Case Study: U.S. Subsidiaries of Foreign Companies Already Well Versed in IFRS
IFRS | June 24, 2009
An increasing number of CPAs in the United States are gradually gaining experience with International Financial Reporting Standards (IFRS). While most U.S. public companies are waiting for the Securities and Exchange Commission (SEC) to decide on a definitive strategy or timetable for either convergence of U.S. GAAP with IFRS or full IFRS adoption, many financial executives at U.S. subsidiaries of foreign-owned firms are doing double duty.
Michael Erdmann, for example, the controller at Krones Inc., a Wisconsin-based subsidiary of Krones AG, a German manufacturer of fully integrated packaging and bottling line systems with sales of more than 2.3 billion Euros last year, currently prepares financial statements in both U.S. GAAP and IFRS. “We still need to report to our banks and to the IRS in U.S. GAAP,” he explains, “while our parent company needs our financial statements in IFRS.”
Erdmann estimates that it takes between one and two days per month of someone’s time to do the conversion, and that he and others at Krones are getting valuable experience with using IFRS. He points to a number of differences between the two sets of standards. For Krones Inc., the two most significant differences are in the area of revenue recognition and the inability to use LIFO (last-in, first-out) under IFRS.
Erdmann says that as a result of these and other differences, Krones Inc. shows more profit using IFRS than it does using U.S. GAAP. But that’s not why he looks forward to the day when he can use a single set of global standards. “Not having to keep track of two different methods would certainly simplify things,” he acknowledges. “And the use of IFRS everywhere would make it much easier to compare financial information.”
But Erdmann believes that in many instances, U.S. GAAP and IFRS are already more similar than many people think. “If you fulfill the strict rules of U.S GAAP, they tend to fit with the general principles of IFRS,” he explains. “I think as accountants, we’ll have to adjust our thinking. Maybe there is an apprehension on the part of the accounting community that we are going to have to use more judgment. But in my experience, this apprehension is unjustified.”
Conversions Can Be Complicated
Janice Butler is the controller at the Connecticut-based Strategic Minerals Corporation, owned by the Russian conglomerate, the Evraz Group S.A., one of the largest vertically-integrated steel, mining and vanadium companies in the world. Like Erdmann, Butler says that she reports her company’s results in both IFRS and GAAP. “A minority share of the company is still owned by U.S. investors, so in addition to bank financing, we also need to report to our U.S. shareholders in U.S. GAAP,” she explains. “Conceivably we could at some point change our bank covenants, and get our U.S. shareholders to accept results in IFRS, and that would allow us to stop using U.S. GAAP altogether. But at this point we use both sets of standards, mainly because that’s the way we’ve always done it.”
Butler says that, “If we continue to move toward convergence, it will be interesting to see which standards will be followed.” She explains that for 2006, the corporate parent converted the financial results of Strategic Minerals into IFRS, but beginning in 2007 it asked the local subsidiaries to do it themselves. “There were certain adjustments that had to be made,” she explains, “including adjustments for pension obligations and the way fixed assets are valued. It’s a challenge. We’re trying to see if we can come up with an Excel spreadsheet that will do some of the calculations for us.”
Butler also points to accounting for income taxes as a source of differences, but recognizes that the IASB (International Accounting Standards Board) and the FASB (Financial Accounting Standards Board) in the United States might be working toward convergence in this area. In fact, an exposure draft to replace IAS 12, Income Taxes, was issued by the IASB in March 2009.
But Butler has to be concerned with more than just two sets of standards. “We also have a location in South Africa,” she notes. “We have to change their local currency into U.S. dollars, report each individual company in U.S. GAAP, consolidate it, then reconsolidate into IFRS, then send it over to our parent in Russia.”
Both Butler and Erdmann have come to understand that IFRS are more open to interpretation than U.S. GAAP. “I’d probably say they are equally difficult,” says Erdmann. “IFRS tends to have less guidance.”
“IFRS increases the degree of judgment and interpretation that will be expected of CPAs,” agrees Butler. “That means different people are going to look at similar transactions and perhaps come to different conclusions. A related issue is that it is more difficult to read financials in IFRS. You have to take a careful look at the footnotes, where the explanations of decisions are disclosed.”
Learning on the Job
Howard Fowler, who worked as a CFO for a large division of a European-owned company from 2003 to 2007, says that he “had to learn IFRS on the job. While it was not so complicated for us since we were only a single division, it will be more complex for large U.S.-based multinationals, particularly for affiliates in non-U.S. jurisdictions that have to understand local GAAP, U.S. GAAP and IFRS all at the same time.”
“We had no formal training in IFRS, so we were learning things on the fly,” explains Fowler, who also says he did not find a significant difference in bottom line earnings between the two sets of standards. “We were audited by a large U.S. firm, but back then they had to bring in auditors from other countries. There is still a real education gap. With IFRS, initially U.S. CPAs are going to be looking for those bright line rules, and they’re not going to find them.”
One Not Better Than the Other
Even those who regularly work with IFRS find the learning curve to be steep, but nevertheless look forward to the day when converting from one to another will no longer be necessary. “Sure I prefer U.S. GAAP,” says Butler, “because I have more experience and am more familiar with it. On the other hand, it would be a lot easier to report everywhere using one standard.”
While there is a comfort level with U.S. GAAP that generally does not yet exist for IFRS among most CPAs, those who are currently using both standards are hesitant to say that one is better than the other. “I don’t know if either is better,” agrees Erdmann. “That’s kind of like asking which country is better.”
For daily updates, training courses, case studies and other informational resources, visit www.IFRS.com.
