For as long as most people can remember, U.S.-based GAAP (Generally Accepted Accounting Standards) has been the gold standard for financial reporting. But today, more than 100 countries require or allow the use of another benchmark: International Financial Reporting Standards, or IFRS, for the preparation of financial statements by publicly held companies.
Will the U.S. follow suit? In 2016, the Chief Accountant of the SEC’s Office of the Chief Accountant, Wes Bricker seemed to throw cold water on that possibility, noting that it wasn’t likely “in the foreseeable future.”
But Bricker did encourage the U.S. accounting standards setter FASB (Financial Accounting Standards Board) and the European International Accounting Standards Board (IASB) to work together to eliminate differences when it’s in the best interest of capital markets. And, the SEC is still talking about allowing domestic issuers to voluntarily submit IFRS financial information, without reconciliation, in addition to their U.S. GAAP financial statements.
“It doesn’t look like the U.S. will fully adopt IFRS, but standard-setting bodies here and in the EU still appear to be working on some degree of convergence, so there’ll be less difference between the two systems,” observed Ed O’Connell, an East Brunswick-based partner with the regional CPA and advisory firm WithumSmith+Brown PC. “As part of that convergence initiative, many publicly held companies had to make some technical changes in the way they report revenue for annual reporting periods beginning after Dec. 15, 2017. All other entities, including privately held businesses that issue financial statements, will generally adopt the new standards for annual reporting periods beginning after Dec. 15, 2018.”
The highly technical changes may tweak the timing of when a company can recognize revenue.
“While some companies may not see much of an impact from the new revenue recognition standard, certain industries including software companies, construction companies, technology and life-science companies may be affected,” O’Connell added. “Either way, revenue recognition is a big topic and every company should speak with their CPA or other accounting advisor and consider whether they need to make changes to the way they’re accounting for and reporting their revenue.”
The new revenue recognition standards however, are only the first of a one-two punch. “For fiscal years beginning after Dec. 15, 2018, many public companies will generally have to change the way they account for leases,” O’Connell reported. “The new lease standard introduces some technical changes, but could also result in many companies recognizing a significant portion of their lease activity on the balance sheet, as well as the income statement.” For private companies, the new standard will be effective for fiscal years beginning after Dec. 15, 2019.
This convergence of standards will also affect companies with international operations.
“If you’re a U.S. based company with only domestic operations, then you’ve likely always reported under GAAP and will continue to do so, although you have to make some modifications for the new standards,” he explained. “Likewise, for European companies, you’ll continue to report under IFRS. But U.S. companies with a European subsidiary, or European-based firms with a U.S. subsidiary that has to report under GAAP (not all of them have to, under U.S. rules) will likely continue to engage in some conversion from one format to the other.”
WithumSmith+Brown audits companies with dual reporting requirements, said O’Connell.
“We have a dedicated group that focuses on these kinds of engagements, so we are on top of any changes,” he said. “Some smaller, privately held companies, though, may not be up to speed on the convergence changes, but their bankers and investors are, and if they’re getting financial statements from the firm — perhaps because of a financing arrangement — the bank or other lender will likely expect to see the new standards reflected in the financials. So some companies may get an unexpected wake-up call.”
For a period of time, it looked like the federal Securities and Exchange Commission was leaning towards a full-blown adoption of IFRS, “but the agency cooled on that idea and instead swung towards convergence, making the standards more consistent, if not quite identical,” said David Schmid, the Florham Park-based international accounting leader of PricewaterhouseCoopers. “Some differences, though remain.”
In addition to revenue recognition, and lease-accounting standards — which have been modified to bring the standards a bit closer — differences include the way that companies need to write down, or reduce the balance sheet value, of certain assets that are deemed to be impaired.
“Inventory accounting is another area of difference, said Schmid. “Under GAAP, most companies can use the [last in, first out] method, but that’s not permitted under IFRS.”
Some multinational companies must report under both methods, and that can add to the complexity — and fee — of an audit, he noted.
“Any time you have to do two types of reporting and build additional processes and controls, that provides a fair amount of additional work,” he said.
In an increasingly unified global economy, does it still make sense to maintain two kinds of accounting systems?
“GAAP and IFRS were developed to meet the needs of their respective jurisdictions,” Schmid said. “So you really can’t say one’s better than the other. Right now, the U.S. capital market offers certain efficiencies, so there’s no rush for U.S. companies to leave here and raise capital overseas, which would likely require them to adopt IFRS. But if that situation ever changes significantly, we could see a shift to IFRS. But in the meantime, we’re still in a globally connected environment, so it’s still a good idea to be familiar with IFRS.”