Accounting - Calculator In August 2008, the United States Security and Exchange Commission (SEC) unanimously agreed to provide U.S. companies and investors with a “roadmap” for moving toward potential mandatory filing of financial statements according to the International Financial Reporting Standards (IFRS) versus U.S. Generally Accepted Accounting Principles (GAAP). The SEC document, issued in November 2008, is titled "Roadmap for the Potential Use of Financial Statements Prepared in Accordance with the International Financial Reporting Standards by U.S. Issuers."

In reference to changing the accounting standards, then SEC chairman, Christopher Cox, stated:

"The increasing worldwide acceptance of financial reporting using IFRS, and U.S. investors' increasing ownership of securities issued by foreign companies that report financial information using IFRS, have led the [SEC] Commission to propose this cautious and careful plan. Clearly setting out the SEC’s direction well in advance, as well as the conditions that must be met, will help fulfill our mission of protecting investors and facilitating capital formation."

More than 113 countries, including all EU countries, Australia, New Zealand, Israel and many Asian countries, already require or allow IFRS-based accounting standards. Within the next few years, that number is expected to grow to 150 countries.

Many experts consider the switch to IFRS by the U.S. to be inevitable. While intended for public entities only, it is likely that many private organizations, particularly those already filing under IFRS in other countries, will also make the move to IFRS and away from GAAP.

What is IFRS?

The International Financial Reporting Standards is a set of accounting standards that was developed by the International Accounting Standards Board (IASB). IASB is an independent accounting standard-setting body based in London, which began operations in 2001. It is funded by contributions from major accounting firms, private financial institutions and industrial companies, central and development banks, and other international and professional organizations throughout the world.

What are the advantages of switching from GAAP to IFRS?

According to proponents of IFRS, making the switch to a single, worldwide standard would:

Improve investor confidence, as financial statements would be more transparent and comparable across borders.
Allow investors to draw better conclusions, as they could compare companies on an apples-to-apples basis.
Improve consistency among regulators, capital markets, and the investment community.
Simplify the financial reporting process. The IFRS is relatively short, filling one volume approximately 2-inches thick; the U.S. GAAP fills two volumes, combined at 10-inches thick.
Cut costs, especially for multinational corporations that are currently required to file under multiple systems.
Help U.S. companies (or other currently non-IFRS companies) compete more effectively in global markets for both capital and customers.

Both of the U.S. NAFTA partners, Mexico and Canada, have already taken steps toward mandatory use of IFRS. (Although it should be noted that Canada initially planned to converge with US GAAP, until reviewing the US position on IFRS.)

What are the disadvantages of the switch from GAAP to IFRS?

Opponents to the switch cite:

High costs, as the conversion will require large-scale educational and retraining efforts, knowledge transfer and system changes. In fact, one major U.S. multinational organization anticipates conversion to cost in the tens of millions of dollars and to take as long as 18-24 months to complete.
The loss of what many (in the U.S.) consider the Gold Standard in accounting – U.S. GAAP.
The possibility that the attempt will actually result in less comparability, since many countries that claim to be converting to the IFRS may never get to 100% compliance. These countries reserve the right to selectively remove or modify any portions of the IFRS that they do not consider in their national interest.

How Will Adoption of IFRS Specifically Impact Credit Management?

Credit departments selling to companies utilizing IFRS will need to develop a thorough understanding of the significant differences between the IFRS and GAAP.

The change to IFRS will alter the processes associated with analysis and evaluation of customer's and prospect’s financial information. If you're re-evaluating a current customer, the results of financials created under IFRS will not be comparable to financial statements created under GAAP.

Per an article in the December 2008 issue of Managing Credit, Receivables & Collections:

"Credit scoring systems will, in many cases, require re-estimating. Simply feeding IFRS-based data into a model designed for GAAP-based data [or vice versa] will probably produce inaccurate results."
Historical data, the basis for most scoring models, will have to be recalculated to ensure there is an apples-to-apples comparison.
Contracts and debt covenants that require the use of GAAP may need to be renegotiated.
Training costs to learn the IFRS standard will have to be factored into the credit department’s budget. An April 1, 2008 article in CFO Magazine, Goodbye GAAP, cited: "The Institute of Chartered Accountants in England and Wales estimates that European companies with revenue between 500 million euros and 5 billion euros spent 0.05 percent of their revenue in their first year of switching from their local GAAP to IFRS."

According to a January, 2009 article by Jacob Barron in Business Credit magazine, a publication of the National Association of Credit Management (NACM):

Knowing [and understanding] the differences between GAAP and IFRS statements will be essential.
IFRS gives companies more flexibility in presenting how transactions are reported. This may lead to results that present that company's financial position in a more favorable light than under GAAP. [One comparison of a U.S. firm's profitability as determined under GAAP and IFRS resulted in an 8% higher figure under IFRS.]
Focusing on cash flow will become more important.

Some Essential Differences Between U.S. GAAP and IFRS

Many countries currently require utilization of their own Generally Accepted Accounting Principles (GAAP), which may differ from the U.S. GAAP. To keep this article manageable, we are only providing some of the essential differences between the U.S. GAAP and IFRS.

In July 2008, Deloitte – a brand under which independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk management, and tax services – published a Pocket Comparison of IFRSs and U.S. GAAP. The table of comparisons alone fills 63 pages. If you would like to review the entire Deloitte Pocket Comparison PDF, click the link.

With time, the differences between U.S. GAAP and IFRS have been shrinking due to the ongoing efforts of convergence by the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).

Here is a brief comparison of selected key differences.

Comparison of IFRS to U.S. GAAP

Topic	IFRS	U.S. GAAP
Fundamental structure	Principal-based, provides more leeway to filers.	Rules-based, generally viewed as more complex.
Presentation	No precise format for balance sheet and income statement, although certain minimum information is required.	Requires not only what information is required in both documents, but also how the documents should be structured.
Guidance for preparers	Less attention to specific application guidance.	More in-depth, specific guidance.
Required financial statements	1) Balance Sheet 2) Income Statement 3) Statement of Cash Flow 4) Statement of Changes in Equity	Same
LIFO - Last In, First Out inventory accounting)	Not allowed.	Allowed, resulting lower tax burden and, thus, improved financial position.
Statement of Cash Flow	Direct or Indirect method of cash flow presentation is allowed.	Both presentations are allowed. More guidance to what would fall into each category.
Cash equivalents on Cash Flow Statement	Cash equivalents include short-term maturities and overdrafts.	Excludes overdrafts from cash equivalents.
Revenue recognition	More flexible; guidance is less extensive. Four criteria must be present for recognition as revenue: 1) Amount of revenue can be measured reliably; 2) Economic benefits associated with transaction will flow to the enterprise; 3) Stage of completion of the transaction at the balance sheet date can be measured reliably; 4) Costs incurred for the transaction and the costs to complete the transaction can be measured reliably.	Less flexible, guidance is more extensive. Four criteria must be present: 1) Vendor price must be determinable; 2) Persuasive evidence of an arrangement must exist; 3) Services have been rendered or delivery has occurred; 4) Collectability is reasonably assured.
Equity	A financial instrument is considered a liability when there is a contractual obligation causing it to be exchanged unfavorably. Compound instruments must be separated into debt and equity components.	Financial instruments that are not shares are classified as liabilities when the obligation to transfer economic benefit exists.
Impairment write-downs	Single-step method.	Two-step method, making write-downs more likely.
Write-downs when value of asset drops	Can write down and then, if value later increases, it can be readjusted upward.	Once the value is written down, it cannot be readjusted upward.

Conclusion

Today, more than 12,000 companies use IFRS either solely, or in conjunction with various countries’ required filings under their own GAAP. This, and the fact that more than 113 countries require or allow IFRS, makes it the global norm for financial accounting, with the United States and Japan as the only major exceptions.

Along with the backing of the U.S. SEC, it seems inevitable that U.S. entities will eventually be required to follow the IFRS accounting standards.

The proposed SEC timeline for implementation:

11/08 - SEC issues proposed roadmap and milestones for moving to IFRS.

2011 - SEC will determine whether to proceed with the plan to require U.S. public companies to utilize IFRS.

2011-2012 - Dual reporting period during which comparatives must be reconciled to U.S. GAAP.

2014-2016 - Earliest years the U.S. SEC would require U.S. public companies to convert financials to IFRS.

With the amount of training required to understand IFRS and its differences from GAAP, it would be in the interest of Credit Management departments to start the education process of their financial analysts as soon as possible.

Further Resources on IFRS

American Institute of CPAs: IFRS Resources

Financial Accounting Standards Board

Illinois CPA Society

International Accounting Standards Board

KPMG International Financial Reporting Standards (Views on a financial reporting revolution)

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Managing Credit Receivables & Collections is a monthly business intelligence publication from IOMA (www.ioma.com).

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