From an economic perspective, the world is getting smaller. Many people argue that with globalization comes the need for a universal set of accounting standards. Public (and most private) companies in the United States have long employed Generally Accepted Accounting Principles (U.S. GAAP), established by the Financial Accounting Standards Board (FASB) to prepare their financial statements and reports. In order to address the need for a universal set of standards, in late 2008 the Securities and Exchange Commission (SEC) issued a roadmap for the transition (also known as convergence) by U.S. public companies to the use of International Financial Reporting Standards (IFRS). The roadmap “set forth several milestones that, if achieved, could lead to the required use of IFRS by U.S. issuers in 2014 if the [SEC] believes it to be in the public interest and for the protection of investors.” In November 2010, the FASB and the International Accounting Standards Board (IASB) released a convergence progress report stating that their priority projects were on target for completion by June 2011 or earlier, although this date was not a decision date as to whether or not the SEC would require the convergence to IFRS.
At the December 5, 2011 American Institute of Certified Public Accountants (AICPA) annual conference, James L. Kroeker, the SEC’s Chief Accountant, gave an update regarding progress towards “the incorporation of IFRS for U.S. issuers.” At that update, he announced that the SEC recently issued two progress reports in the form of Staff Papers: one, “a comparison of the differences between U.S. GAAP and IFRS,” and the second, “an analysis of the use of IFRS in practice around the globe.” He stressed that the final comprehensive report on the SEC’s Work Plan would be produced in a few months (putting the expected completion date in early 2012). The final report is expected to give more information on whether, when, and how IFRS will be incorporated into the U.S. financial reporting system.
Mr. Kroeker noted that part of the reason for the delay is that constituents have asked the FASB and the IASB for additional time. Adding to the complexity of the situation is the discussion, highlighted in Deputy Chief Accountant Paul Beswick’s remarks to the AICPA, about the possibility of allowing the FASB and the SEC to retain the ability to deviate from IASB standards when they feel it is necessary. Another suggestion often discussed is a side-by-side convergence model, where the SEC has the ability to incorporate IFRS into the U.S. financial system but retain U.S. GAAP.
Proponents of a “global standard” are critical of these suggestions, arguing that if the FASB and the SEC retain the ability to depart from IASB standards, we can never truly achieve a single set of high-quality global accounting standards. While there may be instances where departure from IFRS is necessary for financial reporting purposes, they believe these departures should be rare exceptions rather than commonplace occurrences. Opponents of that sentiment contend that many countries currently have IFRS-like standards in place that allow for departure, such as the Australian International Financial Reporting Standards or Singapore’s Accounting Standards Committee’s Financial Reporting Standards, which are closely modeled off IFRS, with appropriate changes made to suit Singaporean businesses.
Critics of a global accounting standard argue that even though financials might be prepared based on the same IFRS standards, the way the standards are enforced will vary across countries, and therefore the integrity and reliability of the financial data would also vary. While this criticism is valid, it is not necessarily a reason to abandon a global accounting standard that can serve as a common financial language. Additionally, the adoption of IFRS might put pressure on countries where enforcement had been lacking in the past to step up their enforcement efforts once one barrier, differing accounting systems, has been removed.
While the SEC has not set a timeline on the transition, Mr. Kroeker seems optimistic that it is a question of when (not whether) convergence with IFRS will take place. Even if convergence is further delayed or halted, accountants and lawyers should proactively familiarize themselves with the major differences between U.S. GAAP and IFRS. Many foreign companies currently use IFRS, and knowing both U.S. GAAP and IFRS, and understanding the differences between the two, is of considerable value to one’s firm and clients when working on cross-border transactions.
Accounting firms and the AICPA have already begun preparing their employees and clients for the changes. Ernst & Young, for example, has recorded a number of free webcasts on IFRS convergence, along with numerous free publications on the subject. The AICPA’s Journal of Accountancy has a number of texts available on their website to help with the transition from U.S. GAAP to IFRS, and provides regular reporting from the SEC on the progress and timeline of the convergence to IFRS. PricewaterhouseCoopers has issued a publication entitled IFRS and US GAAP: similarities and differences to help readers understand what changes to anticipate. Among the areas where change is expected are revenue recognition, tax policy and strategy, financial reporting and planning, contract terms and mergers and acquisitions. Changes to these areas have important implications in both the accounting profession and the legal profession.
The information made available by accounting firms and the AICPA provide a great starting point for lawyers to begin familiarizing themselves with the major changes convergence would bring. It is important that the legal profession fully understand the changes that are expected, and begin acquainting itself with this information before the timeline for convergence is set. That way, when convergence happens, there will be no disruption to their practice, and the transition will be smooth for both firms and their clients.