As the business world becomes
increasingly global and integrated,
more countries have seen the benefit of moving toward International
Financial Reporting Standards (IFRS), a
set of international accounting standards established under the aegis of the
London-based International Accounting
Standards Board. The IFRS determines
how financial events and transactions
are reported. Publicly traded companies
in the European Union have been using
these standards since 2005 and nearly
100 other countries, including Australia,
Russia, Singapore, China, India and
Pakistan, intend to adopt — or already
have adopted — IFRS methods.
“Converging our financial system with
the IFRS would allow greater globalization and greater transparency on a uniform basis,” says Adolf J.H. Enthoven,
director for the Center for International
Accounting Development at the
University of Texas at Dallas.
Smart Business spoke with Enthoven
about the drive for the U.S. to adopt
these international accounting standards and the benefits of transitioning
the U.S. rule-based accounting system to
the principle-based standards of the
IFRS.
What is the drive for the U.S. officials to
move toward International Financial
Reporting Standards?
The U.S. Financial Accounting
Standards (FAS) General Accepted
Accounting Principles (GAAP) — and
many other countries’ accounting standards for that matter — are essentially
rule-based and can be quite elaborate
and complex. While the U.S. accounting standards are extremely well-researched, they tend to neglect the
underlying accounting principals or concepts. The FAS also provides certain
opportunities for manipulating accounting arrangements. While the reforms created by the Sarbanes-Oxley Act of 2002
have strengthened FAS, they have put a
greater burden on accounting firms and
have not created the kind of transparency and conceptual consistency that IFRS
provides.
Could you highlight some of the key differences between FAS/U.S. GAAP and IFRS and
give some specific examples?
Research and development costs are capitalized under IFRS but
expensed under U.S.
FAS. Goodwill is capitalized but subject to an
impairment test under
FAS, while under IFRS
it is capitalized and amortized over its
useful life — presumed to be 20 years or
less. The concept of inventory value and
disclosure of assets is different in the
two systems. Consolidation under IFRS
is based on control; under FAS, on major
voting rights. One particular difference that could have prevented the Enron
accounting issues and subsequent scandal is the special purpose entities (SPE)
category, which cannot be excluded
from the balance sheet under IFRS.
See the chart for some examples.
Are current Financial Accounting Standards
not beneficial anymore?
FAS is beneficial for U.S. purposes —
and it certainly works for companies
that are not publicly traded and/or have
no overseas operations. IFRS would not
be imposed on small privately held companies that do not have operations internationally. But FAS is not the best system for multinational companies. And it
becomes less so as more countries are
adopting — or adapting — IFRS or converging to it. Our multinational companies are at a distinct disadvantage since
they must keep two or sometimes three
sets of books to comply with FAS, IFRS
and perhaps another local accounting
standard. The burden on the accounting
departments of these companies is very
great.
ADOLF J.H. ENTHOVEN is the director of the Center for
International Accounting Development at the University of Texas
at Dallas (www.utdallas.edu). Contact Enthoven at (972) 883-2320 or [email protected]. Information about the
Center for International Accounting Development is at
http://som.utdallas.edu/oilandgas/index.htm.
