Is That a Light at the End of the IFRS Tunnel or Just Another Train?
Helpful guidance for CPA practitioners.
Peter Bible, CPA | CPA Insider | October 22, 2007
Peter Bible
Recently, the U.S. Securities and Exchange Commission (SEC) enacted efforts to move the U.S. capital markets into an integrated global economy. This effort marked the beginning of a potential conversion of accounting standards in which U.S.-based companies could begin reporting their financial activities under the International Financial Reporting Standards (IFRS). Developed and controlled by the U.K.-based International Accounting Standards Boards (IASB), IFRS is currently followed by more than 100 countries. Reporting under IFRS could pose yet another challenge for small American public companies already facing issues such as Sarbanes-Oxley (SOX) and other regulatory compliance requirements.
Discussions at the SEC have also considered requests made by SEC-registered U.S. companies (registrants) to have a choice of issuing financial statements in accordance with IFRS. These two efforts are in line with the roadmap for convergence to establish a global set of generally accepted accounting standards between IFRS and Generally Accepted Accounting Principles (U.S. GAAP), the current reporting method used in the United States (see related story).
Many believe the SEC’s efforts are a good start toward aligning IFRS with U.S. generally accepted accounting principles (GAAP). However, there are still some convergence issues for small U.S. public companies that own international units to consider. Currently, while international units are able to report under IFRS to external institutions the SEC still requires a separate set of financials, as well as the U.S. GAAP reports for U.S. parent companies, required for the consolidation function. If U.S. parent companies had the choice to issue statements under IFRS, there would be one less impediment in the consolidation of international operations.
Overall, it would be prudent for small U.S. public companies that own international units and considering reporting under IFRS to access international markets to commence implementation efforts sooner rather than later.
Here are some suggestions for small U.S. public companies preparing for the implementation of IFRS:
- Identification of U.S. GAAP and IFRS Differences: As differences begin to narrow, there is still a need to identify the disparity between U.S. GAAP and IFRS. Some significant differences between these standards might require a substantial undertaking or have a material impact on the registrants, such as:
- Accounting for Business Combinations: Recalculation of basis might be necessary for consideration of the business acquired, measurement of minority interest, treatment of purchased in-process R&D and recognition of negative goodwill, among other matters.
- Accounting for Leases: Recalculation of basis might be necessary for recognition of gain on a sale and leaseback transaction, inclusion of minimum lease payments and calculation of present value of lease payments, for example.
- Policies and Procedures: The registrants should update their accounting policies and procedures to support compliance with the IFRS standards, as well as ensure consistency throughout the operations.
- Training Employees/Board Members: Successful implementation of the IFRS will occur only if registrants and auditors are thoroughly trained. A major benefit for registrants is that the most worldwide firms have already developed training materials and have implemented IFRS.
- Staffing Employees: Most registrant’s resources are dedicated to keeping abreast of U.S. GAAP and its reporting requirements. It will be necessary to consider a re-allocation of resources that will be dedicated to the IFRS conversion project. As demand for IFRS skill sets increases, it will be more difficult to attract and retain talent.
- Consider Renegotiating Contracts: Re-addressing bank covenants to accept IFRS rather than U.S. GAAP should also be considered. Also, review agreements where submission of U.S. GAAP financial statements is necessary.
- Modify Reporting Techniques and Systems Design: In this stage, it is critical to re-assess if the accounting system currently employed is adequate to accomplish the conversion. Furthermore, consider restructuring and enhancing reporting packages to capture reporting and disclosure requirements of IFRS. Since comparative data is necessary, make sure all data is accessible. After implementing, it is important to re-assess this information to determine if it is consistent, reliable and logical.
- Initiate Discussions With Outside Professionals: Since certain amounts included in the financial statements often require the use of experts, it is important to identify areas that require experts. Independent expertise in areas such as fair value for a business acquired, valuation of contingencies, derivatives and defined benefit plans (pension liabilities), among others, will aid in the conversion process.
Small U.S. public companies will undoubtedly continue to endure financial roadblocks. It seems that IFRS can potentially be the next issue on the horizon causing many to ask the question, “Is that the light at the end of the tunnel, or just another train?”
About the Author
Peter Bible is Officer in Charge of the New York office for Amper, Politziner and Mattia, an accounting firm of certified public accountants, financial consultants and revenue specialists, is one of the fastest growing accounting firms in the region and is ranked 14th in the nation among public company auditors by Public Accounting Report. Amper, Politziner & Mattia is an independent member of Baker Tilly International.
