Transitioning to IFRS: Can It Be Done?

As a global economy becomes reality, implementing International Financial Reporting Standards (IFRS) seems more than a logical move. How could a one-world system be anything but beneficial? On the other hand, is it even a viable option for those countries that lag behind the rest of the world? What are the challenges of transitioning current market accountability to the IFRS? Although it has been a much discussed topic in recent years, uniformity in global markets is complex in nature, even though it may very well be a necessity. There are key components that need to be considered before the process is completed.

Cultural diversity in society is an attribute, but when it comes to assimilating accounting standards worldwide, it creates monumental challenges. The application of reporting transactions from one jurisdiction to another can breed inconsistency. For example, revenue recognition-a real estate property can reflect two very different results. In addition, institutional or legal obstacles can impact loan covenants-specifically, debt versus equity classifications.

Other matters that complicate matters are disagreements on stock-option standards, and rules on derivatives and fair value.

Perhaps one of the most significant disadvantages of using the IFRS is the difficulty of implementing international standards in new emerging economies (Cambodia, The Philippines, Thailand and Vietnam). Unlike the G20 powerhouses (U.S., China, Malaysia, etc.), these less economically-sophisticated countries would have difficulty with the transition. Wayne Upton, Director of International Activities and Chairman of the IFRS Interpretation Committee at the IASB, says "that their regulatory infrastructure or standard-setting capabilities are not as well developed as other, larger emerging markets. They don't tend to have such well-developed accounting profession as, say, Indonesia."

In addition, there are concerns that the "IFRS provides fewer detailed rules and limited industry-specific guidance" than U.S. GAAP, which has been the cornerstone of quality in the financial standards. The insurance and extractive industries are prime examples of where U.S. GAAP guidance exists and IFRS is deficient. Another concern is that U.S. companies with minimal international ties may not find it relevant to prepare IFRS financial statements. This could also lead to discrepancies in reporting. In a sense, the reporting of data may be compromised-contributing to the so-called "disconnect between the accounting outcome recognized in the financial statements, and the economic reality that underlies the transactions that are being accounted for," as reported by Accounting Today. Other key limitations of IFRS include the following:

1) It does not permit Last In, First Out (LIFO).

2) It uses a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP, making write-downs more likely.

3) It requires capitalization of development costs once certain qualifying criteria are met. U.S. GAAP generally requires development costs to be expensed as incurred, except for costs related to the development of computer software, for which capitalization is required once certain criteria are met.

Aside from straight financial reporting, IFRS can directly impact how a domestic company runs its information technology systems, tax reporting requirements, internal reporting, performance metrics, and tracking of stock-based compensation.

Another daunting task of transitioning to the IFRS is getting the FASB, IASB, and other national standard-setters to agree on terms. Australia, Canada, France, Germany, Japan (world's second-largest economy), and the United Kingdom have their own accounting standards. The Accountant, a financial publication, reported that most Japanese listed companies must use Japanese GAAP; Chinese listed companies are required to use Chinese GAAP; India has not transitioned listed companies from Indian GAAP to IFRS; private companies in Europe use national GAAP; and private companies in Canada use a specific version of Canadian GAAP and non-profits and government entities do not use IFRS. Establishing compatibility is essential for a one-world economy, but can it be done? Is it possible to agree on the same standards, interpretations, and language? If this does become a reality, who would be responsible for enforcing the standards?

For a complete overhaul to IFRS, those in the profession will need to learn the new system. CPA's, preparers, auditors, actuaries, and valuation experts will be affected by this change. Extensive training will be both time-consuming and costly. In addition, many financial resources (publications, software, etc.) will have to be revamped to include the new reporting standards.

As the global markets seek to become a one-world operation, the move to IFRS seems inevitable. It may seem like a logical move, but is it really a viable option? With the proposed changes come many challenges. Can it be done? It may very well be an uphill battle.


Article Source: Raymonda Mouchaham