Noting the urgency and immensity of their task, global financial leaders are frantically making small and large changes to U.S. Generally Accepted Accounting Principles (GAAP) and international financial accounting standards (IFRS) to make them more similar, and the Securities and Exchange Commission has recently made a single set of standards a high priority.
With more than 100 countries already using the principles-based IFRS, the world is anxiously waiting to get the U.S. on board, but merging the two standards to eliminate their differences has been and will continue to be a monumental task.
Regulatory leaders have allowed some large, multinational companies to early adopt IFRS, but rule changes to both standards are happening so quickly that some experts suggest companies should wait and see what happens before they try to prematurely adopt any plans that could change before they take effect.
"It is very difficult for companies to early adopt," said Paul Munter, a partner and IFRS national professional practice leader at KPMG. Companies that have stable business models could early adopt IFRS as long as they are able to predict their future business plans, but many companies had such a lousy 2008 that they don't know what's normal any more, he said.
More Work at Hand
The London-based International Accounting Standards Board (IASB) is working with the Norwalk, Conn.-based Financial Accounting Standards Board (FASB) to craft a single set of global standards that the world can agree on, but they still have a lot of work to do.
The Group of 20 nations recently stressed the urgency of adopting a single set of global standards and called on the IASB and FASB to put such a standard in place, but the amount of time required to make the necessary changes is so long that the proposed effective date is more than two years away. A lot can happen in two years.
The IASB has not specified an effective date, but said it expects to set a mandatory effective date to begin after Jan. 1, 2012. The IASB could make early adoption permissible for 2009 year-end financial statements, but critics say only multinational companies that already have to use both plans will jump on the early adoption option.
There is always some confusion whenever groups with strong but different opinions try to work together, and often both parties may find themselves at a standstill, waiting for the other party to make the next move.
For a while, it seemed that the SEC was having second thoughts on adopting the roadmap it proposed last year under a different administration, but after a nine-month delay to focus on the recent financial crisis, the SEC is back on track. SEC Chairman Mary Schapiro recently said the SEC will review its proposed IFRS roadmap for adoption by 2014.
"Turning back to the roadmap will be a priority" for the SEC, echoed James Kroeker, the SEC's chief accountant, at a recent meeting of certified public accountants. The roadmap does not include investment companies.
According to a recent survey conducted by the American Institute of Certified Public Accountants, 62% of CPAs working at public companies said they were delaying IFRS preparations until the SEC sets a date certain for adoption in the U.S.
"Our semi-annual survey shows most CPAs believe the U.S. should move toward IFRS, and they are looking to the SEC for leadership and direction," said Arleen Thomas, AICPA senior vice president for member competency and development.
The FASB and IASB are holding a joint board meeting Oct. 26-28 to discuss their progress and could possibly reconcile some of their differences.
"Reconciling may just mean they agree to disagree," said Enrique Tejerina, a partner and national financial instruments topic team leader at KPMG.
At a recent roundtable, the IASB said it would be willing to amend some of its standards to bring them closer to GAAP, Tejerina said.
"This puts early adopters in a difficult situation. A lot of things can change" before the rules take effect, he said.
Even though the FASB and IASB are working to converge the two standards, several key differences remain, most notably the different measurement attributes of financial liabilities, the timing and approaches to projects and the difference between fair value and amortized costs.
"Fair value is recognized as a key concept," said Ken Owens, a partner at PricewaterhouseCoopers. While most people say GAAP is based on rules and IFRS is based on principles, the reality is that there is a wide spectrum of rules and principles in both plans, Owens said.
IFRS does not have a strong standard for governing fair value measurements, but fair value is so important to the U.S. that many experts predict the IASB will adopt GAAP's Financial Accounting Standard No. 157, also known as FAS 157, to handle financial statements and disclosures. FAS 157 is currently undergoing major changes to bring it more in line with IFRS.
Owens said there is strong support for the continuation of a principles-based framework, and there is already a lot of convergence in progress.
"You can see certain convergences happening, but there are still major differences out there," he said. "Convergence is inevitable. There is going to be change. More judgment will be the norm. When convergence happens, differences will be eliminated."
The AICPA and the IASC Foundation (which oversees the IASB) are planning a joint IFRS conference in New York later this week (Oct. 29-30) to discuss the progress they are making on harmonizing the standards.
"IFRS has broad downstream implications," said Sherif Sakr, a partner at Deloitte.
Because it can take between 18 and 36 months to adopt IFRS, U.S. companies should start as early as possible, though they may want to wait for more guidance from the SEC.
Sakr said he expects to see a new roadmap from the SEC by the end of the year.
"IFRS may be better in some areas and GAAP in others, but both GAAP and IFRS will have to converge equally," he said. "At the end of the convergence process, IFRS and GAAP will be similar but not identical."
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