IFRS in the United States: Challenges

Globalization of financial reporting is becoming a reality with 2015 fast approaching.  Those involved in the process of this globalization believe that global financial reporting will improve the functioning of global capital markets by providing more accurate information to investors and other users of these reports.  The objective is to come up with one set of standards that will make interpretation of financial reports more uniform and easier to compare the information provided.  Many global firms that operate in many countries have a common complaint.  It is costly to prepare and audit financial statements using many sets of standards.

Many challenges, however, still remain.  No change is made without resistance including this convergence from Generally Accepted Accounting Principles to International Financial Reporting Standards.  This change is huge in the financial industry.  Outside the United States, there is concern that the U.S. will dominate the global market.  The International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) have been working together to come up with one set of accounting standards.  The two boards issued the “Norwalk Agreement” which, in part, stated that the two boards would work together to converge both set of standards into a highly qualified set of global standards.  Presently, most major agenda projects are a joint effort.  The goal is for the standards issued by the two boards to be identical so as to not leave any room for discrepancies in interpretation.  Is the convergence working?  Apparently so.  Critics at first were skeptical and said the project was doomed for failure for numerous reasons including the political and cultural differences between the FASB and IASB.  Both sides have succeeded at a surprisingly faster pace than anticipated.  The overall goal of the two organizations is for all major capital markets to be in position for the United States to adopt IFRS by 2015.

Another challenge facing the adoption of IFRS is the need for skilled personnel.  Training existing staff and management will be a time consuming process and there will also be a need for personnel with sufficient experience in the application of IFRS to ensure a satisfactory transition.

Information systems and technology raises a concern also.  Systems running multiple charts of accounts and consolidation methods will need to be brought in sync with each other.  This could be costly.   The SEC compiled the results of over 200 comment letters it received in response to the IFRS roadmap.  Thirty three percent of the people sighted lack of accounting technical guidance was the main concern along with seven percent concerned about insufficient technology.  Is the United States ready for this challenge?

Click to access Top-Acc-13-ebook-final.pdf

Click to access 28.pdf

U.S. GAAP and IFRS: A Brief History

With the stock market crash in 1929 and the plunge of the economy into a Great Depression, it was necessary to set government regulations on businesses; especially financial institutions and the stock market.  The government established what is known as the Securities and Exchange Commission to help standardize financial information given to stockholders.  When the SEC was organized, there were no accounting standards.   Over the years, organizations were formed to develop accounting standards.  The SEC relied on the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA).  Today, the AICPA’s role in standard-setting has diminished.  The SEC relies on the FASB (primary US accounting rule maker since the 1970’s) to develop accounting standards.  The ultimate purpose of accounting standards is to establish a common set of rules and procedures in preparing financial statements so as to not mislead the users and preparers of these accounting statements.  Today, generally accepted accounting principles or (GAAP) are the accounting rules used to prepare the three basic financial statements called the balance sheet, income statement and statement of cash flows.

Without GAAP, companies would be able to report when and what they want on their financial statements.  Investors and creditors would have a difficult time in interpreting the true financial status of a company.  GAAP requires financial statements to be consistent, reliable and comparable.  The current set of standards used in the United States has over 25,000 rules.

The International Financial Reporting Standards (IFRS) is a standard set of accounting rules used basically by over 100 countries and consists of approximately 2,000 rules.  These rules are set by the International Accounting Standard Board (IASB) based in London.  It is made up of 14 members from nine countries.   Over 12,000 companies in over 100 countries are using the International Financial Reporting Standards.

On August 27, 2008, the Securities and Exchange Commission announced their plan to convert all listed companies in the United States from Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS).  They have been in favor of one set of standards since the 1990’s.  They have mapped out a timeline for this conversion which was supposed to have taken place in 2014 but has been delayed until 2015.  It is imperative, according to the SEC, that a global set of standards be used for financial reporting.  There needs to be consistency in reporting financial information to worldwide investors.

What does this conversion from Generally Accepted Accounting Principles to International Financial Reporting Standards mean for companies in the United States and will it help or hurt them?

http://www.legalzoom.com/business-management/running-your-business/general-accepted-accounting-principles-or