The rules that U.S. accountants followare going through major changes. Asmarkets are becoming more global,the standards are likely to change from U.S.Generally Accepted Accounting Principles(U.S. GAAP) to the International FinancialReporting Standards (IFRS). The changesproposed by the Securities and ExchangeCommission (SEC) will likely go throughseveral trials.
“It’s a whole new set of rules to learn,” says Paul Anderson, director of assurance services at GBQ Partners LLC. “Within four or fiveyears, IFRS could replace U.S. GAAP as thefinancial reporting standard.”
Smart Business spoke with Andersonabout the proposed accounting standardschange and how to prepare for it.
What are the international accounting standards and what do they mean?
Since the 1930s, U.S. businesses have followed U.S. GAAP. These are rules that everyaccountant must follow. Recently, there havebeen ongoing efforts to standardize accounting throughout the world; however, the goldstandard has remained U.S. GAAP.
In 2001, the International Accounting Standards Board (IASB) developed a single set ofstandards, IFRS, which could be used acrossborders. Today, more than 100 countries useIFRS, including Australia and the U.K.
For some time, the Financial AccountingStandards Board and the IASB have beenworking on converging the two sets of standards. The SEC initiatives may acceleratethat process. IFRS tends to be principle driven, while U.S. GAAP is more rules driven.The change adds more judgment and lesscomparability to the mix.
Though public companies have a proposedtime frame for adoption, the impact on private companies moving to IFRS is a bit moreuncertain. Having two sets of standardswould make comparison between public andprivate companies more difficult. In order toremain competitive, private companies mustprepare for the move toward IFRS reporting.
What problems might companies run intobecause of these changes?
If there is not uniform adoption of thestandards for U.S. based companies, there will be confusion as to what set of standardsthe financial statements follow.
Many U.S. companies, even smaller ones,now have international operations that aresubject to international reporting standards.Each company must understand the differences between how they’ve been reportingvarious transactions under U.S. GAAP andhow their foreign operations may report thesame transaction, because the answer maybe different. A single set of standards willcause uniformity of financial statements.
How can you learn more about thesechanges?
Since the SEC announced its proposedchange, a great deal of information came outin the accounting profession. There are various studies that look at the differencesbetween international and U.S. standards tohelp management identify areas where theymay have to make changes if the international standards are adopted. For more information, visit www.sec.com or www.fasb.com.
How will changing from GAAP to IFRS impactbankers, boards and audit committees?
The strong global movement toward IFRSwill require everyone to be more conceptually focused. Some areas will require dramaticchange, while others will be minimal.Imagine a banker trying to review a set offinancial statements and having to figure outif they are prepared on international standards or U.S. standards. He or she will needto understand the differences from statements of the customer previously preparedon U.S standards to be able to compare them.For example, LIFO is not currently acceptable under international standards, so thebanker will need to understand how theinventory pricing changed, and if the customer converted from U.S. standards to international standards.
Audit committees and boards of directorsshould anticipate the change from GAAP toIFRS by asking the CEO or CFO about thereadiness of the company. Is there an implementation plan? A transition plan? Are thereforeign subsidiaries or joint ventures currently using IFRS? Has the company done areadiness assessment? Committee membersand company management should discussthese questions, as well as the potential costs,benefits and effects of a transition to IFRS.
Under IRFS, management will be allowedto exercise greater judgment regarding theaccounting treatment of transactions.Effective board members will have the ability to understand what really goes on in thebusiness and question management abouthow and why they treat transactions as theydo. Members should meet with managementto discuss issues like: How will this affectmanagement reporting? Can our current ITsystems handle the business’s revised dataand collection requirement? What are themost significant risks associated with converting to IFRS?
What are the benefits of these changes?
The most important improvement will bethe uniformity. Regardless of where financialstatements are produced, whether it’s China,the U.K. or the U.S., you will know that theyconsistently follow the same set of rules.
PAUL ANDERSON is director of assurance services at GBQ Partners LLC. Reach him at (614) 947-5203 or email@example.com.