Many privately held companies in central Illinois have no international business interests, no foreign investors or creditors, and no immediate plans for international expansion. Even so, the fast-approaching convergence of the United States’ generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS) is almost certain to be felt throughout the business community.
At this stage of the game, the question many business owners, executives and financial officers are asking is how the globalization of financial reporting standards will impact their business, and what can be done now to prepare for the change. While it is true that changes to long-established accounting rules will initially have a direct impact only on publicly-traded U.S. companies, it will ultimately “trickle down” to privately held companies as well.
The pace at which major U.S. financial markets and the global business community are endorsing the IFRS is quickening. In August, the Securities and Exchange Commission (SEC) released a timeline that would allow about 100 of the largest U.S. multinationals to adopt IFRS beginning in 2010. Most other publicly traded companies would begin phasing in the use of IFRS beginning in 2014.
At the same time, the SEC is giving itself three years to call the project off if it feels the new rules are too burdensome, or they are not producing the desired results.
What is IFRS All About?
The move toward a globally accepted and understood set of accounting and auditing standards is simply an acknowledgment of the global nature of today’s marketplace. More than 12,000 companies in 100-plus countries have already put aside national pride and politics and adopted IFRS. Now they can “talk the same language” when comparing and analyzing financial information. The U.S. is one of a handful of holdouts that has not yet converted to the international framework.
However, in an acknowledgement of this international movement, the SEC has dropped an earlier requirement that foreign IFRS filers reconcile their financial statements with GAAP. Some U.S. multinational companies are using IFRS for their foreign subsidiaries, and some private companies with foreign owners have also used IFRS to obtain financing.
Who Benefits From IFRS?
Investors, financial institutions, equity markets and accounting/auditing professionals all benefit from a common accounting framework. Not using the IFRS framework puts U.S. companies at a disadvantage in the world marketplace. The use of globally accepted accounting rules and language removes barriers and increases the competitiveness of U.S. companies doing business in other countries.
Many believe that IFRS offers solid benefits to U.S. businesses, because it will:
- Improve communication of financial data in international markets • Provide greater access to international investors and foreign markets
- Provide a high level of transparency and accountability
- Result in fewer accounting errors and restatements
- As a principles-based standard, rather than the rules-based GAAP, allow for the exercise of more professional judgment by financial statement preparers.
It’s Evolution, Not Revolution
Private companies with international issues and connections may have already encountered IFRS. For example, a company operating in the U.S. as a subsidiary of a parent in Europe may already be required to use IFRS. But for the vast majority of small- and medium-sized enterprises, there is currently no mandate.
Auditors and financial statement preparers are beginning the process of learning the differences between the two sets of standards. In fact, a survey by the American Institute of Certified Public Accountants (AICPA) concluded in December that a 55-percent majority of CPAs at firms and companies nationwide are preparing for the adoption of IFRS. According to the survey, 65.2 percent of CPAs say they have some knowledge of IFRS, but need to learn more.
Many financial statement users in the U.S. also do not fully understand the differences between international and U.S. standards. Until they are able to get up to speed, they may not accept financial statements prepared according IFRS rules.
There are a number of reasons why a switch from GAAP to IFRS, or some hybrid of the two, will come sooner rather than later:
- Companies all over the world are more dependent on each other than ever for resources, sales, employees and growth capital.
- Information technology necessitates immediate access to accurate, consistent financial information for private and public investors.
- The added burden of competing financial reporting standards increases costs for U.S. companies and reduces competitiveness.
- Public companies have already started transitioning to IFRS.
What Should Private Companies Do Now?
While public companies should get up to speed on IFRS soon, it is still fairly early in the game for private companies.
Many accounting firms are encouraging private companies not to convert to IFRS too soon. The learning curve is going to be significant for everyone involved, and there will likely be indirect implications that should be identified and worked through before the move is made. For example, many entities have contracts, compensation awards and debt covenants that rely on GAAP-based measurements of financial performance. Such agreements would need to be addressed before conversion to avoid unintended consequences.
However, this is the ideal time for private companies of all sizes to become aware of the changes that are just around the corner for public companies. Financial officers of small- and mid-sized companies should monitor the convergence of GAAP and IFRS, and with the insight of an accounting or audit professional, begin to considering how global accounting standards will impact their domestic and foreign business strategies. iBi