The Shift to IFRS

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The Shift to IFRS

In 2008, the Securities and Exchange Commission (SEC) released a discussion roadmap regarding the
adoption of International Financial Reporting Standards (IFRS) by U.S. companies in which entities that
are interested in IFRS are allowed to file as early as 2011, even if the regular registration commences in
2014. Two years after the publication of the roadmap, the SEC announced that they would start
considering the integration of IFRS into the countrys financial reporting system as soon as the specified
readiness requirements are met and the U.S. GAAP and IFRS concurs.
The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board
(IASB) have been busy working on the convergence of U.S GAAP and IFRS. Some of the most critical
points of discussion revolved around the financial reports, financial tools, recognition of income, and
lease accounting.
In relation to the disclosure of financial statements, the FASB and IASB have put out a list of
suggestions that require more disclosure. Regarding the financial tools, the Boards are conducting a
profound discussion with the financial industry and managements across the globe in order to identify
the best approach to analyzing and report on intricate financial instruments and undertakings. In income
recognition, suggestions are being considered to replace both the U.S. GAAP and IFRS income
recognition tools with a performance obligation model while plans, which will define long-term financing
of assets with short-term renting of assets in lease accounting, are also afoot.

What is IFRS?
Released by the IASB, the IFRS is a set of guidelines in accounting that is used globally by public
companies in making their financial statements. More than 100 countries including Japan, Canada, and
the European Union compel or permit the use of IFRS. Even if there are considerable achievements
attained with the adoption of universal standards, there will still be some doubts with regard to its
adequacy and effectiveness all throughout.
Critics contend that IFRS's assertions of efficient uniform measures cannot be fully achieved. Several
factors such as disparities with the law and culture of the countries contribute to the ineffectuality of
IFRS. Nevertheless, it is seen that IFRS can help better the almost obsolete U.S. financial reporting
system.

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The Shift to IFRS

IFRS is becoming more and more appealing as the ultimate global model. A system footed on
principles, IFRS will let issuers demonstrate thoroughly the economic undertakings that are exclusive to
their industry, in contrast with a system based on rules such as GAAP. According to the SEC, the shift to
IFRS needs careful consideration and deliberation. Even if there are certain merits along the way,
inevitable challenges and consequent demerits will emerge and should be addressed properly.

Challenges with the Shift to IFRS

According to Oracle, the fundamental obstacles and challenges that U.S. corporations will encounter
involve accessing the correct and relevant information, handling numerous frameworks, and
comprehending the accounting impact.
Entities that will adhere to IFRS will surely be in a position wherein they have to collect information and
data using new methods and techniques. There might be a necessity to employ new accounting
descriptions and do an assessment for certain parts of an income statement and balance sheet, acquire
thorough disclosures from operations abroad, or comply with broader reporting obligations.
The managements responsibility is not limited to compliance with various accounting rules and
measures mandated by IFRS. They also have to strengthen and keep a firm control of all the other legal
obligations pertinent to the group.
Since there are no defined universal accounting standards to follow yet, U.S. firms have to carry out
controls to guarantee that the international financial reporting guidelines are being followed while
ensuring that the financial reports and the calculated taxes adhere to local rules and policies.
When corporations outside the U.S. first instituted IFRS, they had to invariably go through and rework
the management and statutory accounts in order to gauge the eventual effects of IFRS. This includes
significant reconciliation tasks that are focused on measuring and testing out the rationale for the
disparities so that their effect on the disclosed outcomes can be justified.

Merits and Demerits to Consider when Transitioning to IFRS

A dissertation from the University at Albany asserts that Certified Public Accountants (CPAs), Chief
Financial Officers (CFOs), Chief Executive Officers (CEOs), investors, and chairmen of auditing firms
will benefit from the shift to IFRS. For instance, CPAs need not conform GAAP with IFRS while
corporations can fend off the transformation of IFRS financial statements to GAAP for its foreign
bureaus.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com

The Shift to IFRS

Based on a global survey conducted by the Association of Chartered Certified Accountants, a majority of
investors and CFOs think that IFRS could demonstrate favorable accounting, non-financial disclosures,
and corporate governance. In addition, they supposed that the new standards would demonstrate a
clearer and more detailed picture of the entitys total accomplishment.
IFRS will provide a longer discussion boardroom that will promote adequate and competent decisions
from the corporate executives, hence establishing a stronger entity. In addition, U.S. companies can
categorize again specific equities as debt, and administer enhanced transfer pricing regulations.
Several CEOs and chairmen of top accounting firms asserted that IFRS will ensure comparability and
aggressiveness with rival international companies. Moreover, it can assist entities to attain greater
efficiency with fewer distinct reporting demands. Furthermore, a universal guideline will offer a basis for
a capital market movement that advocates for investment and bolsters economies.
However, critics argue that there are considerable and substantial drawbacks from this transition. There
are contentions that the shift to IFRS will cause resistance and tax complications. For instance,
companies will have to change their effective tax rates since there will be a new method of calculating
the net income. Also, IFRS will exclude LIFO as a technique in valuating an inventory. Consequently,
entities will have to utilize different methods such as FIFO, which will result in higher tax obligations.
Another disadvantage linked with IFRS is that it will cause greater divergence between bookkeeping
based on tax and accounting for non-private companies.

Distinctions Between the International Reporting Standards (IFRS) and

the U.S. Generally Accepted Accounting Principles(GAAP)
In order to fully understand the impact of the transition to IFRS, one must first know the key disparities
between IFRS and GAAP.
In terms of the accounting framework, the first-time adoption of U.S. GAAP demands retrospective
application. Companies need not demonstrate conformities on equities, losses, or profits. On the other
hand, IFRS requires an absolute retrospective application starting on the reporting date for the
companys first IFRS financial statements. Reconciliations of profits, losses, and equities on a specified
timeframe must be presented in their first IFRS financial statements.
The items in an IFRS financial statement consist of two years income statements, balance sheets, cash
flow statements, changes in equity, and accounting policies and notes. For U.S. GAAP financial
statement, the components are the same except that three years are needed for SEC registrants on all
statements but the balance sheet.
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The Shift to IFRS

Both U.S. GAAP and IFRS instruct companies to use equity method and demonstrate the share of posttax results in presenting the associate results on the consolidated financial statements. When getting
involved with mergers and acquisitions, IFRS only authorizes the use of purchase method, which is
similar to U.S. GAAP.
There are a lot of similarities and differences between IFRS and U.S. GAAP. It is now the prerogative of
the companies to determine the manner in which they can use them in order to assess the impact when
shifting to IFRS from GAAP.

Bracing Up for the Transition

In reality, the conversion to IFRS cannot be avoided. We may not be fully aware of it but the transition
has already started. What companies must do is to brace themselves up for the impending shift.
In the years to come, there will be drastic changes in terms of financial reporting. To ensure that an
entity is prepared for these developments, they have to keep an eye on the activities of SEC, observe
international practices, and engage in scenario planning.

15301 Dallas Parkway, Suite 960 Addison, Texas 75001 Phone: 214.545.3965 Fax: 214.545.3966 www.bkmsh.com