The Securities and Exchange Commission is inching closer to mandating the use of International Financial Reporting Standards for U.S. publicly traded companies.
Eventually, public companies will be required to adopt IFRS, and most large private companies also will need to adopt them to stay competitive.
Some U.S. companies will be allowed to use IFRS for 2010 filings. The SEC’s goal is to require public companies to use IFRS by 2014.
“Only an issuer whose industry uses IFRS as the basis of financial reporting more than any other set of standards would be eligible to elect to use IFRS, beginning with filings in 2010,” an SEC report said.
About 12, 000 companies in 113 countries use IFRS.
“Even for private companies, IFRS will eventually become the standard,” said Robert D. MaCoy, director of accounting and auditing for BKD’s Colorado office. “Most of the world — and a lot of Europe — are already there. Actually, our European counterparts think there will be more changes for them during the transition.”
The Financial Standards Accounting Board and the International Accounting Standards Board are working to merge the content of U.S generally accepted accounting principles and IFRS.
The convergence is an ongoing process and significant differences remain, according to the IFRS Backgrounder.
“IFRS guidance regarding revenue recognition is less extensive than GAAP and contains relatively little industry-specific instruction; IFRS doesn’t permit curing debt covenant violations after year-end; IFRS uses a single-step method for impairment write-downs, rather than the two-step method used in U.S. GAAP, making write-downs more likely; and IFRS doesn’t permit Last In First Out as an inventory costing method.”
MaCoy said that the major differences include measurements of financial instruments — such as debt agreements and investments — and defining fair value.
However, he said, there are enough similarities between GAAP and IFRS that, depending on the industry, or the complexity of a company’s financials, some small businesses will not have to make many changes.
“But public companies and large private companies should gain an understanding of the differences and track the new pronouncements issued by FASB,” MaCoy said. “And in a few years, this could also be a priority for mid-size private companies — especially those who have large companies as customers.”
A common misconception, he said, is that GAAP is “doing all the changing,” but, actually both sets of standards are being changed “to reach a common goal.”
Last month, the FASB and IASB established milestone targets for modifying the following areas: