IFRS: Coming to America: What CPAs Need to Know about the New Global GAAP

EXECUTIVE SUMMARY * International Financial Reporting Standards (IFRS) are destined to be the lingua franca of the international accounting world. * Approximately 100 countries already require, allow or are in the process of converging their national accounting standards with IFRS. FASB and the IASB have agreed to converge their respective standards. The SEC also has a road map to allow foreign issuers that list on U,S. exchanges to report exclusively in IFRS by 2009 * IFRS is intended to be a more principles-based set of standards rather than the rules-based approach of U.S. GAAP. The two systems (IFRS and U.S. GAAP) differ conceptually on a number of points. * Important differences lie in areas such as the way pre-operating and pre-opening costs are reported and the fact that IFRS prohibits the use of LIFO for inventory valuation. Borrowing costs, fair value, revenue recognition and extraordinary items are also areas of significant differences, * It is important for American CPAs to be familiar with | FRS and the convergence process now so that they can counsel their clients (or companies) on how IFRS could affect their reporting. ********** American business is fortunate. English has become the language of international commerce. But American CPAs have been less lucky in the international acceptance of U.S. GAAP; International Financial Reporting Standards (IFRS) are destined to be the lingua franca of the international accounting world. In today's increasingly international business environment, American CPAs are frequently encountering IFRS as they serve U.S. subsidiaries of foreign companies and foreign subsidiaries of U.S. companies and as they assist in cross-border transactions. Fortunately, the standard setters for U.S. GAAP and IFRS are engaged in a convergence process designed to the two sets of standards compatible. STATE OF CONVERGENCE Approximately 100 countries require, allow or have a policy of convergence with IFRS. Countries such as Japan, the United States and Canada have active programs designed to achieve convergence with IFRS. China's Accounting Standards Committee has announced that convergence is a fundamental goal of its standard-setting program, and the Institute of Chartered Accountants of India has taken up the issue of convergence of Indian accounting standards with IFRS. To be sure, not all countries that claim to have adopted IFRS have adopted standards that are entirely consistent with IFRS. Nevertheless, there is undoubtedly a global movement toward convergence. To some extent, the EU gave global convergence a kick-start when the EU mandated that EU companies with securities listed on an EU exchange prepare their consolidated accounts for all fiscal years beginning on or after Jan. 1, 2005, under IFRS as adopted by the EU. For the most part, the EU has adopted IFRS as promulgated by the IASB, but there have been some exceptions. In the United States, FASB has engaged in an active effort to seek convergence of U.S. GAAP with IFRS. In 2002, the IASB and FASB jointly pledged, in what has come to be known as the Norwalk Agreement, to use their best efforts to make their existing financial reporting standards fully compatible as soon as is practicable. On Feb. 27, 2006, the two organizations issued a Memorandum of Understanding (2006 MOU) that not only reaffirmed their objective of developing common accounting standards, but also set forth with some specificity the goals they sought to achieve by 2008. FASB and the IASB have already made progress under their short-term convergence project, which often resulted in choosing between the U.S. GAAP approach and the IFRS approach. In the 2006 MOU, however, FASB and the IASB both recognized the need to improve standards rather than merely eliminate differences between their two sets of standards. As a result, one of their goals for 2008 is to significant progress in areas where they jointly believe current accounting practices under both sets of standards need improvement. …

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