- What is IFRS?
International Financial Reporting Standards (IFRS) are a
set of accounting standards developed by the International Accounting
Standards Board (IASB) that is becoming the global standard for the
preparation of public company financial statements. - What is the IASB?
The IASB is an independent accounting standard-setting
body, based in London. It consists of 15 members from nine countries,
including the United States. The IASB began operations in 2001 when it
succeeded the International Accounting Standards Committee. It is funded
by contributions from major accounting firms, private financial
institutions and industrial companies, central and development banks,
national funding regimes, and other international and professional
organizations throughout the world. While the AICPA was a founding
member of the International Accounting Standards Committee, the IASB's
predecessor organization, it is not affiliated with the IASB. The IASB
neither sponsors nor endorses the AICPA's IFRS resources website (ifrs.hongjingedu.com). - How widespread isthe adoption of IFRS around the world?
Approximately 120 nations and reporting jurisdictions
permit or require IFRS for domestic listed companies, although
approximately 90 countries have fully conformed with IFRS as promulgated
by the IASB and include a statement acknowledging such conformity in
audit reports.1 Other
countries, including Canada and Korea, are expected to transition to
IFRS by 2011. Mexico will require IFRS for all listed companies starting
in 2012. Japan has introduced a roadmap for adoption that it will
decide on in 2012 (with a proposed adoption date of2015 or 2016) and
is permitting certain qualifying domestic companies to apply IFRS from
fiscal years ending on or after March 31, 2010. Still other countries
have plans to converge their national standards with IFRS. - What is the possibility of the Securities and Exchange Commissionsubstituting IFRS for GAAP?
For many years, the SEC has been expressing its support
for a core set of accounting standards that could serve as a framework
for financial reporting in cross-border offerings. Most recently on
February 24, 2010, the SEC issued release Nos. 33-9109 and 34-61578, Commission Statement in Support of Convergence and Global Accounting Standards.
In the release, the SEC stated its continued belief that a single set
of high-quality globally accepted accounting standards would benefit
U.S. investors and its continued encouragement for the convergence of
U.S. GAAP and IFRS. The release also called for the development of a
work plan (the “Work Plan”) to enhance both the understanding of the
SEC’s purpose and public transparency in this area. Execution of the
Work Plan, combined with the completion of previously agreed upon
convergence projects between the FASB and IASB according to their
current schedule, will permit the SEC to make a determination, in 2011,
regarding incorporating IFRS into the financial reporting system for
U.S. issuers.
The SEC made clear that it envisions 2015 as the earliest possible date for the required
use of IFRS by U.S. public companies.However, in the statement
approved February 24, the SEC said while it is not pursuing an early
adoption option, it could reconsider this position later.To learn more
about the SEC’s Statement in Support of Convergence and Global
Accounting Standards and its Work Plan, click here.
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- What are theadvantages of converting to IFRS?
By adopting IFRS, a business can present its financial
statements on the same basis as its foreign competitors, making
comparisons easier. Furthermore, companies with subsidiaries in
countries that require or permit IFRS may be able to use one accounting
language company-wide. Companies also may need to convert to IFRS if
they are a subsidiary of a foreign company that must use IFRS, or if
they have a foreign investor that must use IFRS. Companies may also
benefit by using IFRS if they wish to raise capital abroad. - What couldbe the disadvantages of converting to IFRS?
Despite a belief by some of the inevitability of the
global acceptance of IFRS, others believe that U.S. GAAP is the gold
standard, and that a certain level of quality will be lost with full
acceptance of IFRS. Further, certain U.S. issuers without significant
customers or operations outside the United States may resist IFRS
because they may not have a market incentive to prepare IFRS financial
statements. They may believe that the significant costs associated with
adopting IFRS outweigh the benefits. - What is the difference between convergence and adoption?
Adoption would mean that the SEC sets a specific timetable
when publicly listed companies would be required to use IFRS as issued
by the IASB. Convergence means that the U.S. Financial Accounting
Standards Board (FASB) and the IASB would continue working together to
develop high quality, compatible accounting standards over time. More
convergence will make adoption easier and less costly and may even make
adoption of IFRS unnecessary. Supporters of adoption, however, believe
that convergence alone will never eliminate all of the differences
between the two sets of standards. - Who are the key players in the United States regarding the development and adoption of IFRS?
The key players are the Securities and Exchange
Commission, which is responsible for the supervision and regulation of
the securities industry and has oversight responsibility for the FASB;
the Financial Accounting Standards Board, an independent body that
establishes and interprets U.S. GAAP; and the IASB, which is working
with the FASB on the convergence of U.S. GAAP and IFRS. The AICPA has
provided thought leadership to the IASB and the FASB on financial
reporting topics.
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- Have any major U.S. companies begun transitioning to IFRS?
Until the Securities and Exchange Commission issues a
rule allowing or requiring U.S. public companies to adopt IFRS, they
must continue to prepare their financial statements under U.S. GAAP.
Several large multinational corporations,however, have started using
IFRS for their foreign subsidiaries where allowed by local law. Also,
some U.S. subsidiaries of foreign-owned companies are also using IFRS. - When comparing IFRS and GAAP, what are some overall key differences I should be aware of?
The biggest difference between U.S. GAAP and IFRS is
that IFRS provides much less overall detail. Its guidance regarding
revenue recognition, for example, is significantly less extensive than
U.S. GAAP. IFRS also contains relatively little industry-specific
instructions. - What are some of the most important specific differences between IFRS and U.S. GAAP?
Becauseof longstanding convergence projects between
the IASB and the FASB, the extentof the specific differences between
IFRS and GAAP has been shrinking. Yetsignificant differences do
remain, most any one of which can result insignificantly different
reported results, depending on a company's industry andindividual
facts and circumstances. For example:
• IFRS does not permit Last In, First Out (LIFO).
• IFRS uses a single-step method for impairment write-downs rather than
thetwo-step method used in U.S. GAAP, making write-downs more likely.
• IFRS does not permit debt for which a covenant violation has occurred
to be classifiedas non-current unless a lender waiver is obtained
before the balance sheetdate. - Is the possible conversion to IFRS from U.S. GAAP solely a financial reporting issue?
Conversion to IFRS is much more than an accounting
exercise. It will affect many aspects of a U.S. company's operations,
from information technology systems and tax reporting requirements, to
internal reporting and key performance metrics and the tracking of
stock-based compensation.
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- What other areas of the profession will IFRS affect?
As IFRS grows in acceptance, most CPAs, financial
statement preparers and auditors will have to become knowledgeable about
the new rules. Others, such as actuaries and valuation experts who are
engaged by management to assist in measuring certain assets and
liabilities, are not currently taught IFRS and will have to undertake
comprehensive training. Professional associations and industry groups
have begun to integrate IFRS into their training materials,
publications, testing, and certification programs, and many colleges and
universities are including IFRS in their curricula. Some textbooks are
already covering IFRS, primarily in a comparative presentation to their
instructions on U.S. GAAP. New textbooks covering IFRS are currently
being written and should be in circulation in the reasonably near
future. - What are the likely costs of converting to IFRS?
The costs would be determined largely by the size and
nature of the respective company. While the initial cost to identify and
quantify the differences between U.S. GAAP and IFRS, staff training and
implementing IT support could be significant, the conversion also could
result in an ultimate reduction of costs for capital and financial
reporting related to operations. In its proposed roadmap to move all
U.S. publicly traded companies to the global standards issued in
November 2008, the Securities and Exchange Commission estimated that the
largest U.S. registrants that adopt IFRS early would incur about $32
million per company in additional costs for their first IFRS-prepared
annual reports, and that the average U.S. company would incur costs of
between 0.125% to 0.13% of revenue. - What should I do now?
The bottom line is that CPAs need to begin to prepare
for the day in the not-so-distant future when the Securities and
Exchange Commission could designate a date for voluntary, or even
mandatory, adoption of IFRS by all U.S. public companies. Also, be aware
that the way financial statements are prepared differs based on whether
a company is using IFRS, U.S. GAAP, or another country's GAAP. Keep
abreast of SEC developments regarding IFRS and its potential adoption by
U.S. companies, and of the various efforts to allow nonpublic companies
to use IFRS as well. Two good sources of information are the AICPA's
Web site at ifrs.hongjingedu.com, and the SEC Web site at www.sec.gov. - If the United
States mandates IFRS for publicly traded companies, will private
companies and not-for-profit organizations be required to adopt IFRS?
The simple answer is no. All the discussion thus far about
the possibility of the Securities and Exchange Commission designating a
future date for voluntary, or even mandatory, adoption of IFRS has been
for U.S. public companies only.
That said, many privately held companies adopted provisions of the
Sarbanes-Oxley Act, such as the formation of independent audit
committees. Many might take similar action regarding IFRS, even if they
are not mandated to do so.
On December 17, 2009, the AICPA, the Financial Accounting Foundation
(FAF) and the National Association of State Boards of Accountancy
(NASBA) announced the establishment of a blue-ribbon panel to address
how U.S. accounting standards can best meet the needs of users of
private company financial statements.The panel will provide
recommendations on the future of standard setting for private companies,
including whether separate, standalone accounting standards for private
companies are needed. A report is expected in the early part of 2011.
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- What actions are being taken that could allow private companies to follow IFRS?
The AICPA's governing Council in May 2008 approved
amending Rules 202 and 203 of the Code of Professional Conduct to
recognize the IASB as an international accounting standard setter. That
removed a potential barrier and gives U.S. private companies and
not-for-profit organizations the choice whether to follow IFRS. - 18. What might make some private companies in the United States adopt IFRS?
The eventual adoption of IFRS by small businesses and
not-for-profit organizations is likely to be market driven. The IASB has
developed a version of IFRS for small and medium-size entities that
would minimize complexity and reduce the cost of financial statement
preparation, yet allow users of those entities' financial statements to
assess financial position, cash flows, and performance. IFRS for Small
and Medium Entities (SME) was released on July 9, 2009. You can view
questions and answers developed by the AICPA regarding IFRS for SMEs here. - Will IFRS be incorporated into the Uniform CPA Exam?
Yes. The AICPA Board of Examiners in May 2009 announced
that exam content updates have been developed and, for the first time,
IFRS will be eligible for testing on the Uniform CPA Exam starting in
2011.