Ready or not, the requirement for U.S. companies to comply with new international accounting standards is rapidly approaching. Over the last several years there has been a huge push in the accounting world to implement the use of International Financial Reporting Standards. There has been a recent push for companies located in the United States and other nations to present financial statements on the same basis so that making comparisons will be easier.
“Just as other broad-based international policies have been reactive to the rapidly growing global economy, the accounting industry has to change its reporting policies,” says Larry Kane, CPA and director of Assurance Services for Glenn M. Gelman & Associates, Certified Public Accountants and Business Consultants. “The financial world wants standards that will provide for consistency in reporting no matter where a particular company is domiciled. As a consequence, the U.S. Financial Accounting Standards Board has a wide range of joint projects currently in process with the International Accounting Standards Board to assist in creating the desired consistency.”
Smart Business spoke with Kane to discuss whether the switch from U.S. generally accepted accounting principles to IFRS is inevitable for U.S. companies.
What are IFRS and how are they different than U.S. GAAP?
IFRS are accounting standards developed by the IASB. The IASB is an independent accounting standards setting body consisting of various member countries including the United States. IFRS are becoming the global standards for preparation of publicly held company financial statements.
IFRS use a principles-based approach versus the rules-based approach used under U.S. GAAP. Probably the biggest difference between U.S. GAAP and IFRS is that IFRS provides less overall detail and less industry-specific guidance. It is for this reason that many believe that the adoption of IFRS could lessen the quality of current financial reporting. In response, the FASB is working diligently on the convergence of U.S. GAAP and IFRS.
How are U.S. governing boards adapting to the proposed standards?
As I stated earlier, the FASB is working with the IASB to create a convergence of both sets of standards so that when and if use of IFRS is mandated, the major accounting differences will have been resolved. In November of last year, the FASB and IASB reaffirmed their commitment to achieve convergence by June of 2011. In recent meetings they have stated that some of the projects will be completed by the target date, but others may be delayed until the second quarter of 2011.
Current joint projects being addressed by the FASB and IASB include projects relating to leases, revenue recognition, financial statement presentation, fair value measurements, liabilities and equity, the statement of comprehensive income and financial instruments.
The SEC is also very interested in seeing through the implementation of IFRS. However, they have made it known that they most likely will not require U.S. public companies to use IFRS any time before the year 2015. They currently have no plans to pursue an early adoption date.