Joe Bentzen
Professor Kasmir
ACCT 303
4 December 2012
IFRS Research Paper Assignment
History:
For many years the U.S. has been working with the rest of the world to have one unified
set of regulations and standards for all publicly traded companies to follow. So far nothing has
been globally implemented, however major work has been leading up to a unified set of
standards which began back in 1973 with the forming of the IASC (International Accounting
Standards Committee). Although the IASC formed in 1973 it took about 25 years to get their
initial core standards completed. The IASC, along with the SIC (Standing Interpretations
Committee), set forth 77 standards and regulations, 40 of which are still active today. The IASC
is now known as the IASB which stands for International Accounting Standards Board, and the
SIC is known as the IFRIC which is the acronym for International Financial Reporting
Interpretations Committee. The IASB took over in 2001 and has since implemented 24 new
international standards.
The IFRS standards are steadily making their way to becoming truly global standards. As
of 2008 over 100 countries require or allow companies to use the IFRS standards and principles.
Of these 100, there are several large countries which include Russia, China, Australia, South
Africa, and much of South America. This is close to double the amount of countries that had
implemented these plans as of 2004. One of the most recent countries with these plans was Japan
which had goals of a full convergence by 2011. This shows that slowly but surely the IFRS
standards are becoming more and more globally accepted and over time most countries should be
able to find an agreeable set of standards.
The FASB officially became involved in a convergence with the U.S. GAAP and the
IFRS in 2002. Converging these two different sets of accounting principles has taken much effort
and as of April 2012 there is still much work to be completed. FASB and IASB have worked to
settle differences on many topics including: shared base payments, Business Combinations,
Goodwill and other intangible assets, however noticeable differences still apply. A main reason
for this is that U.S. GAAP principles are much more detailed than their IFRS counterparts. This
leaves room for an exercise of judgment on many accounting standards.
Major Differences
Although FASB has been working with the IASB since 2002 there are still many topics
that need to be settled before a new set of standards can be agreed upon. The first of these is a
proper recording of inventories. According to the IFRS, “Inventories should be measured at the
lower of cost or net realizable value (NRV).” This is different from U.S. GAAP which states that
“Inventories should be measured at the lower of cost or market (current replacement cost).” The
IFRS do not take into the equation the market value which will result in different values of
inventory.
Another difference is on share based payments specifically based on deferred tax assets.
The IFRS believes “Deferred tax assets should be measured and based on the amount for which
deduction is expected.” However the U.S. GAAP states “Deferred tax assets are measured based
on fair value of awards.” In many cases the difference between an expected deduction and the
fair value of awards can be quite different. This is why it has been so difficult to solve this major
issue.
Depreciation of assets is also a very important topic between U.S. GAAP and IFRS. The
two sides do not agree on the calculation of recoverable amounts, the stage that discounting
should occur, and whether or not impairment losses should exist. U.S. GAAP and IFRS each
have different standards for calculation of recoverable amounts and the stage of discounts. Also,
the U.S. GAAP does not have a principle about impairment losses being reversed under any
circumstance while the IFRS does.
Another problem between U.S. GAAP and IFRS is on consolidation based on voting
interests. According to IFRS standards “Potential voting interests are considered for control and
significant influence.” This is not the case for U.S. GAAP where potential voting interests are
considered for control. This has major impacts on public companies because it deals with the
voting interests of stock holders of public companies. U.S. GAAP and IFRS must be able to
agree on a specific standard for voting rights in order for there to be a convergence.
There are also major differences between IFRS and U.S. GAAP on benefit plans. IFRS
states to “Recognize past year service cost on a straight-line basis over the average remaining
service period until the amended benefits become vested.” However the U.S. GAAP states it
should be “Based on the expected future years of service of participants active at the date of the
amendment who are expected to receive benefits under the plan.” This will cause big changes in
companies expected pension costs.
Differences also occur between IFRS and U.S. GAAP rules for presenting the income
statement. While both sets of rules include a balance sheet small differences occur. Under U.S.
GAAP companies are supposed to follow specific guidelines in the order they display their
accounts on the balance sheet. However under IFRS companies are given much more freedom
with the placement of accounts. This is an example of an area where U.S. GAAP is more
structured which results in more use of judgment under IFRS.
In a similar way to the balance sheet, differences also occur on the display of the income
statement. While it is necessary to display all of the same major pieces of the income statement
including revenue, expenses, and income or loss, there are still less guidelines under the IFRS.
This is yet another example of how things are often left to company’s judgments, as opposed to
being a distinguished format. Under the U.S. GAAP it is necessary to use either the single-step
format or multi-step format for the displaying of an income statement.
These examples show that although progress has been made, there is still much more
work to be done. It is important in the upcoming years for work to be done on this convergence if
it is going to be globally accepted.
Proposed Roadmaps
In 2008 the SEC issued a proposed roadmap for convergence plans of the U.S. GAAP
and IFRS. This roadmap was made-up of several mile markers beginning with a 120 day
comment period which was open for major U.S. companies to announce their thoughts on the
convergence plans. The second step, which was scheduled for 2009, was a potential adoption of
the IFRS by several companies the SEC felt were prepared for convergence. Another step
included in this plan was to monitor the companies that had made the switch between the years
2009 – 2011. In 2011 the SEC was to consider whether to require the use of IFRS by all U.S.
companies. The final step of this plan was to begin the phased in implementation of the IFRS on
all public traded U.S. companies to occur in 2014 - 2016.
Although the SEC set out this roadmap, the plan wasn’t exactly followed. In 2010 the
SEC postponed their scheduled 2011 plan to consider the requirement of IFRS by all public
companies. This occurred because the FASB and IASB came to the realization that the
convergence was not near completion as a result of no agreements on things such as financial
statement presentation. The IFRS convergence with GAAP has been a major struggle as
postponements also occurred in 2012.
Companies are not prepared
Below is a chart taken from cfo.com which shows the results of a survey they took in
which they surveyed 472 US CEO’s on their companies preparedness for the switch over to
IFRS standards. At this point in time, the results of this survey show that many companies are
not prepared for this switch. Companies must continue to prepare if they want to keep up with
the accounting standards.
Recommendations
Due to all the postponements that have occurred in the convergence process, it is
commonly known that companies are not prepared for if the IFRS do become required. One
major recommendation for U.S. companies is to stay aware of the status of the convergence.
Even though much effort has been put into this process, it can still end up being many more
years before FASB and IASB come up with a mutual agreement on the topic of GAAP and IFRS
convergence. Therefore if companies are up to date on knowledge of the convergence, it will be
much easier to make the necessary changes when they actually become implemented.
Works Cited
1. Pwc.com. 2012. http://www.pwc.com/us/en/issues/ifrs-reporting/country-adoption/index.jhtml
2. Steven Brice. August 22, 2011. IFRS and U.S. GAAP Convergence — Delays Upon Delays
http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_
2011/CPA/Aug/IFRSGAAP.jsp
3. Lie Putra. 2011. IFRS Vs GAAP: Balance Sheet and Income Statement. http://accountingfinancial-tax.com/2008/06/ifrs-vs-gaap-balance-sheet-and-income-statement/
4. KPMG LLC. February 13, 2009. IFRS: The Road to Conversion