International Financial Reporting Standards ... Coming to the U.S.

By: Sarah Russell, CPA

Owners and CFOs of privately held companies - take note. The United States is heading toward convergence with International Financial Reporting Standards ("IFRS"). This shift makes practical sense because as the world continues to get flatter, privately held companies are increasingly doing business in the global marketplace.

Consider this: Our neighbor to the north, Canada, has called for full adaptation of IFRS in 2011 for publicly accountable entities. Thus, the many U.S. businesses that have ties to Canada will have the acronym "IFRS" suddenly appear on their radar. To date, over 100 countries have required or permitted IFRS for public companies, and that's expanding rapidly. It's easy to envision that in the near future, IFRS will be adopted by private companies as the globalization of business and convergence of standards continue at today's rapid pace.

Today, financial statements are prepared in accordance with the Generally Accepted Accounting Principles ("GAAP"). In simplest terms, the difference between the two is that GAAP is rules-based, and IFRS is principles-based. Another distinction is that GAAP rules require a 25,000 page manual, and IFRS requires only a 2,000 page manual. Given these differences, one would only hope this will spell relief from the increasing complexity of financial reporting.

These standards could bring some benefits, such as helping everyone "speak the same language" in financial reporting, which could help make international business easier even for those companies just embarking on their first global venture. In addition, the economics of standardizing the financial reporting process should mitigate having to bear additional accounting fees by having statements prepared under two different methods.

There are many differences between the two systems which could affect your business, however, common differences include the valuation of inventory and fixed assets. Existing debt covenants and revenue recognition accounting methods may also be affected.

The similarities of GAAP and IFRS financial statement presentation are:

  1. Complete set of financials include same statements
  2. Accrual basis of accounting
  3. Materiality and consistency requirements

The key differences will be evident in:

  1. Financial statement presentation
  2. Income statement revenue recognition
  3. Financial statement disclosures

The question to be asked on GAAP and IFRS for public companies is not a matter of "if," but "when and how." The SEC recently announced their goal is to begin implementation in 2014 for publicly held companies. It is expected that implementation for privately held companies will follow shortly thereafter. In the meantime, it is expected that U.S. GAAP and IFRS will continue to evolve.

At Clayton & McKervey, our client base and market focus are growth driven, middle market business owners with global reach. Because of this, we are investing resources to stay ahead of the curve and are taking the first steps to educate and prepare clients for the inevitable conversion to IFRS. It is important that companies begin now to plan and address this change, and it is our commitment to keep our clients and friends updated as developments occur.

For more information on how the GAAP/IFRS convergence may affect your business, please contact Sarah Russell, International Group Services Manager, at 248.208.8860.

248.208.8860 | 2000 Town Center, Suite 1800 | Southfield, MI 48075

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