IFRS or U.S. GAAP? Featured

8:00pm EDT September 25, 2007

The Securities and Exchange Commission (SEC) is exploring the possibility of allowing U.S. public companies to prepare financial statements using either International Financial Reporting Standards (IFRS) or U.S. GAAP standards. To gauge the public’s interest on this subject, the SEC issued in August of 2007 a concept release that includes 35 questions to provoke feedback on the subject. The concept release addresses various issues, including the effects of not allowing U.S. issuers to use IFRS, the costs of converting to IFRS for companies, investors, auditors and others, and the costs of training and education.

Smart Business asked J. Marc Welch, CPA, principal-in-charge of the audit department at Tauber & Balser, P.C., about the implications of allowing U.S. companies to file financial statements using International Financial Reporting Standards.

What are the benefits of allowing the use of international standards?

Having a single set of high-quality globally accepted accounting standards is expected to greatly benefit both the global capital markets and investors. The use of a single set of standards should help investors better understand investment opportunities, as opposed to making investment decisions when differing sets of national accounting standards are used.

As such, the SEC has long supported the idea of reducing the disparity between the accounting and disclosure practices of the United States and other countries as a way to ease cross-border capital formation.

In 1997, the SEC noted that for companies wishing to raise capital in more than one country, preparing more than one set of financial statements to comply with differing jurisdictional accounting requirements increased compliance costs and created inefficiencies.

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced in 2002 their formal commitment to the convergence of U.S. and international accounting standards and have undergone a robust and active process for converging IFRS and GAAP.

Almost 100 countries now either require or allow the use of IFRS, and other countries are moving to do the same. The SEC expects to see this number of IFRS filings increase in the future — in fact, Canada has announced a move to IFRS, and there are approximately 500 foreign private issuers from Canada.

If we are moving in this direction anyway, what are the concerns with allowing U.S. public companies to use IFRS now?

The SEC’s Aug. 7, 2007, concept release poses 35 questions to trigger feedback as the commission gathers input on the potential significance and effect of any such change to investors, companies and market participants as well as to the accounting profession in general. Some of the concerns raised include:

  • How long will it take for most U.S. companies, their auditors and investors to understand and implement IFRS?

  • Will we see a time where the SEC requires adherence to IFRS?

  • What will it cost companies to convert from GAAP to IFRS? Do the benefits of converting justify the costs?

  • When will U.S. companies be allowed to use IFRS?

If U.S. public companies have the option to use IFRS, how will this affect the comparability of financial reporting among U.S. issuers?

One of the most significant concerns revolves around how the convergence work done by the IASB and FASB to date would be impacted. If the SEC were to begin accepting IFRS financial statements from U.S. companies, would market participants still have an incentive to support convergence work?

Another concern is that if the convergence work is interrupted or halted, the future work of the IASB and FASB may result in standards that are significantly different or that are not timely in their development.

What’s next?

The purpose of the SEC’s concept release is to gather input on the questions surrounding this issue. Comments are due by Nov. 13, 2007, and can be submitted in various formats, including via the SEC Web site: www.sec.gov/rules/concept.shtml.

It is important for many voices to be heard before standard-setters determine the next best steps to take in the move toward embracing the use of international standards.

J. MARC WELCH, CPA, is the principal-in-charge of the audit department at Tauber & Balser, P.C. He has more than 20 years of experience with a concentration in assurance and attestation services. Marc has obtained experience in the technology, construction, manufacturing and wholesale distribution industries, among others. His background includes consulting with public companies on the application of GAAP and other reporting requirements of the SEC. Reach him at (404) 814-4990 or mwelch@tbcpa.com.