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 firstname.lastname@example.org. Information about the Center for International Accounting Development is at http://som.utdallas.edu/oilandgas/index.htm.