by Rob Fisher and Jim Phillips
For Virginia Business
U.S. companies, regulators, academics and investors are about to learn a new accounting language. It’s out with U.S. GAAP (Generally Accepted Accounting Principles) and in with IFRS — the new International Financial Reporting Standards — which are well on their way to becoming accepted around the world.
Today, more than 100 countries either require or allow the use of IFRS. The need for a common global standard is compelling. Professionals who set accounting standards want to make financial reporting meaningful across borders, provide consistent financial reporting for companies with global operations and create common reporting systems that can reduce costs for these companies. A single global standard would also make it easier for investors to compare the financial statements of companies from different countries.
Exactly what IFRS means for U.S. companies will vary, but the following are five things companies need to know.
When will IFRS become widely used in the U.S?
In August, the Securities and Exchange Commission proposed a plan that could require U.S. companies to switch to IFRS starting in 2014 but permit others to start using international accounting rules earlier.
Under the plan a small number of U.S companies that meet certain criteria could voluntarily adopt IFRS for years ending on or after Dec. 31, 2009. Then in 2011, the SEC would vote on requiring all U.S. companies to make the switch. If approved, the changeover would be staggered. Large companies would begin using IFRS in 2014, with midsize companies following the next year and the remaining companies in 2016.
How challenging will it be to convert to IFRS?
The complexity of the task will vary from company to company depending on the size and scope of each business. However, converting to IFRS is not just an accounting exercise. The move can affect a company’s accounting policies, internal controls, cash management, IT services, and contractual and compensation arrangements — almost all parts of its operations.
Most companies will need to assess the implications of converting to IFRS, and the sooner they do it, the better.
How much will conversion cost?
The cost will vary depending on the current state of a company’s operations, its familiarity with IFRS, how it assesses its needs for the conversion process and how soon it starts that process. The most reliable way to develop an accurate cost estimate is to institute a company-wide assessment of the implications of an IFRS conversion.
How will IFRS change your reported results?
The answer to this question depends on a company’s specific transactions and events, its business practices and the accounting policy elections it makes when adopting IFRS.
However, as a guide, the Analyst’s Accounting Observer looked at how financial reporting results might change by reconciling 130 corporate financial statements reported under IFRS against how these statements would have been reported under U.S. GAAP. Here are some of the findings:
• About two-thirds of companies showed higher earnings under IFRS than GAAP; one-third showed lower earnings; only two showed earnings to be the same.
• Slightly more than half showed greater equity under IFRS; only one company showed the same equity under both.
What are the major differences between IFRS and U.S. GAAP?
IFRS is only about 10 years old while U.S. GAAP has been in use roughly 60 years longer. IFRS standards comprise about 2,500 pages of text while U.S. GAAP comprises about 10 times that number. U.S. GAAP has developed more extensive implementation guidance and includes industry-specific guidance. IFRS leaves more to the judgment of the preparer and auditor.
IFRS implementation poses challenges. Colleges and universities will have to change their accounting curricula. Significant training at accounting firms and at each company also will be required. U.S. companies may need to help financial analysts understand the financial reporting issues and nuances under the international standards. And adoption of IFRS may call for changes in operational procedures and information technology systems, making strong project management a critical aspect of a successful conversion effort.
Approaching the IFRS conversion as merely an accounting project would be a mistake. The task can be a significant undertaking. Adequate planning and project management will ensure a more efficient transition to the new global standards.
Rob Fisher and Jim Phillips are partners in KPMG LLP’s Richmond office. Fisher can be reached at . Phillips can be reached at . The views and opinions are those of the authors and do not necessarily represent the views and opinions of KPMG LLP. All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.
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