Busting IFRS myths Featured

7:00pm EDT November 25, 2008

The SEC’s proposed change from Generally Accepted Accounting Principles (U.S. GAAP) to International Financial Reporting Standards (IFRS) has many executives scratching their heads. Rumors persist about whether the change will ultimately affect private companies, and the 2014 compliance date for public companies requires further clarification. As the SEC takes final comments about the proposed change, CEOs must separate truth from fiction to understand the true business impact of IFRS and prepare to comply with its passage.

“We’ve generally thought that we have the best accounting standards here in the U.S.,” says Rick Smetanka, CPA, partner-in-charge of audit and business advisory services for Haskell & White LLP. “Now, given the growth in international equity markets, it’s become clear that we need to get on board with the rest of the world or risk being left behind. However, with any change, there’s often uncertainty and misinformation in the air, and the inevitable change to IFRS is no exception.”

Smart Business spoke with Smetanka to understand the reasons behind the change to IFRS and to extract the truth about its impact on U.S. businesses.

What’s the real likelihood of this change occurring?

It’s a myth that this change will never take place because the U.S. has the best accounting standards in the world. While we’ve been focused on the credit crisis and the slowing economy in this country, one by one the countries in Asia and the European Union have adopted these standards. The reality is, given the growth in India, China and other international markets, U.S. capital markets have been getting relatively smaller so we’re no longer the dominant global force that we once were. This time it’s not a bluff; the global standards are coming.

Won’t this change strictly impact public companies with international operations?

There’s no truth to the myth that your company must have international operations to be affected. This new way of reporting will apply to public domestic companies whether they have international operations or not. While it’s true that the changes will impact public companies first, ultimately, IFRS will likely spell the death of U.S. GAAP. Even private companies, especially those posturing for a buyout or an initial public offering (IPO), will be impacted or face the possibility of having to recast their financials under international standards to complete M&A or other financing transactions.

Full implementation isn’t scheduled until 2014; what’s the rush?

While 2014 is the proposed implementation date for most U.S. public companies, those companies will also be required to report their 2012 and 2013 financial statements using IFRS for comparison purposes. Further, a select group of approximately 100 of our largest public companies may actually start reporting under the standards beginning in 2009. Given the systems changes that need to take place, the companywide education and preparation efforts that will be required, and a realistic implementation date of 2012, CEOs should start planning for the transition sooner rather than later.

Aren’t the international standards quite similar to U.S. GAAP?

The rumor that the two sets of standards are very similar is not completely true. U.S. GAAP is a rules-based system and IFRS is referred to as a principles-based system, which is subjective in nature and much more flexible. As a result, more judgment will be required of financial statement preparers and auditors and there is a potential that standards will be interpreted differently based on international and political bias. As an example of differences between IFRS and U.S. GAAP, the U.S. uses historical cost-based accounting for fixed assets like equipment and land; under international standards, companies may report those assets at current fair values with periodic changes in fair value being recorded in that period’s earnings.

Won’t compliance simply be accounting’s responsibility?

This transition will have a far-reaching impact on many facets of a company. Expect the change to IFRS to impact everything from executive compensation — because it will change how profit is calculated — to how CEOs communicate with investors, shareholders and analysts. It will also change the ways companies work with lenders, because debt covenant structures and debt service ratio calculation methods will also change. Expect that IT will be heavily involved, as the company’s internal and external financial reporting and data tracking systems must be adapted. Lastly, CEOs should expect that the change to IFRS will require additional investments to educate and train employees. Ultimately, increased comparability of financial information is expected to provide a solid long-term return on these investments.

RICK SMETANKA, CPA, is the partner-in-charge of audit and business advisory services for Haskell & White LLP. Reach him at (949) 450-6313 or RSmetanka@hwcpa.com.