Update on US GAAP/IFRS Convergence
New England Regional Council
Fall Conference
The Need for Convergence
Net Income Calculations Around the World
• United States
– $20,000
• United Kingdom
– $250,000
• Australia
– $225,000
• Germany
– $10,000
Current Status of IFRS Adoption
• Two-thirds of the G20 countries have adopted
IFRS
• 110 countries are currently committed to IFRS
• It is estimated that in a few years 150
countries will commit to IFRS
Recent Adopters
• 2010 – Brazil adopted IFRS
• 2011-2012 – Canada, Korea and Mexico have
required IFRS
• China has committed to convergence
• India allows IFRS for consolidated financial
results only
• Japan allows IFRS for selected companies that
have consolidated financial statements
Top 10 Global Capital Markets
Country
• Australia
• Switzerland
• Spain
• Hong Kong
• Germany
• Canada
• France
• UK
• Japan
• US
Standard
Market Cap. ($ in trillions)
IFRS
0.8
IFRS or US GAAP
0.9
IFRS
1.0
IFRS
1.0
IFRS
1.2
IFRS
1.5
IFRS
1.7
IFRS
3.1
Converging to IFRS
4.7
US GAAP
17.0
Failure to Adopt IFRS
• Coalition of nations supporting IFRS could
break apart. We could go back to the
situation before 2000 – fragmentation
• The U.S. could be marginalized as the rest of
the world moves ahead with the use of IFRS as
a global standard
Questions That Might Arise
• What are the key differences between the standards?
• What is the impact on earnings?
• What is the estimated cost of conversion?
• What is the impact on systems/processes/data
collection/consolidation/financial reporting
• Who is impacted and what training will they receive?
IFRS in the United States
• The idea of a single set of global accounting
standards remains a goal of the IASB, but
there is no indication that the SEC will act
soon to have companies adopt IFRS.
• The idea of achieving global comparability is
being advanced by FASB.
– Journal of Accountancy January 10, 2013
Private Companies
• There are roughly 5,000,000 private
companies in the U.S.
• In May 2008, the AICPA recognized the IASB as
issuing high-quality standards on par with
FASB.
• They may now use IFRS and it is estimated
that 5%-10% of companies do use them.
– These are affiliated with foreign companies
– They may want to raise capital in foreign markets
Public Companies
• There are about 25,000 public companies.
• These companies must follow the SEC’s
guidance.
– The U.S. companies may not use IFRS
– The foreign companies listing on U.S. exchanges
are allowed to use IFRS - since 2007
The Case for the Decision to Adopt IFRS
• Prior to 2001, U.S. GAAP was the gold
standard and some thought the world would
switch to U.S. GAAP as the international
standard
• In 2001, the U.S. accounted for 52% of world
equity market capitalization
• By the end of 2009, our share had dropped to
31%.
• The world did not need to come to the U.S. to
raise capital now.
The Road to IFRS in the United States
• The FASB and IASB issued a Memorandum of
Understanding in 2002
– To make their existing financial reporting
standards fully compatible as soon as is practical
– To coordinate future work programs to ensure
that once achieved, compatibility is maintained
The Initial SEC Roadmap
• Large U.S. companies would voluntarily start
using IFRS
• Other companies would follow in 2014
• The start date has now been moved to 2016
Possible Implementation Approaches
• Adoption – U.S. adopts all IFRS standards and
new standards as issued by the IASB.
– FASB plays a diminished role
– Only 10 countries have opted for this approach
• Canada
• Australia
• South Africa
Possible Implementation Approaches
• Endorsement – IFRS are considered separately
by FASB as they are issued for being
acceptable for use in the U.S.
– Most countries follow this approach including the
European Union. The EU rejected the standard on
financial instruments.
– Can we have comparability with this approach?
– Many countries have chosen to exclude one or
more IFRS.
Possible Implementation Approaches
• Convergence – The IASB and FASB continue to
issue their own standards but work together
to achieve nearly identical standards
– China and India have adopted this approach
An Alternative Approach
• Condorsement – The SEC suggested this in
2011. This is a framework that
– Keeps FASB, but in a different role
– Transitions to IFRS over a period of 5-7 years
– Incorporates IFRS in to U.S. GAAP over a period of
5-7 years until it is compliant with IFRS as issued
by the IASB.
Arguments in Favor of Adoption of IFRS
• Enhances transparency and comparability
among companies globally – IFRS enables
investors and other users to more readily
assess performance and to make comparisons
among companies.
– Surveys indicate that IFRS would transform the
finance function and create value.
• Lower costs – IFRS present opportunities for
global U.S. companies to lower costs through
standardization of financial reporting,
centralization of processes, improved controls,
and better cash management.
• Improves liquidity, valuation, and cost of
capital – Research appears to show that U.S.
companies would benefit financially from
adopting IFRS in countries with relatively strict
enforcement regimes and where the
institutional environment provided incentives
for more transparent earnings.
AICPA
• The AICPA has recommended that the SEC
move immediately to allow optional adoption
of IFRS by U.S. companies.
• It also reports that a majority of its members
have at least a basic knowledge of IFRS and
support this position.
Bumps in the Road for IFRS in the
United States
• SEC Roadmap Milestones
1. Sufficient development and application of
standards
• SEC found a number of areas with no guidance, policy
options or industry guidance.
• In a study of company reports, many inconsistencies
were found and many failures related to compliance
with IFRS were noted.
2. Independent funding of the IASC Foundation
and the standard setting process – Funding for
the foundation is approximately 50% from
companies that must report using IFRS.
Other SEC Roadmap Milestones
• Education and training of investors relating to
IFRS
• Effect on U.S. regulatory environment
• Impact on users
• Human capital readiness
Other Major Challenges
• Differences between IFRS and U.S. GAAP are
significant – U.S. GAAP has a longer history and is
more comprehensive than IFRS.
• IFRS do not cover many areas existing in U.S.
GAAP. We have industry-specific accounting
standards, how will IFRS incorporate them?
• Studies have shown that differences in financial
results between U.S. GAAP companies and IFRS
companies have increased.
• Some U.S. standards that differ from IFRS
may be difficult to change – As an example
IFRS does not allow LIFO inventory valuation
method. This difference will cause U.S.
companies to suffer a greater cash tax burden.
Only a change in the IRS regulations or an act
of Congress can deal with this issue.
• IASB needs strengthening as an independent,
global standard setter – IASB needs stability
of funding as well as the means to enforce
compliance in countries where IFRS are
adopted only as they suit local reporting
traditions.
• Continued existence of European IFRS
undermines global comparability – Since IFRS
are principles-based and do not provide great
detail, there is room for each country to apply
them in their own way. At times, European
regulators simply ignore aspects of IFRS.
• Significant changes to the U.S. reporting
infrastructure are needed
– Train and educate issuers, regulators, auditors,
and investors about IFRS
– Transition auditing standards
– Adjust regulatory and contractual arrangements
– Assess impact on nonpublic companies
• U.S. accountants and educators need to
adapt to IFRS – unprecedented changes in
curriculums at colleges and universities and a
substantial increase in professional education
for those already in practice are required.
• Elimination of U.S. GAAP for U.S. companies
contradicts the general sentiment for
maintaining control in the United States –
The influence of FASB, the SEC, and other U.S.
organizations would be limited or nonexistent.
Differences Between IFRS and U.S. GAAP
• Rules-Based Standards – Perceived to be the
dominant approach of FASB, attempts to
anticipate all or most of the application issues,
U.S. GAAP is approximately 17,000 pages.
• Principles-Based Standards – Stated as the
dominant approach of IASB, rely on broad
statements of objectives and principles to be
followed, IFRS is approximately 2,500 pages.
Income Measurement
• U.S. GAAP emphasizes measurement of items
on the income statement, the matching
principle, revenues and expenses are recorded
as earned or incurred and the balance sheet
effects are the result of these recognitions.
• IFRS emphasizes the measurement of assets
and liabilities on the balance sheet at fair
value.
Revenue Recognition
U.S. GAAP – Industry Practice
IFRS - Judgment
• Persuasive evidence of an
arrangement exists
• Product is delivered or service
performed
• Seller’s price to the buyer is
fixed or determinable
• Collectability is reasonably
assured
• 16 standards, 24
interpretations, and other
documents
• There are probable future
economic benefits
• Revenue can be measured
reliably
• Costs can be measured reliably
• Significant risk and rewards of
ownership are transferred
• Managerial involvement is not
retained as to ownership or
control
• 2 standards and 3
interpretations
Inventories
U.S. GAAP
• Values inventory at lower of
cost or market
– This differs from IFRS in three
ways:
• Market is defined as net
replacement value not fair
value – IFRS
• Does not recognize increases
in market above cost – IFRS
• Prohibits the reversal of
write-downs if replacement
costs subsequently increase
but IFRS do not
IFRS
• Prohibits the use of LIFO
– The IRS may/will not let
companies use LIFO on tax
returns if they are not using it
for financial reporting
purposes
– Increased tax cost – large
barrier to adoption
Property, Plant, and Equipment
U.S. GAAP
• Component Depreciation
– Allowed but rarely used
• Revaluation
– No upward revaluation
IFRS
• Component Depreciation
– Required
• Revaluation
– Asset can be valued at cost or
revaluation to its market
value – either above or below
cost
Impairment
U.S. GAAP
• Requires impairment testing
at reporting unit level
• Impairment Test
– Compares undiscounted cash
flows to carrying value
– If undiscounted cash flows is
greater than carrying value
then we compute PV of
future cash flows an compare
to carrying value
IFRS
• Requires impairment testing
at the cash-generating unit
level
• Impairment Test
– Compares carrying value with
recoverable amount
Intangible Assets
• Under IFRS, if an intangible asset is previously
written down, it may be revalued upward if
there is an increase in fair value
• U.S. GAAP does not allow any write-up once
an asset is written down
Research and Development Costs
U.S. GAAP
• Costs are expensed as
incurred
IFRS
• Research costs are
expensed but development
costs are capitalized and
amortized when technical
and economic feasibility can
be demonstrated
Commitments and Contingencies
U.S. GAAP
• Do not record commitments
• Contingent assets and
liabilities are recognized
when they are probable
IFRS
• Commitments are
recognized when an entity
has demonstrable
commitment for a future
payment or transfer of
assets
• Same as U.S. GAAP except
only contingent liabilities
may be recognized
Balance Sheet Presentation
•
•
•
•
•
U.S. GAAP
Current Assets
Long-Term Assets
Current Liabilities
Long-Term Liabilities
Equity
•
•
•
•
•
IFRS
Long-Term Assets
Current Assets
Equity
Long-Term Liabilities
Current Liabilities
Proposed Financial Statement Presentation
I/S
B/S
Cash Flow
Operating
Operating
Operating
Investing
Investing
Investing
Financing
Financing
Financing
Income Taxes
Discontinued Operations
Income Taxes
Discontinued Operations
Income Taxes
Discontinued Operations
Other Comprehensive Income
Equity
Equity