The SEC’s proposed change from
Generally Accepted Accounting
Principles (U.S. GAAP) to International Financial Reporting Standards
(IFRS) has many executives scratching
their heads. Rumors persist about whether
the change will ultimately affect private
companies, and the 2014 compliance date
for public companies requires further clarification. As the SEC takes final comments
about the proposed change, CEOs must
separate truth from fiction to understand
the true business impact of IFRS and prepare to comply with its passage.
“We’ve generally thought that we have
the best accounting standards here in the
U.S.,” says Rick Smetanka, CPA, partner-in-charge of audit and business advisory services for Haskell & White LLP. “Now, given
the growth in international equity markets,
it’s become clear that we need to get on
board with the rest of the world or risk
being left behind. However, with any
change, there’s often uncertainty and misinformation in the air, and the inevitable
change to IFRS is no exception.”
Smart Business spoke with Smetanka to
understand the reasons behind the change
to IFRS and to extract the truth about its
impact on U.S. businesses.
What’s the real likelihood of this change
occurring?
It’s a myth that this change will never take
place because the U.S. has the best
accounting standards in the world. While
we’ve been focused on the credit crisis and
the slowing economy in this country, one
by one the countries in Asia and the
European Union have adopted these standards. The reality is, given the growth in
India, China and other international markets, U.S. capital markets have been getting relatively smaller so we’re no longer
the dominant global force that we once
were. This time it’s not a bluff; the global
standards are coming.
Won’t this change strictly impact public companies with international operations?
There’s no truth to the myth that your
company must have international operations to be affected. This new way of
reporting will apply to public domestic
companies whether they have international operations or not. While it’s true that the
changes will impact public companies first,
ultimately, IFRS will likely spell the death
of U.S. GAAP. Even private companies,
especially those posturing for a buyout or
an initial public offering (IPO), will be
impacted or face the possibility of having
to recast their financials under international standards to complete M&A or other
financing transactions.
Full implementation isn’t scheduled until
2014; what’s the rush?
While 2014 is the proposed implementation date for most U.S. public companies,
those companies will also be required to
report their 2012 and 2013 financial statements using IFRS for comparison purposes. Further, a select group of approximately 100 of our largest public companies may
actually start reporting under the standards beginning in 2009. Given the systems
changes that need to take place, the companywide education and preparation
efforts that will be required, and a realistic
implementation date of 2012, CEOs should
start planning for the transition sooner
rather than later.
Aren’t the international standards quite similar to U.S. GAAP?
The rumor that the two sets of standards
are very similar is not completely true. U.S.
GAAP is a rules-based system and IFRS is
referred to as a principles-based system,
which is subjective in nature and much
more flexible. As a result, more judgment
will be required of financial statement preparers and auditors and there is a potential
that standards will be interpreted differently based on international and political bias.
As an example of differences between
IFRS and U.S. GAAP, the U.S. uses historical cost-based accounting for fixed assets
like equipment and land; under international standards, companies may report
those assets at current fair values with
periodic changes in fair value being recorded in that period’s earnings.
Won’t compliance simply be accounting’s
responsibility?
This transition will have a far-reaching
impact on many facets of a company.
Expect the change to IFRS to impact
everything from executive compensation
— because it will change how profit is calculated — to how CEOs communicate
with investors, shareholders and analysts.
It will also change the ways companies
work with lenders, because debt covenant
structures and debt service ratio calculation methods will also change. Expect that
IT will be heavily involved, as the company’s internal and external financial reporting and data tracking systems must be
adapted. Lastly, CEOs should expect that
the change to IFRS will require additional
investments to educate and train employees. Ultimately, increased comparability of
financial information is expected to provide a solid long-term return on these
investments.
RICK SMETANKA, CPA, is the partner-in-charge of audit and business advisory services for Haskell & White LLP. Reach him at
(949) 450-6313 or [email protected].
