IFRS: A New Accounting Standard for the U.S.

The International Financial Reporting Standards (IFRS) is a set of accounting standards that defines how to prepare financial reports for publicly traded companies (AICPA, 2008).  The United States is currently using Generally Accepted Accounting Principles (GAAP) and the SEC has approved a roadmap that would move the U.S. from GAAP to IFRS by 2014 (Epstein, 2008). IFRS is in use by about 113 countries, with Canada, India, Mexico, Japan, and the U.S. planning to go to it in the next several years.

The IFRS standard is developed and governed by the International Accounting Standards Board (IASB) (AICPA, 2008). IFRS is defined by a framework that prescribes financial statements, the valuable characteristics that make the information in the financial statements useful, and then defines how you can recognize and measure the information in the statements (Deloitte Touche Tohmatsu, 2009).  The underlying assumptions for financial statements within IFRS is that they are based on accrual based accounting and that firms will continue indefinitely (going concern.) IFRS mandates that the information in financial statements be understandable, relevant, reliable, and comparable.

IFRS differs from GAAP on several items.  The first major difference between IFRS and GAAP is the size of the regulations.  IFRS is a principles-based approach that can fit into one two inch thick book (AICPA, 2008).  GAAP is a rules-based approach that has grown organically to several books that measure about nine inches thick. IFRS provides less detailed regulations and lacks a lot of industry specific regulations that are contained in U.S. GAAP. On issues of regulation themselves, IFRS requires a balance sheet and an income statement just like GAAP, but GAAP requires a specific formatting of the information and IFRS does not (Gill, 2007).  IFRS does not allow the LIFO method of valuing inventory, and GAAP does.  IFRS allows the fair value of property, plant, and equipment assets to be revalued, and U.S. GAAP does not.

Even with the differences between IFRS and GAAP, the SEC has decided to move the U.S. use to IFRS for financial reporting.   IFRS was chosen over GAAP and other standards because it is used more than any other standard in the world. In an SEC press release dated August 27, 2008, SEC Chairman Cox had this to say about moving to IFRS:

“An international language of disclosure and transparency is a goal worth pursuing on behalf of investors who seek comparable financial information to make well-informed investment decisions. The increasing worldwide acceptance of financial reporting using IFRS, and U.S. investors’ increasing ownership of securities issued by foreign companies that report financial information using IFRS, have led the Commission to propose this cautious and careful plan.” (SEC, 2008)

According to The American Institute of Certified Public Accountants (AICPA), adopting IFRS supports the goal of a global standard of transparent, high-quality, and comparable reports that can be used throughout the world (Journal of Accountancy, 2009). Investors and global companies stand to benefit the most from the IFRS conversion, while small public companies and private companies will probably not get any benefits.

Almost every company is affected by globalization today, and differences in culture, business practices, tax codes and other factors define the accounting practices of a nation (Choi & Meek, 2008).  Without standardized reporting, it makes it difficult for investors to determine the performance of a company in one country with a competitor in another country.  Also, a country with multiple divisions in various countries has to produce reports in different formats as there isn’t a common format today. Even though the full conversion to IFRS is five to seven years out, public U.S. companies should start planning their conversion now.  Companies need to take a look at what the IFRS standards are, determine the how the differences in IFRS will affect their organization, and decide how they can leverage the better information they will get from IFRS. According to the Journal of Accountancy, public U.S. companies need to establish a structured plan (with a methodology, timeline, training plan, and communications plan) and learn from Europe’s conversion to IFRS (Ostling, 2009).

Works Cited

American Institute of Certified Public Accountants. (2008). IFRS FAQs. Retrieved April 24, 2009, from AICPA | http://www.IFRS.com: http://www.ifrs.com/ifrs_faqs.html#q1

Choi, F., & Meek, G. (2008). ACCT 3013 Accounting View of . In S. M. Business, ACCT 3013 Accounting View of Economic Events (p. 161). New York: Pearson Custom Publishing.

Deloitte Touche Tohmatsu. (2009). ISA Plus: THE FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS. Retrieved April 24, 2009, from IAS Plus: http://www.iasplus.com/standard/framewk.htm

Epstein, K. (2008, August 28). An SEC Timetable for Global Accounting Rules. Retrieved April 11, 2009, from BusinessWeek.com: http://www.businessweek.com/bwdaily/dnflash/content/aug2008/db20080827_422492.htm

Gill, L. M. (2007, Jun). IFRS: Coming to America. Retrieved April 24, 2008, from Journal of Accountancy: http://www.journalofaccountancy.com/Issues/2007/Jun/IfrsComingToAmerica.htm

Journal of Accountancy. (2009, April 9). AICPA Supports IFRS Adoption, Recommends Changes to SEC Road Map. Retrieved April 24, 2009, from Journal of Accountancy: http://www.journalofaccountancy.com/Web/20091613

Ostling, D. (2009, February). Converting to IFRS. Retrieved April 24, 2008, from Journal of Accountancy: http://www.journalofaccountancy.com/Issues/2009/Feb/ConvertingtoIFRS

SEC. (2008, August 27). SEC Proposes Roadmap Toward Global Accounting Standards to Help Investors Compare Financial Information More Easily. Retrieved April 24, 2009, from SEC: http://www.sec.gov/news/press/2008/2008-184.htm

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About jpthomp137
Techie/student/husband/father interested in new technology, social media, and innovation.

2 Responses to IFRS: A New Accounting Standard for the U.S.

  1. Pingback: IFRS: A New Accounting Standard for the U.S. « disRupTions

  2. liespeque says:

    I really enjoyed reading this article, keep on writing such exciting posts!

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