Accounting Tips For You

Will it Be the Rabbit Or the Turtle? Who Wins the Race on IFRS?

For years, the SEC has been issuing warnings of an upcoming transformation from the almighty GAAP to the globally accepted IFRS. The problem concerning these warnings, however, is that they have been just that; warnings. In 2008, the SEC declared a 2014 deadline for the transition of U.S Generally Accepted Accounting Principles into International Financial Reporting Standards. Now, as of early 2010, the SEC stated that 2015 would be the earliest possible date for the transformation to be executed. The SEC has also declared that “it is not pursuing an early adoption option and, accordingly, withdrew the proposed rules that would have permitted it” (journal of accountancy). What does this mean for companies who are preparing themselves for the IFRS impact? Hurry up and wait.

Under the projected 2014 deadline, companies prepared for adjustments with the perception that they were going to occur. Companies sent out representatives to C.P.E classes regarding the upcoming change, companies had to inform clients of how the new regulations would affect them, and they had to start preparing for software changes that were going to occur. All of these things have tremendous costs involved. As we all know, repetition is the key to remembrance. If the knowledge that all of these workers obtained is not used, these workers will lose most of it and have to be retrained at a later time. Most companies found the postponement of IFRS to be disheartening. “After all this time, the SEC’s decision is somewhat disappointing. [It] does not help us and it’s not inconsequential because theirs cost associated with waiting” states Arnold C. Hansh, chief accounting officer at Eli Lilly. Without a permanent date established by the SEC, it appears as though companies are going to be left in limbo. Most businesses believe that due to the costs incurred, it would be a wise choice to accelerate the process and establish IFRS as quickly as possible.

Other companies, however, think differently. These companies believe that slow and steady wins the race. After all, there are many obstacles in the way that must be sorted out. The longer length of time, it is believed, will allow for all changes in the new standards to be absorbed. There are not just a few dozen big standards to be revised. There are huge turnaround projects of both bigger issues and smaller details to be thoroughly examined. For example, the statement of cash flows has been an important topic being discussed at round tables. This is one of the major statements in accounting. People can use either the direct or indirect methods under both IFRS and GAAP. But the smaller details inside this huge statement, is what is concerning. Interest received, interest paid, and dividends received, for example, are carried under operating activities of the cash flow statements of GAAP. These three topics, however, can be under investing activities with IFRS. Another example of a big change with little details is defining fair value. IFRS contains more flexibility when it comes to valuing certain assets than GAAP does. This may seem to be a big criterion as does the statement of cash flows, but like the statement of cash flows, it contains so many intricate details, it will take many sessions to arrive at a conclusion for each individual part. There are categories to consider such as related party transactions, if the seller is under duress during the transfer, or if the sale takes place in a different geographic location than where it was purchased. There are 168 financial accounting standard board standards that govern over GAAP, each with its own set of rules inside rules. To transition or consolidate these rules with IFRS is one complicated task.

Almost 120 countries have now adopted IFRS as their financial accounting standards. Due to the many global interactions between companies, adopting IFRS will be an asset to the United States. Financial statements all around the world will be transparent for each company to read and understand. The SEC may not know the exact timeline of the transformation occurrence from GAAP to IFRS, but one thing is for sure; eventually, the change will occur. As I have stated in this paper, companies have been learning and updating for quite a few years now and when the time comes for the change, they will be ready. Although there are complaints of lingering on the subject, insight and strategy is always the key to success and it appears as though most businesses are in the process of preparing themselves even as you read this paper. Sometimes, it seems, slow and steady is the most effective way to run the race.

My name is Susan Macauley. I am a senior accounting major.
susieqz00@aol.com