On Aug. 27, 2008, the Securities and
Exchange Commission (SEC) agreed
to a roadmap that will take U.S. issuers one step closer to using the
International Financial Reporting System
(IFRS) by 2014.
“Within five or six years, it is likely IFRS
will become accepted as financial reporting standards alongside Generally Accepted Accounting Principles (GAAP) in the
U.S.,” says Harry Cendrowski, CPA/ABV,
CFE, CVA, CFD, CFFA, managing member,
Cendrowski Corporate Advisors LLC.
“In 2005, the EU mandated the use of
IFRS. In 2011, several countries, including
China, India, Japan, and Canada, will adopt
IFRS. Previously, foreign issuers reporting
in the U.S. were required to convert to
GAAP, but the SEC stated they will no
longer have to do so. The same goes for private issuers.”
Smart Business asked Cendrowski what
the changes will mean for boards.
How does GAAP differ from IFRS reporting?
Transitioning from GAAP to IFRS presents a business risk that should be
addressed in the same manner used in the
organization’s normal risk management
process to mitigate risk. Boards must continue to gather information about potential
pitfalls with the transition and take action
to address those concerns. For example, a
board may require new or different skill
sets than those currently required to be
able to question management’s decisions
under the IFRS framework. Some examples include:
- IFRS utilizes several criteria for revenue recognition including the transfer of
risks, rewards and control, and reliable
measurement. While GAAP utilizes similar
principles in theory, the big difference is the
inclusion of substantial detailed guidance
regarding specific transactions that can
lead to departures from the general theory. - GAAP allows for the inclusion of
extraordinary items (events that are both
infrequent and unusual) in the financial
statements, whereas extraordinary items
are prohibited within IFRS. - Both GAAP and IFRS stipulate that
inventory is presented at the lower of cost
or net realizable value using FIFO (first in,
first out) or the weighted average method,
however, GAAP also permits the use of
LIFO (last in, first out). Furthermore, GAAP
prohibits reversals of inventory write-downs, whereas IFRS requires reversals in
the event of subsequent increases in value.
Is the change to IFRS being embraced in the
U.S.?
On one hand, yes. Brokers and stock dealers favor IFRS because it is a consistent
reporting method when comparing the
financial results of a British company
against one in the U.S. Also, IFRS makes it
easier for foreign companies to report in the
U.S. However, it is change, and there are
many people whose livelihood is based on
their knowledge of GAAP. It will cost money
to learn and implement the new standards.
For companies, it will require board and
staff education, potential restatements and
conversions. For CPAs, the impact is
tremendous in terms of the accounting standards they will need to know.
How will changing from GAAP to IFRS impact
boards?
IFRS will require board members to be
more conceptually focused. The current
detailed, rules-based system will be
replaced by the concept of ‘do the right
thing.’ Currently, board members are
required to have an understanding of
GAAP; under IFRS, they will be required to
exercise greater judgment regarding the
accounting treatment of transactions.
Management will have to be more involved
to provide detailed guidance. Effective
board members will have the ability to
understand what really goes on in the business and question management about how
and why they treat transactions as they do.
Boards will also have to perform scenario
planning by considering alternatives in
light of the new accounting standards and
their effect on recording transactions. The
changes also will impact the audit committee’s choice of a financial expert. Currently,
SOX Section 408 requires this person to
understand financial statements and
GAAP. The understanding of GAAP
requirement could change to an understanding of IFRS. The board will have to
track the SEC’s specific requirements to
ensure it remains in compliance.
What steps should boards take now to prepare for the future?
Be aware and informed. Analyze the latest board assessment to understand its
strengths and weaknesses. Assess the corporation’s risk and impact from a change in
accounting standards in a similar, systemic
manner as other risks. Understand that the
impending changes may require the board
to seek out new members with different
skill sets. Keep an ear to the ground for
issues affecting the industry in regard to
IFRS changes. Identify educational opportunities for IFRS both internally and externally. Finally, institute an IFRS implementation plan and set goals that will ensure a
smooth IFRS transition.
HARRY CENDROWSKI, CPA/ABV, CFE, CVA, CFD, CFFA, is managing member of Cendrowski Corporate Advisors LLC. Reach him
at (866) 717-1607 or [email protected] or visit the company’s Web site at www.cca-advisors.com.
