The Move To International Accounting Standards

A recent Financial Times article discusses timetables for U.S. businesses to manage the move from domestic accounting rules to the International Financial Reporting Standards (IFRS). Five years is being discussed as a good time frame in that it is short enough to get people interested now, but long enough to give them time to successfully implement the standards. The SEC is still considering proposals and time frames. Foreign companies are already allowed to file international financial reporting standards without converting them to GAAP (generally accepted accounting principles). IFRS is already being used by over 100 countries, including China and India, and members of the European Union. U.S. acceptance would essentially make it the chosen standard for other countries still on the fence.

Given the increased level of globalization, and the increased interest in international investment, the move to a global standard would on the surface make it easier for investors to analyze international companies. Yet there are issues to be resolved and worked out, such as inventory issues, dealing with extraordinary items, depreciation of existing assets, lease issues, derivatives, and numerous tax issues, among others. Details of the differences can be found in a report from Price Waterhouse Coopers. In another report, described in an article from Accountancy Age last August, an analysis by Citigroup found 426 reconciliation differences. The biggest areas of difference included the general areas of tax, pensions, goodwill and intangible assets, and financial instruments. Of additional interest is that moving to IFRS would allow some U.S. companies to boost some of their numbers. The Citigroup study found that 82% had higher net income under IFRS, while book value was lower for 70% of the sample. Overall returns on equity were also higher under IFRS. Nonetheless, it is felt that over time these differences would be worked out.

One potential drawback of moving to an international standard is that it could make it more difficult for the U.S. to maintain flexibility without additional regulation when dealing with reporting issues that present themselves unexpectedly. Nonetheless, the positives and environment currently seem to outweigh the negatives, even with the initial inconsistencies, so it is likely that such a move will be made. While it is hopeful that investors and companies will benefit in the long-term, there is no doubt that consultants and accountants will see some short-term benefit as well, at least in terms of increased business. As transitions are never as smooth as originally planned, investors and traders relying on fundamentals can only hope that the makers of headache medicine and antacids also do not see an increase in business as they wade through the new standards.