The Transition from GAAP to IFRS
The Transition from GAAP to IFRS
The Transition from GAAP to IFRS
FASB, The Financial Accounting Standards Board, which oversees the development of GAAP (Generally Accepted Accounting Principles), has so far spearheaded the effort to transition from GAAP reporting standards to IFRS (International Financial Reporting Standards). In 2002, the IASB (International Accounting Standards Board) and FASB jointly pledged, in what has come to be known as the "Norwalk Agreement," to use their best efforts to "make their existing financial reporting standards fully compatible as soon as is practicable."
Understanding the most fundamental challenges of transitioning from GAAP to IFRS requires delving into the intrinsic ideology and history of each reporting system. GAAP is a set of over 2,000 pronouncements, some hundreds of pages long on their own. And while it has evolved to become a very strict rule based guide to accounting standards, it started out as its name would suggest, as a collection of generally accepted accounting principles.
IFRS on the other hand, is essentially a principle driven set of guidelines for accounting standards that puts considerably more discretion into the hands of managers to decide how to report financial information than GAAP. While GAAP is comprised of about 2,000 pronouncements, IFRS consists of only about 2,000 pages of accounting regulations. The large contrast in the amount of source material highlights the stark differences between GAAP and IFRS.
Lawrence M. Gill, a writer for the journalofaccountancy.com, describes the intrinsic difference between GAAP and IFRS with a metaphor that likens IFRS and its underlying principles to, "telling your child to be home at a reasonable hour." and GAAP and its underlying principles to, "telling her to be home at 11 p.m. and then providing for the 15 contingencies that might justify a different time."
In addition to the philosophical differences between reporting standards, there are also notable differences in reporting specific items. For instance, under IFRS companies are allowed to value certain assets such as plant, property and equipment at fair market values instead of cost as it's required to be valued under GAAP. The inventory method LIFO (Last in First Out), is not allowed to be used under IFRS. Under GAAP R&D is expensed when incurred however under IFRS R&D can be capitalized under certain circumstances. Other notable differences relate to the impairment of intangible assets, accounting for sales and lease backs, addressing contingent liabilities, the valuation of inventory and accounting for pension plans.
Lumped in with the difficult task of trying to reconcile GAAP and IFRS are some logistical challenges. For instance, foreign companies have recently been allowed to participate in our stock exchange markets with the option to report solely by IFRS, and it has been suggested that this gives foreign companies an unfair advantage (since US companies would be required to report using two different accounting standards in global operations), and that US companies should also be given the right to exercise that option. But According to David Katz, Deputy Editor of CFO.com, that would mean that, "the SEC would have to recognize IASB as an official authoritative body for setting accounting standards." Which would conflict with the Sarbanes Oxley Act because, "Although the act does not explicitly refer to FASB, it did establish a funding mechanism for it, and says the SEC can recognize only standards-setting bodies that use that funding mechanism."
The FASB thinks that one potential solution to this funding mechanism' problem is to render it moot by eliminating differences between FASB and IASB international reporting standards to create what former SEC chief accountant Conrad Hewitt describes as an, "apples to apples" comparison. He has also stated that, "many see the ultimate endgame as a single standard." Clearly, the SEC understands the logistical problems associated with simply adopting IFRS outright. So their envisioned solution has evolved into a work around. If you can't report by IFRS standards, then make the standards you can report by identical to IFRS.
Recently, relating to the progress of converging GAAP with the IFRS, on February 24, 2010 the SEC held an open meeting to advance their goal of converging GAAP and IFRS for US issuers. At the meeting the SEC unanimously agreed to publish a statement of continued support for a single set of high-quality global accounting standards and stated that "IFRS is best positioned to serve in that role." The statement expresses that sometime in 2011 the SEC will have to make a determination on whether or not to include any additional IFRS accounting practices into our current reporting standards. Though the SEC has been vocal about its wish to transition to a unified reporting standard it is likely that any timeline devised will change in order to accommodate US businesses and their capacity to transition. And since in the current economic conditions businesses are experiencing slow growth and uncertainty, their capacity to transition has been diminished and will likely push back the date at which they're able to convert. But currently the earliest possible date that the SEC has envisioned to start requiring public US companies to issue IFRS statements is 2015.
Stakeholders in this convergence to IFRS may encompass far more than just accountants. The shift may also have drastic implications for the structure of a company according to a 2009 Ernst and Young publication about the shift from GAAP to IFRS, "Although IFRS begins as an accounting change, our experience shows that it quickly permeates the organization, affecting product development, tax, human resources, information technology, treasury, performance management and much more."
Already, approximately 100 countries require, allow or have a policy of convergence with IFRS. Countries such as Japan, the United States and Canada have active programs designed to achieve convergence with IFRS. It is now certain that the world is heading toward a unification of financial reporting standards and IFRS is the blue print of what those standards will likely resemble.
Bibliography
Gill, Lawrence M.. " IFRS: Coming to America ."Journal of Accountancy. N.p. (June 2007). Retrieved November 20, 2010 .
Katz, David. "IFRS or GAAP: Take Your Pick?" - Accounting - CFO.com."CFO.com - News and Insight for Financial Executives. N.p. (2007, May 3). Retrieved November 21, 2010. .
No Attribution. "IFRS vs. GAAP: The basics." Ernst and Young. N.p., (Jan. 2009). Retrieved November 22, 2010 http://www.ey.com/Publication/vwLUAssets/IFRS_v_GAAP_basics_Jan09/$File/IFRS_v_GAAP_basics_Jan09.pdf
Securities and Exchange Commission. (2009, February 19).Roadmap for the potential use of IFRS. Retrieved November 22, 2010, from Securities Exchange Commission: http://www.sec.gov/rules/proposed/2008/33-8982.pdf
FASB & IFRS Memorandum of Understanding. "The Norwalk Agreement" (2002, October 29). Retrieved November 19, 2010 from Financial Accounting Standards Board: http://www.fasb.org/news/nr1
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