subject: IFRS: There's a New Kid in Town [print this page] IFRS: There's a New Kid in Town IFRS: There's a New Kid in Town
IFRS: There's a New Kid in Town!
IFRS: We've all heard talk of it; things are changing, and globalization is shifting the accounting industry into a new era. The Securities and Exchange Commission may be requiring companies to convert from the Generally Accepted Accounting Principles to the International Financial Reporting Standards as early as 2014. While this conversion is not yet set in stone, the issue has long been debated and has gained substantial momentum, so much so that now more than 120 countries already use IFRS, and many more are in the process of converting or deciding to convert, just as we are. Before you know it, accounting standards as we know them will be just a memory. Before all this can happen, companies and businesspeople nationwide need to prepare for the new kid in town: IFRS.
The International Financial Reporting Standards may seem unnecessary at first, but the conversion is indeed necessary. Standards are the language of financial reporting, and just as you can't understand those who don't speak your language, you may not understand financial statements from a foreign company. If you're an investor, you may be comparing multiple companies' financial statements and choosing the wrong one due to the fact that some are in accordance with GAAP, and some are the product of IFRS. You could be unintentionally misled due to the differences in representation. Both the users and the creators of financial statements will benefit from this change. The investors, creditors, and other users will be able to understand any set of statements from any country, and accountants will have a world full of career opportunities once they understand IFRS. Today's students will be in highest demand as they will be the first to have attained formal education of the International Financial Accounting Standards, and therefore they should be especially appreciative of the changes. Those that are not currently in school should consider taking a course, attending a seminar, or doing some research to ready themselves for the switch.
Evidently, the conversion from GAAP to IFRS will require some changes. This means that accountants and business people should familiarize, if not completely understand, themselves with the changes that come with this type of adaptation. Some of the most significant changes involve inventory, asset valuation and depreciation, intangible valuation, and the general concept. In IFRS, LIFO (Last in First Out) inventory costing is not acceptable. In GAAP, it is. If a company that normally uses GAAP (such as an American company) is trading worldwide (which is not at all uncommon), they must convert their financial statements to IFRS and thus must completely revalue their inventory. This can be both a non-pleasant experience as well as a costly expense for a retailer such as Wal-mart. Additionally, IFRS allows for the reevaluation of an asset's value to the fair market value with an adjustment to depreciation expense allowed. They may even recover the value written off in subsequent years. GAAP does not. IFRS allows for the capitalization of some research and development costs as long as they meet certain criteria, whereas GAAP only allows for the capitalization of costs for the development of software. This would greatly affect the valuation of assets for a firm with a lot of intangible non-software assets. The last major significant difference between US GAAP and IFRS is that GAAP is much more rules-based and IFRS is principles-based. To demonstrate, IFRS is more representative of a guiderail than the train tracks that are the US GAAP. IFRS just lays out the framework and wants accountants to stay within the dotted lines, which US GAAP tells us exactly how it is to be done, and it should be done that way. GAAP is stricter and has many more written pronouncements than the IFRS does. Furthermore, IFRS's has only a fraction of GAAP's rules. You can see now why the two sets of standards are so different.
In conclusion, there are many facts that the Securities and Exchange Commission should consider as we move forward as a nation to accept, convert to, and adopt the IFRS . There are many reasons why the International Financial Reporting Standards are more convenient and easier for the entire planet to conform to than to convert quarterly or even yearly statements to IFRS so that they can be easier for other countries' investors and business people to understand. Firstly, companies with multinational subsidiaries would spend less time and money on translating and remeasuring the financial statements. The initial lack of understanding of IFRS would be easily overcome as new graduates entered the market, and as older CPA's took a class or two to continue their education. Secondly, IFRS is a general framework while GAAP consists of stricter rules. This becomes far easier to understand for most. A system of specific rules that must be memorized is much harder to learn than a system of general guidelines that point you in the right direction. Overall, the conversion from The Generally Accepted Accounting Principles to the International Financial Reporting Standards will be a pretty comfortable switch.
