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  • The New Globalization of Accounting Standards


    11/29/2007

    There's been a revolution in accounting and its initials are IFRS - International Financial Reporting Standards.  This was the topic of discussion on November 14th, when the College of Business presented the Accountancy Roundtable, the third in this year's series of Business Leadership Roundtables.  Featured speaker Tessie Johnson shared her expertise on "The New 'Globalization' of Accounting Standards" at the luncheon.  Johnson is a Director in the Global Capital Markets Practice of Transaction Services at PricewaterhouseCoopers, sponsor of the event.  

    On January 1, 2005, 7,000 European companies converted to IFRS, and Canadian ones will do so in 2010, leaving US GAAP (Generally Accepted Accounting Principles) behind.  The US is number one on the list of Top 10 Global Capital Markets but is the only one still fully using GAAP.  (Canada and Japan are making the transition to IFRS.)  According to Johnson, conceptually and fundamentally GAAP and IFRS are the same, but their biggest difference is volume.  "You could read IFRS in about two to three hours, but GAAP is more massive," says Johnson.  However, the larger issue is that there are many capital market implications of IFRS that are not inherent in US GAAP.  Among them are 1) cost reduction in compliance reporting; 2) improved comparability across borders and within global industry; 3) streamlined M&A activity; 4) improved transparency of non-US companies, making comparisons easier; and 5) more efficient access to capital.

    The US Securities and Exchange Commission (SEC) will likely be accepting IFRS for domestic companies by 2010, and could possibly even require it sometime between 2013 and 2015.  Local business units of companies with overseas operations will be adopting IFRS for statutory reporting.  The IASB's Business Combination standard will move US GAAP towards IFRS, not the other way around.  There's a large impact on M&A, as American companies who sell their foreign operations to overseas buyers will need to show results under IFRS, and foreign purchasers of US businesses may want results presented in IFRS.

    Johnson notes that her employer, PricewaterhouseCoopers, has a very positive outlook on IFRS.  "We feel US GAAP puts companies at a competitive disadvantage while IFRS is a major step forward."

    However, IFRS is not without its challenges.  Among them are funding and political issues, accreditation and licensing concerns, and difficulty getting colleges and universities to sanction classes covering IFRS.  There is also the potential for regulators to harass companies with good intentions.  

    Johnson worked in London for five years during the time public companies there were required to adopt IFRS.  She points out several lessons that were learned during the UK's and other countries' shift to IFRS, which should be kept in mind during what will likely be an inevitable change for the US.  One is to be sure to have adequate staffing levels, as the transition puts a strain on internal staff and diverts attention from regular business and operating priorities.  Another is to prepare data capture and communication plans ahead of time so you have the ability to extract required data from reporting systems when it's needed.    

    Johnson offers several other suggestions to help prepare now for the potential switch, such as adding IFRS talent to your organization, keeping abreast of the SEC's policies and actions regarding IFRS, and centralizing accounting functions where possible.  Because a new GAAP affects all aspects of a business, says Johnson, "Only an integrated approach will enable you to truly be ready for IFRS."

    Why not be ready for the New Year and make it your resolution to attend our first Roundtable of 2008?  It will cover Twenty-Something Leaders in Business and will take place on Wednesday, January 16, 2008, 5:30 p.m., at the Illini Center, 200 S. Wacker, 4th floor, in Chicago.

    UIUC College of Business Department of Accountancy