Before the dust had even settled on their ruling to end the requirement that foreign companies listing in the U.S. reconcile financial statements based on International Financial Reporting Standards (IFRS) to U.S. generally accepted accounting principles (U.S. GAAP), the Securities and Exchange Commission (SEC) last month signaled its intention to consider allowing U.S. companies the option to use IFRS in place of U.S. GAAP. The commission initiated discussion through a "Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with International Financial Reporting Standards."
A concept release is not a rule, but the questions raised were far reaching. Some immediate practical concerns U.S. companies should consider before changing their primary GAAP to IFRS were discussed in a Webcast, "IFRS - An Option for U.S. Issuers," conducted by partners from Ernst & Young (E&Y) three weeks after the concept release was issued. The webcast was also supported by the Financial Executives Institute (FEI). Among the concerns addressed by the participants were how much time it would take for companies and their auditors to convert to IFRS, what kind of added costs would the change entail, and how well do IFRS compare to U.S. GAAP.
"The costs will be significant. The effort will be significant," said Danita Ostling, an E&Y partner, beginning with assessing IT capability and the technology costs of implementation and training personnel to conduct the audits.
Accounting firms and academic accounting departments will have to make a concerted education to prepare auditors for the global standards, Ostling said, adding that E&Y would conduct necessary training for its own auditors. David L. Holman, E&Y partner, who moderated the discussion, said that webcast participants included accounting professors who had requested suggestions for materials to use in courses on global standards. Holman offered that E&Y had prepared a book on the subject; Ostling said she was aware that other firms and publishers were also at work preparing training materials.
While training will be expensive, Ostling admitted, IFRS and U.S. GAAP have many similarities. Accounting education in the U.S. is based on principles, and introducing the principles-based IFRS to the accounting curriculum will not be that difficult.
Ostling predicted that if the SEC rules in favor of the option, it would give U.S. companies at least three years to transition - the time allowed foreign companies to convert from their national GAAP to IFRS.
Ostling admitted that comparability presented issues, including the matter of what bodies in the U.S. and Europe would determine how the standards were comparable. It was too early to tell, for example, what the differences might be on income or earnings, she said. A great deal would depend on elections made prior to adopting IFRS 1 and the company's disclosures.
Early analysis of the differences has shown that IFRS reporting can result in higher income. A recent survey by Citigroup of 73 European companies that had performed reconciliations to U.S GAAP in order to list in the U.S. found 426 reconciliation differences, Accountancy Age reports. Eighty-two percent had higher net income under IFRS while book value was lower for about 70 percent of the sample. Other areas where differences arose were treatment of tax, pensions, goodwill and intangible assets, and financial instruments.
IFRS enable companies to be more flexible about when they recognize revenue, according to Jay Howell a partner at BDO Seidman, CFO.com reports. Under IFRS, a company can show revenue growth "faster than a company that uses U.S. GAAP." This would benefit technology companies who have to compete with foreign technology companies listing in the U.S. and reporting higher revenue under IFRS.
Howell believes that the SEC will eventually decide to allow U.S. companies to report according to IFRS.
The SEC has support in the government and the business community. "There is a growing consensus around the need to have international standards," says Robert J. Kueppers, deputy CEO of Deloitte & Touche USA LLP. "It's striking how quickly that consensus has formed, as very senior people in the Administration, from the SEC to the Department of the Treasury, are focusing on the issue." While FASB and the IASB have been working methodically to converge standards, "I think the policymakers have made it more of a priority, and they're saying we can accelerate it," says Kueppers, according to a separate report in CFO.com.