IFRS and GAAP
International Accounting Standards
For almost 40 years a movement has been underway to establish one set of international accounting standards for all countries around the world in order to facilitate international trade and investment. Since it is no longer unusual to have foreign companies list their stock on the New York Stock Exchange, one common set of accounting standards should go a long way towards increasing the understandability of international financial reports. Until recently, listing rules required that non-U.S. companies must reconcile their financial statements prepared under home country standards to U.S. generally accepted accounting principles (GAAP). However, the SEC now permits foreign companies to use International Financial Reporting Standards (IFRS) in lieu of the conversion of foreign financial statements to GAAP.
The U.S. is under a great deal of pressure to adopt IFRS because members of the European Union did so in 2005 and many other countries have or will be adopting IFRS by the end of 2011. To date about 120 nations have adopted IFRS as their home country standards. The final decision of the SEC to mandate IFRS will be based on whether those accounting standards are of high quality and sufficiently comprehensive. The SEC’s convergence approach is based on the notion of “improve and adopt” IFRS before giving its stamp of approval. The Commission has been assessing whether IFRS develops a high quality of financial reporting relative to the standards which may be replaced.
On November 14, 2008, the SEC released for comment a proposed roadmap for the adoption of IFRS that would monitor progress until 2011, when the Commission plans to consider requiring U.S. public companies to file their financial statements using IFRS commencing in 2015. However, that date is misleading because publicly-owned companies must include three years’ financial statements with their 2014 financials so the filing would include statements for 2012-2014. The question is whether U.S. companies are ready to make the transition to IFRS effectively next year. The answer seems to be it’s too soon. In an October 2009 survey of financial executives conducted by Grant Thornton LLP, more than one-half of the respondents indicated the implementation date should be delayed -- in five years or longer (14%) or never (40%). A good question is why are US companies so reluctant to embrace IFRS? One reason may be concerns about ethical standards.
The U.S. has a code of professional ethics for CPAs that relies on strict independence of auditors from their clients; the need to approach an audit with a healthy dose of skepticism and an objective mind-set; and an integrity standard that requires CPAs to not give in to the pressure of a superior or client to deviate from proper accounting and financial disclosure standards. Top management may want their financial statements to “tell the clients’ side of the story” rather than present financial information in accordance with GAAP. GAAP conformity depends on a strong set of ethical values to guide behavior and an ability to make professional judgments with respect to the relevance and reliability of financial information.
On an international level, the Global Code of Ethics issued by the International Federation of Accountants, a voluntary organization, provides guidance similar to the independence, integrity and objectivity standards in the U.S. but it is predicated on following principles that underlie decision making such as economic substance over legal form and the “true and fair view override.” The latter enables an accountant to deviate from the requirements of an accounting standard to present fairly financial information. There is no such standard in the U.S. Moreover, no organization currently exists to enforce the Global Code whereas in the US each state board of accountancy is responsible for enforcement. Therefore, there are no required, enforceable international ethics standards that would protect the public interest short of the regulatory boards in each country adopting the Global Code. Therein lies the rub. While IFRS has the support of accounting standards setting bodies and regulatory organizations in over 100 countries, the same cannot be said about ethics. Can US investors trust that auditors from another country will follow similar ethics standards as we have in the US? If not, does that diminish the value of IFRS-prepared financial statements? What do you think?