International Financial Reporting Standards (IFRS)

What is IFRS?

International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements.

2. What is the IASB?

The IASB is an independent accounting standard-setting body, based in London. It consists of 15 members from nine countries, including the United States. The IASB began operations in 2001 when it succeeded the International Accounting Standards Committee. It is funded by contributions from major accounting firms, private financial institutions and industrial companies, central and development banks, national funding regimes, and other international and professional organizations throughout the world. While the AICPA was a founding member of the International Accounting Standards Committee, the IASB's predecessor organization, it is not affiliated with the IASB. The IASB neither sponsors nor endorses the AICPA's IFRS resources website (www.IFRS.com).

3. How widespread is the adoption of IFRS around the world?

Approximately 120 nations and reporting jurisdictions permit or require IFRS for domestic listed companies, although approximately 90 countries have fully conformed with IFRS as promulgated by the IASB and include a statement acknowledging such conformity in audit reports.1 Other countries, including Canada and Korea, are expected to transition to IFRS by 2011. Mexico will require IFRS for all listed companies starting in 2012. Japan has introduced a roadmap for adoption that it will decide on in 2012 (with a proposed adoption date of 2015 or 2016) and is permitting certain qualifying domestic companies to apply IFRS from fiscal years ending on or after March 31, 2010. Still other countries have plans to converge their national standards with IFRS.

4. What is the possibility of the Securities and Exchange Commission substituting IFRS for GAAP?

For many years, the SEC has been expressing its support for a core set of accounting standards that could serve as a framework for financial reporting in cross-border offerings. Most recently on February 24, 2010, the SEC issued release Nos. 33-9109 and 34-61578, Commission Statement in Support of Convergence and Global Accounting Standards. In the release, the SEC stated its continued belief that a single set of high-quality globally accepted accounting standards would benefit U.S. investors and its continued encouragement for the convergence of U.S. GAAP and IFRS. The release also called for the development of a work plan (the “Work Plan”) to enhance both the understanding of the SEC’s purpose and public transparency in this area. Execution of the Work Plan, combined with the completion of previously agreed upon convergence projects between the FASB and IASB according to their current schedule, will permit the SEC to make a determination, in 2011, regarding incorporating IFRS into the financial reporting system for U.S. issuers.

The SEC made clear that it envisions 2015 as the earliest possible date for the required use of IFRS by U.S. public companies. However, in the statement approved February 24, the SEC said while it is not pursuing an early adoption option, it could reconsider this position later. To learn more about the SEC’s Statement in Support of Convergence and Global Accounting Standards and its Work Plan, click here.

5. What are the advantages of converting to IFRS?

By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier. Furthermore, companies with subsidiaries in countries that require or permit IFRS may be able to use one accounting language company-wide. Companies also may need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS, or if they have a foreign investor that must use IFRS. Companies may also benefit by using IFRS if they wish to raise capital abroad. 

  

6. What could be the disadvantages of converting to IFRS?

Despite a belief by some of the inevitability of the global acceptance of IFRS, others believe that U.S. GAAP is the gold standard, and that a certain level of quality will be lost with full acceptance of IFRS. Further, certain U.S. issuers without significant customers or operations outside the United States may resist IFRS because they may not have a market incentive to prepare IFRS financial statements. They may believe that the significant costs associated with adopting IFRS outweigh the benefits.  

7. What is the difference between convergence and adoption?

Adoption would mean that the SEC sets a specific timetable when publicly listed companies would be required to use IFRS as issued by the IASB. Convergence means that the U.S. Financial Accounting Standards Board (FASB) and the IASB would continue working together to develop high quality, compatible accounting standards over time. More convergence will make adoption easier and less costly and may even make adoption of IFRS unnecessary. Supporters of adoption, however, believe that convergence alone will never eliminate all of the differences between the two sets of standards.

8. Who are the key players in the United States regarding the development and adoption of IFRS?

The key players are the Securities and Exchange Commission, which is responsible for the supervision and regulation of the securities industry and has oversight responsibility for the FASB; the Financial Accounting Standards Board, an independent body that establishes and interprets U.S. GAAP; and the IASB, which is working with the FASB on the convergence of U.S. GAAP and IFRS. The AICPA has provided thought leadership to the IASB and the FASB on financial reporting topics.

9. Have any major U.S. companies begun transitioning to IFRS?

Until the Securities and Exchange Commission issues a rule allowing or requiring U.S. public companies to adopt IFRS, they must continue to prepare their financial statements under U.S. GAAP. Several large multinational corporations, however, have started using IFRS for their foreign subsidiaries where allowed by local law. Also, some U.S. subsidiaries of foreign-owned companies are also using IFRS.

10. When comparing IFRS and GAAP, what are some overall key differences I should be aware of?

The biggest difference between U.S. GAAP and IFRS is that IFRS provides much less overall detail. Its guidance regarding revenue recognition, for example, is significantly less extensive than U.S. GAAP. IFRS also contains relatively little industry-specific instructions. 

11. What are some of the most important specific differences between IFRS and U.S. GAAP?

Because of longstanding convergence projects between the IASB and the FASB, the extent of the specific differences between IFRS and GAAP has been shrinking. Yet significant differences do remain, most any one of which can result in significantly different reported results, depending on a company's industry and individual facts and circumstances. For example:

• IFRS does not permit Last In, First Out (LIFO).

• IFRS uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP, making write-downs more likely.

• IFRS does not permit debt for which a covenant violation has occurred to be classified as non-current unless a lender waiver is obtained before the balance sheet date.

12. Is the possible conversion to IFRS from U.S. GAAP solely a financial reporting issue? 

Conversion to IFRS is much more than an accounting exercise. It will affect many aspects of a U.S. company's operations, from information technology systems and tax reporting requirements, to internal reporting and key performance metrics and the tracking of stock-based compensation.

13. What other areas of the profession will IFRS affect?

As IFRS grows in acceptance, most CPAs, financial statement preparers and auditors will have to become knowledgeable about the new rules. Others, such as actuaries and valuation experts who are engaged by management to assist in measuring certain assets and liabilities, are not currently taught IFRS and will have to undertake comprehensive training. Professional associations and industry groups have begun to integrate IFRS into their training materials, publications, testing, and certification programs, and many colleges and universities are including IFRS in their curricula. Some textbooks are already covering IFRS, primarily in a comparative presentation to their instructions on U.S. GAAP. New textbooks covering IFRS are currently being written and should be in circulation in the reasonably near future.

14. What are the likely costs of converting to IFRS?

The costs would be determined largely by the size and nature of the respective company. While the initial cost to identify and quantify the differences between U.S. GAAP and IFRS, staff training and implementing IT support could be significant, the conversion also could result in an ultimate reduction of costs for capital and financial reporting related to operations. In its proposed roadmap to move all U.S. publicly traded companies to the global standards issued in November 2008, the Securities and Exchange Commission estimated that the largest U.S. registrants that adopt IFRS early would incur about $32 million per company in additional costs for their first IFRS-prepared annual reports, and that the average U.S. company would incur costs of between 0.125% to 0.13% of revenue.

15. What should I do now?

The bottom line is that CPAs need to begin to prepare for the day in the not-so-distant future when the Securities and Exchange Commission could designate a date for voluntary, or even mandatory, adoption of IFRS by all U.S. public companies. Also, be aware that the way financial statements are prepared differs based on whether a company is using IFRS, U.S. GAAP, or another country's GAAP. Keep abreast of SEC developments regarding IFRS and its potential adoption by U.S. companies, and of the various efforts to allow nonpublic companies to use IFRS as well. Two good sources of information are the AICPA's Web site at www.ifrs.com, and the SEC Web site at www.sec.gov.  

16. If the United States mandates IFRS for publicly traded companies, will private companies and not-for-profit organizations be required to adopt IFRS?

The simple answer is no. All the discussion thus far about the possibility of the Securities and Exchange Commission designating a future date for voluntary, or even mandatory, adoption of IFRS has been for U.S. public companies only.

That said, many privately held companies adopted provisions of the Sarbanes-Oxley Act, such as the formation of independent audit committees. Many might take similar action regarding IFRS, even if they are not mandated to do so.

On December 17, 2009, the AICPA, the Financial Accounting Foundation (FAF) and the National Association of State Boards of Accountancy (NASBA) announced the establishment of a blue-ribbon panel to address how U.S. accounting standards can best meet the needs of users of private company financial statements. The panel will provide recommendations on the future of standard setting for private companies, including whether separate, standalone accounting standards for private companies are needed. A report is expected in the early part of 2011.

17. What actions are being taken that could allow private companies to follow IFRS?

The AICPA's governing Council in May 2008 approved amending Rules 202 and 203 of the Code of Professional Conduct to recognize the IASB as an international accounting standard setter. That removed a potential barrier and gives U.S. private companies and not-for-profit organizations the choice whether to follow IFRS.

18. What might make some private companies in the United States adopt IFRS?

The eventual adoption of IFRS by small businesses and not-for-profit organizations is likely to be market driven. The IASB has developed a version of IFRS for small and medium-size entities that would minimize complexity and reduce the cost of financial statement preparation, yet allow users of those entities' financial statements to assess financial position, cash flows, and performance. IFRS for Small and Medium Entities (SME) was released on July 9, 2009. You can view questions and answers developed by the AICPA regarding IFRS for SMEs here.

19. Will IFRS be incorporated into the Uniform CPA Exam?

Yes. The AICPA Board of Examiners in May 2009 announced that exam content updates have been developed and, for the first time, IFRS will be eligible for testing on the Uniform CPA Exam starting in 2011.