Under U.S. GAAP, comparative information is not mandatory (the SEC does however mandate comparative information).
Under IFRS, accounting policies of all subsidiaries must conform to those used by the parent company. Under U.S. GAAP, this is not a requirement.
Additional considerations:
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Existing lending arrangements a company has may require compliance with financial measures that are based on U.S. GAAP. Unless the loan terms are rewritten, it may be necessary to produce financial statements using both U.S. GAAP and IFRS.
There may potentially, at least in the short term, be a lack of financial professionals with IFRS knowledge and experience in your finance department, as well as outside companies your business deals with.
The volume of guidance material available regarding IFRS, at least initially, will be rather limited, especially as it relates to unique circumstances that are not often encountered in the regular course of business. The lack of appropriate guidance will be further complicated by the fact the IFRS is generally less rigid than U.S. GAAP and therefore open to more interpretation.
Subsidiaries may be required to conform to IFRS in advance of the deadline for U.S. based companies. Therefore, U.S. companies should consider developing a shared services infrastructure to support subsidiary reporting which, in turn, can assist with the migration to IFRS reporting for the remainder of the company.
Enterprise resource planning (ERP) software may need to be upgraded or replaced in order to support IFRS requirements. Further, the type of data needed to prepare IFRS financial statements will differ from the information currently required for U.S. GAAP reporting.
Human resource, finance and operations departments will need to work together to develop revised training, education, compensation structures, accounting policies and procedures, as well as standard business contracts to reflect the change from U.S. GAAP to IFRS
Give your company time. Under the proposed roadmap, IFRS will be mandatory only for publicly traded organizations by 2014. But many privately held companies are also expected to adopt the standards. The shift to IFRS will significantly affect the global business environment and at some point, companies that aren't using international standards may be at a disadvantage. Given that it takes an estimated two to five years to fully adopt IFRS, your business may want to begin to assess its ability to make the switch.
Could LIFO Be Repealed?
International Financial Reporting Standards (IFRS) are closer to becoming a reality in the United States now that the SEC set out a timetable for adopting them.
However, LIFO is prohibited in valuing inventory under IFRS.
If the U.S. and the Financial Accounting Standards Board were to fully adopt the international accounting language, experts say Congress is likely to make major changes to the LIFO tax rules or even repeal them. A LIFO repeal would cause large tax increases for auto dealerships, retailers, distilled spirits companies, medical supply firms, manufacturers and other businesses.
You may ask: Can't a company just use LIFO for tax purposes and not for accounting purposes? Unfortunately, a tax law provision states that a business cannot use tax LIFO unless it also uses financial statement LIFO.
Congress has discussed eliminating LIFO in the past, but industry groups lobbied hard to maintain its use. And earlier this year, President Obama proposed repealing it in his 2010 budget, beginning in 2012. (Exactly how the repeal would be structured is not detailed in the budget.)
Current status: LIFO is safe for now. But many industry leaders and tax professionals are concerned about the adoption of international accounting standards and the continued possibility that Congress will look at LIFO as a way to raise large amounts of revenue. Stay tuned.