The International Financial Reporting Standards: a Report on the Roadmap and Roadblocks to Implementation
A Report on the Roadmap and Roadblocks to Implementation in the US and Abroad Robert B. Shaw Term Paper Prof. Paul Strohmenger GBA 521 – 002 Financial Accounting and Reporting Fall Semester – December 2010 2) how is it progressing? 3) how does it differ from GAAP? 4) will it be implemented & how? The International Financial Reporting Standards, otherwise widely known as the IFRS, are a set of high quality financial reporting standards that are designed to be used globally by profit making enterprises.
The continuous development of such international standards is an example of the international harmonization witnessed in the global financial sector over the last two to three decades. The history of the IFRS only spans the length of a decade or so and can be best summarized by the following milestones. (www. ifrs. org) In 2001, the International Accounting Standards Board (IASB) and the International Accounting Standards Committee (IASC) Foundation were formed. The next year the European Union passed regulation to adopt IFRS for listed entities in the year 2005.
In addition, the FASB and the IASB signed the “The Norwalk Agreement” which was a commitment to reduce differences between US GAAP and IFRS. This was the beginning of all the conversion efforts that are presently in process today. By the year 2005, nearly 7,000 listed entities in Europe adopted IFRS. The following year brought about an announcement from the IASB regarding a “three year stable platform period,” in which entities that have already adopted IFRS will not need to implement new IFRS until 2009. In 2007, the SEC removed the reconciliation requirement for non-U.
S entities reporting under IFRS. This single act brought about further pressure from all the parties in the global financial community to further support IFRS. A proposed roadmap was published in 2008 by the SEC which identified potential mandatory adoption of IFRS by U. S. Filers. Finally, the most recent major actions in relation to IFRS were the reluctance to fully support the roadmap to IFRS by the Mary Shapiro, the current SEC Chairman, and the Group of Twenty’s (G20) support of IFRS as the most important step towards reforming the current global financial system. www. iasb. org) The IFRS was originally established by the International Accounting Standards Board (predecessor is the International Accounting Standards Committee? ) and its located in London, UK. The IASB is a full time organization, and functions independent of preparers, auditing organizations, and accounting agencies. The IASB has 14 board members which consists of a balance of financial industry leaders. These leaders are appointed based on their technical expertise as well as their experience in their respective fields.
This ensures that the balance between these diverse groups produces a set of standards that satisfies the needs of the various users in the ever-developing, global version of the investor-creditor financial community. (www. kpmg. com) It is now apparent more than ever that the world is attempting to come together in the accounting and financial reporting arena. As it stands, the US adheres to its own Generally Accepted Accounting Principles (US GAAP) while the rest of the world has gradually accepted that the IFRS standards are needed and welcomed. This is due to the fact that capital resources are required around the world.
Therefore, investors need a uniform set of standards and this is further supported by the open acceptance by international organizations such as the G-20. The original goal of the IASC was to have onset of standards so that every investor in the world would understand the principles that go into the creation of corporate financial reports and corporate financial statements. Those in support of the IFRS argue that global accounting standards will improve the functioning of global capital markets by providing better information to investors and other users of financial statements.
They will achiever this by decreasing the cost of preparing and interpreting financial statements and reduce the cost of capital. Some of the additional benefits are specific to certain groups. The capital markets will benefit from enhanced world wide comparability for investors and more efficient capital allocation. In addition, foreign investors will perceive enhanced credibility of local market entities while US securities will be suitable for foreign listings. Finally, the IFRS will eliminate the need to develop and maintain national standards.
On the other hand, the benefits to companies include easier consolidation and cross-border acquisitions and increases the overall understanding of the financial statements of overseas suppliers, customers, vendors, and subsidiaries. However, though the benefits seems very clear to the global financial community, there seems to be an apparent hesitation on the part of the US to adopt or immediately identify specific intent to implement IFRS. The notion is that IFRS doesn’t have strong guidance and will lead to further chaos. Especially, if it is accepted in haste. www. bcbs. org) In relation to the progression of acceptance abroad there is a stark contrast between those who support IFRS and those who do not. Since 2000, with the creation of the IASB and its takeover from its predecessor, the acceptance of these standards saw a substantial increase in its use, especially by European countries. Switzerland was one of the first major countries to apply the standards. All of the major financial markets in the world recognized the standards after Australia and the European Union recognized the standards.
The United States has yet to adopt the standards as the SEC still subscribes to the US GAAP regulations and standards. These standards are primarily for listed companies but each jurisdiction may adjust the standards to their particular needs. The point of having one set of financial reporting standards is for investors to invest time into understanding only one set of principles that is useful for all investors. However, it doesn’t limit the corporation from using other reporting tools or options. As it stands, the SEC is interested in IFRS but the question must be asked: What are the incentives?
Why would the SEC be interested in converting from GAAP? Mary L. Schapiro, SEC Chairman since 2009, has stated that she is committed to convergence and has a roadmap to implementation in place. The SEC currently has a 5 year plan that doesn’t specify a date for adoption. There is an opposition that exists within the US and there is evidence that supports there position. The details of the standards are flexible in that they may be changed in regards to the details of interpretations, recognition, and alternatives in reporting. (www. sec. org)
The US is hesitant to rapidly implement this reporting standard for two main reasons. One is the US Taxation system and the other is the need to have trained professionals prepared to handle this workload. To expand on this, these are the requirements necessary for the potential use of IFRS in the U. S. The requirements are improvements in the accounting standards, the accountability and funding of the IASC Foundation, the improvement in the ability to use interactive data for IFRS reporting and the immediate need for education and training.
However, the SEC’s roadmap is actually a 5 year convergence plan. There are three areas of concern that are key to the SEC Chairman. They include the pace of the timeline, the independence of the IASB and the cost of the IFRS adoption. These concerns are all valid, but it is more likely that this delay is truly due to the change in the political party that is currently in office. (www. sec. org) The global perspective is different as GAAP exists for each country independently in that each has they each originally had their own respective set of standards.
Approximately 110 of the 195 countries on the planet have accepted IFRS. The this unbalanced acceptance has the SEC under significant pressure to address the idea of quickly implementing a unified set of globally accepted standards in addition to the development of competitive exchange markets. Nonetheless, the idea of adopting IFRS originally came up in 2007 when the SEC decided to excluded a long-standing requirement by incorporating the use of IFRS to substitute certain GAAP requirements for corporations that were established in other countries.
There is also the likelihood that the SEC may be attempting to increase its position in the global market by accruing power as the global regulator of corporate standards by delaying the implementation and leaning towards the idea of convergence. The Big Four, which was actually once known as the Big Eight prior to mergers, are all for the requirement for corporations to adhere to IFRS as it poses an opportunity for an thrust in the demand for financial consulting services and increased earnings. Thus, the question that must be answered is whether or not IFRS is truly better than the current GAAP system in place in the United States.
The reality is that each country has historically had its own set of standards to which it adhered to. Some are better than others. For example, France has been said to have a weaker set of standards in comparison to that of the United States. Therefore, the IFRS would be better suited for a country with a weak set of standards to consider as it would be an immediate improvement and allow that country to be in the collective of those who already subscribe to IFRS. (www. deloitte. com) When one considers the cost-benefits associated with the use of IFRS in the United States they vary due to the variety of stakeholders involved.
The reality is that costs have not been sufficiently quantified by the SEC, however, estimates state that the cost associated in conforming to these standards may range in the area of 1% – 3% of an organizations total revenue. In addition, audits are more likely to incur a heavier costs in the future as there will only be so many parties trained to handle such matters as it is totally new to the industry on a whole. The cost will also affect educators as they scramble to develop curriculum’s and select ufficient literature to support the demands to produced knowledgable and qualified employees for the financial services market. The issue that many will face in the varied fields associated with IFRS is the challenge of shifting from a rules based system of financial accounting and reporting to a principles based system. The key to the successful recognition of the IFRS standards will be the goal of convergence. The reason many are willing to wait on subscribing IFRS in the U. S. Is the concern for the conflict of standards based on principles versus rules.
The US GAAP standards are developed on specific rules, while the IFRS are strictly principles based. This means that IFRS are very limited. They seek out to provide the same results but the keys to doing so may result in different answers. This is where the convergence process will suffice in bringing all parties to a consensus on how to best apply the standards. The reality is that the US accounting industry and the global financial system ought to be fairly pleased with this open support, but investors, companies and firms continue to be in the dark on the exact date of this transition.