From U.S. GAAP to IGAAP: The Shift to IFRS

IFRS

In 2008, the Securities and Exchange Commission (SEC) released a discussion roadmap regarding the adoption of International Financial Reporting Standards (IFRS) by U.S. companies in which entities that are interested in IFRS are allowed to file as early as 2011, even if the regular registration commences in 2014. Two years after the publication of the roadmap, the SEC announced that they would start considering the integration of IFRS into the country’s financial reporting system as soon as the specified readiness requirements are met and the U.S. GAAP and IFRS concurs.The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been busy working on the convergence of U.S GAAP and IFRS. Some of the most critical points of discussion revolve around the financial reports, financial tools, recognition of income, and lease accounting.

In relation to the disclosure of financial statements, the FASB and IASB gave put out a list of suggestions that require more disclosure. Regarding the financial tools, the Boards are conducting a profound discussion with the financial industry and managements across the globe in order to identify the best approach to analyze and report on intricate financial instruments and undertakings. In income recognition, suggestions are being considered to replace both the U.S. GAAP and IFRS income recognition tools with a performance obligation model while plans, which will define long-term financing of assets with short-term renting of assets in lease accounting, are also afoot.

What is IFRS?

Released by the IASB, the IFRS is a set of guidelines in accounting that is used globally by public companies in making their financial statements. More than 100 countries including Japan, Canada, and the European Union compel or permit the use of IFRS. Even if there are considerable achievements attained with the adoption of universal standards, there will still be some doubts with regard to its adequacy and effectiveness all throughout.

Critics contend that IFRSs assertions of efficient uniform measures cannot be fully achieved. Several factors such as disparities with the law and culture of the countries contribute to the ineffectuality of IFRS. Nevertheless, it is seen that IFRS can help better the almost obsolete U.S. financial reporting system.

IFRS is becoming more and more appealing as the ultimate global model. A system footed on principles, IFRS will let issuers to demonstrate thoroughly the economic undertakings that are exclusive on their industry, in contrast with a system based on rules such as GAAP. According to the SEC, the shift to IFRS needs “careful consideration and deliberation.” Even if there are certain merits along the way, inevitable challenges and consequent demerits will emerge and should be addressed properly.

Challenges with the Shift to IFRS

According to Oracle, the fundamental obstacles and challenges that U.S. corporations will encounter involve accessing the correct and relevant information, handling numerous frameworks, and comprehending the accounting impact.

Entities that will adhere to IFRS will surely be in a position wherein they have to collect information and data using new methods and techniques. There might be a necessity to employ new accounting descriptions and do assessment for certain parts of income statement and balance sheet, acquire thorough disclosures from operations abroad, or comply with broader reporting obligations.

The management’s responsibility is not limited to compliance with various accounting rules and measures mandated by IFRS. They also have to strengthen and keep a firm control of all the other legal obligations pertinent to the group.

Since there is no defined universal accounting standards to follow yet, U.S. firms have to carry out controls to guarantee that the international financial reporting guidelines are being followed while ensuring that the financial reports and the calculated taxes adhere to local rules and policies.

When corporations outside the U.S. first instituted IFRS, they had to invariably go through and rework the management and statutory accounts in order to gauge the eventual effects of IFRS. This includes significant reconciliation tasks that are focused on measuring and testing out the rationale for the disparities so that their effect on the disclosed outcomes can be justified.

Merits and Demerits to Consider when Transitioning to IFRS

A dissertation from the University at Albany asserts that Certified Public Accountants (CPAs), Chief Financial Officers (CFOs), Chief Executive Officers (CEOs), investors, and chairmen of auditing firms will benefit from the shift to IFRS. For instance, CPAs need not to conform GAAP with IFRS while corporations can fend off the transformation of IFRS financial statements to GAAP for its foreign bureaus.

Based on a global survey conducted by the Association of Chartered Certified Accountants, majority of investors and CFOs think that IFRS “could demonstrate favorable accounting, non-financial disclosures, and corporate governance.” In addition, they supposed that the new standards would demonstrate a clearer and more detailed picture of the entity’s total accomplishment.

IFRS will provide a longer discussion boardroom that will promote adequate and competent decisions from the corporate executives, hence establishing a stronger entity. In addition, U.S. companies can categorize again specific equities as debt, and administer enhanced transfer pricing regulations.

Several CEOs and chairmen of top accounting firms asserted that IFRS will ensure comparability and aggressiveness with rival international companies. Moreover, it can assist entities to attain greater efficiency with fewer distinct reporting demands. Furthermore, a universal guideline will offer a basis for capital market movement that advocates for investment and bolster economies.

However, critics argue that there are considerable and substantial drawbacks from this transition. There are contentions that the shift to IFRS will cause resistance and tax complications. For instance, companies will have to change their effective tax rates since there will be a new method in calculating the net income. Also, IFRS will exclude LIFO as a technique in valuating an inventory. Consequently, entities will have to utilize different methods such as FIFO, which will result to higher tax obligations. Another disadvantage linked with IFRS is that it will cause greater divergence between bookkeeping based on tax and accounting for non-private companies.

Distinctions Between the International Reporting Standards (IFRS) and the U.S. Generally Accepted Accounting Principles (GAAP)

In order to fully understand the impact of the transition to IFRS, one must first know the key disparities between IFRS and GAAP.

In terms of the accounting framework, the first-time adoption of U.S. GAAP demands retrospective application. Companies need not to demonstrate conformities on equities, losses, or profits. On the other hand, IFRS requires an absolute retrospective application starting on the reporting date for the company’s first IFRS financial statements. Reconciliations of profits, losses, and equities on a specified timeframe must be presented on their first IFRS financial statements.

The items in an IFRS financial statement consist of two years’ income statements, balance sheets, cash flow statements, changes in equity, and accounting policies and notes. For U.S. GAAP financial statement, the components are the same except that three years are needed for SEC registrants on all statements but the balance sheet.

Both U.S. GAAP and IFRS instruct companies to use equity method and demonstrate the share of post-tax results in presenting the associate results on the consolidated financial statements. When getting involved with mergers and acquisitions, IFRS only authorizes the use of purchase method, which is similar to U.S. GAAP.

There are a lot of similarities and differences between IFRS and U.S. GAAP. It is now the prerogative of the companies to determine the manner in which they can use them in order to assess the impact when shifting to IFRS from GAAP.

Bracing Up for the Transition

In reality, the conversion to IFRS cannot be avoided. We may not be fully aware of it but the transition has already started. What companies must do is to brace themselves up for the impending shift.

In the years to come, there will be drastic changes in terms of financial reporting. To ensure that an entity is prepared for these developments, they have to keep an eye on the activities of SEC, observe international practices, and engage in scenario planning.