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What Firms Are Doing To Become Ifrs Compliant

For many years, when accountants heard the term “International Financial Reporting Standards,” they probably thought that they wouldn’t be around to finally see the changes that would take place. However, the time is coming soon, and more and more accountants are coming to the realization that US GAAP will no longer be a part of their lives.  So what is it that accountants need to do in order to become more familiar with IFRS? They first need to understand what IFRS exactly are, and then know how to compare them to GAAP statements.

On the IMA’s list of short-term convergence projects, several differences are apparent. First, when dealing with impairment, US GAAP will use the undiscounted cash flows in order to determine if there is an instance of goodwill. IFRS, however, uses the future discounted cash flows. Secondly, when determining if there is goodwill impairment, GAAP will use a two-step method, while IFRS requires only one step. The goodwill impairment cannot be reversed under GAAP, but with IFRS, the goodwill impairment can be reversed, but must be recognized. Third, income taxes are recorded differently. The main difference is that all deferred tax assets and liabilities will be considered non-current, instead of being treated as “on the books.” Finally, one of the last short-term projects is to implement changes in research and development costs. Under GAAP, these costs are expenses as they are incurred. With IFRS, these expenses can be capitalized under the cost of the asset, thus allowing the company with the costs to consider them an investment, rather than just a one-time expense (Hughes, Table 1).  There are also long-term convergence projects, which have been determined to take more time to implement. This could be explained as the fact that the transactions are more advanced in nature and will, in turn, take longer to properly train those accountants in order to be in compliance.

Included on the list of long-term projects are: business combinations, consolidations, fair values, intangible assets, and leases. For business combinations, GAAP to IFRS will require changes in valuation dates, determination of minority interest, treatment of research and development (as mentioned previously), and how negative goodwill is treated. For a business consolidation, GAAP determined that majority interest has control of the corporation. IFRS determines the majority by who holds the most control in the business. For determination of fair value, the definition of relevant parties, prices, and how liabilities are treated differ from GAAP to IFRS. Intangible assets cannot be marked-up under GAAP, but their value can be increased under IFRS. When dealing with leases, gains on sale of leaseback transactions that result in an operating lease are handled differently. Under GAAP, the gain is amortized of the life of the lease, but in IFRS the gain is recognized at the date of the sale of the lease (Hughes, Table 2.)

According to the PriceWaterhouseCoopers’ website regarding the switch to IFRS, a timeline has been established. As early as 2011, the SEC will meet to determine whether or not a date needs to be set for mandatory conversion. This will most likely be put into effect after determining the percentage of US firms that are taking proactive action to become compliant. By 2014, the conversion could be taking place; again pending what the outcome of the SEC meeting is (www.pwc.com). The website also notes the fact of the recent financial crisis, which showed just how interconnected the world is when it comes to financial matters. This company, along with hundreds of others, is already working toward the future.

So what will clients of these accountants see when the change to IFRS has taken place? Many of the visible changes will be how income tax is treated for a business and its recognition in relation to the assets of his business.  As tax practitioners, the CPA/accountant should work with the business to determine just what needs to be changed in the course of everyday business, which employees are aware of what needs to be changed, and to explain what will take place. As also previously mentioned, many of the tax consequences will deal with the deferring of assets and liabilities, which will adjust the net income of the business. This net income, in turn, will determine the amount of tax liability (McGowan.)

Most of the changes to IFRS should have already taken place by the writing of this article. However, those in the business industry know that the delay has been for good reason. The global financial crisis that began in 2007 has worked the industry to the bone to try and figure a way out.  Previously, the only thing accounting firms had in plans for the future were IFRS complacency. Now, with the crisis weighing in all aspects of the company, IFRS has faced a push to the side. The year for full conversion was once 2011, now it could be anywhere from 2014 to 2016, basically depending on the company itself.  It still will, however, be beneficial for any company to get ahead with IFRS preparations. This will save money on training in the future, as well as reduce expenses for the project if it completed in a timely manner. Although all accounting firms are different, they can agree on one thing: IFRS is coming soon, and when it arrives, it will not just be something abstract to plan for in the distant future, but the law (Marshall.)

Works Cited

“Current Situation and Next Steps.” IFRS Reporting. PriceWaterhouseCoopers. Web. 17 Mar. 2010. .

Hughes, Susan B., and James F. Sander. “A U.S. Manager’s Guide to Differences Between IFRS and U.S. GAAP.” Management Accounting Quarterly 8.4 (2007): 1-8. Print.

Marshall, Kenneth. “IFRS Adoption in the United States: Hurry Up and Wait.” Corporate Compliance Insights. 22 Sept. 2009. Web. 18 Mar. 2010. www.corporatecomplianceinsights.com

McGowan, John R., and John Wertheimer. “The Effect of IFRS Implementation on Tax.” The Tax Advisor (2009): 842-48. Print.

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