Although IFRS adoption in the US is still a few years away (according to the last SEC proposal: 2014 for large accelerated filers, 2015 for accelerated filers, and 2016 for non-accelerated filers and smaller companies), some US-based issuers may have the opportunity to report financials using IFRS standards sooner, depending on their industry and relative market share. Still, the SEC has not made its final decision and won’t until at least 2011, though it has renewed its commitment to move forward with adoption.
Nevertheless, outstanding issues that are not yet resolved – and may not be before the various deadlines – will affect filers, contributing to the chaos and confusion of any significant transition in reporting requirements.
For example, IFRS does not yet have standards for the treatment of insurance contracts, recapitalization transactions, extractive activities, some common control transactions, reorganizations, and other similar transactions. Also, IFRS permits various accounting practices based on local standards, something the SEC seeks to eliminate. But even today U.S. GAAP also does not have a single standard for property, plant, and equipment or even revenue recognition.
In addition there are known differences between U.S. GAAP and IFRS. For example, IFRS does not permit accounting for inventory on a LIFO basis and instead requires FIFO which could impact taxable income based on differences in inventory valuation using the two methods.
Complications would also impact companies that invest in entities that don’t report using IFRS or private companies planning an IPO that need to switch to IFRS from a different standard. And companies that do not operate globally will be challenged to adopt IFRS both for financial reporting and auditing, e.g. reporting on the effectiveness of internal controls over financial reporting (SOX Section 404).
The SEC has asked for comments to help it assess two alternative reconciliation proposals, neither of which has yet been selected. The first proposal would require a one-time reconciliation from U.S. GAAP to IFRS1, whereas reconciliation in the second proposal would cover a three-year period. If option 2 is approved, large accelerated filers would need to reconcile 2012 – 2014, accelerated filers would reconcile 2013 – 2015, and non-accelerated filers would reconcile 2014 – 2016. In effect the companies would need to issue two sets of reports in each of the three years, one set following U.S. GAAP rules the other set using IFRS standards. Of course, some large global companies may already have to report using both.
Depending on company size and the number of times reconciliation disclosure is required, the SEC estimates modest costs for the IFRS roll-out, anywhere from 0.125% to 0.13% of revenue, a number that is expected to drop over time. However, if the SEC’s SOX compliance estimates are used as a predictor, then their cost estimates for adopting IFRS are much too low.
Although the SEC decision is not expected until 2011, the time to prepare for what appears to be an inevitable future is now. The difficulty and complexity in IFRS reporting will only be exacerbated for organizations that frequently acquire other companies, frequently reorganize, or have different charts of accounts (COAs) for various business entities. It stands to reason that compiling period-end reports for them is already difficult and will only be more so as U.S. GAAP rules morph into IFRS standards.
At the very least, organizations should move toward adopting a single COA for all business entities. At a minimum this will mean that all of the convoluted mapping during period-end consolidation will be minimized, if not completely eliminated, along with the myriad spreadsheets consumed in the effort. IFRS compounds the issue for U.S. filers accustomed to following rules by establishing standards and not publishing a recommended COA. The sky is the limit, or so it seems. But adopting a COA that can accommodate various lines of business in different countries and industries is not an insurmountable task if best practices are followed. The question then becomes, what are those best practices?
In If IFRS…Then, Part 2 we share best practices in COA design.