Discerning the Impact of IFRS on Companies in the US

By Chris Mutter & Steve Haffner, Pricewaterhouse Coopers LLP

In 2005 UK listed companies adopted International Financial Reporting Standards (IFRS). Now IFRS is not only affecting subsidiaries of UK public companies in the US but US companies in general. The impact will broaden considerably over the next few years as ongoing convergence of US GAAP and IFRS changes a dozen key areas in financial reporting guidance. Meanwhile, companies are feeling the indirect effect of IFRS adoption by their foreign subsidiaries and counterparties, particularly in customer and vendor transactions. To take these developments in stride, companies need to assess where IFRS intersects with their financial reporting and business decisions, both in the US and around the globe.

Moving to a universal accounting language is a natural and necessary response to the globalization of business, finance and investment. A single set of high-quality global standards will not only reduce the unnecessary complexity that exists with multiple reporting languages, but it will also help achieve greater global comparability of information, broaden the accessibility of cross-border capital, and generate process and cost efficiencies for multinational US issuers over time. This will improve investors’ ability to assess investment options across a full spectrum of globally available securities and increase the competitiveness of the US capital markets.

Developments in the UK
Public companies in the UK, including local Philadelphia companies like GlaxoSmithKline and AstraZeneca, have been reporting under IFRS for a number of years now. However, the application of IFRS to private companies was optional. In July 2009, the IASB released the new “IFRS for SME’s” which is a modification and simplification of full IFRS aimed at meeting the needs of private company financial reporting users and easing the financial burden on private companies through a cost-benefit approach. IFRS for SME’s is a self-contained global accounting and financial reporting standard applicable to the general purpose financial statements of, and other financial reporting by, entities that in many countries are known as small and medium sized entities.

In early August, the UK ASB issued a consultation paper that sets out a roadmap for the replacement of UK GAAP. The consultation paper recommends mandatory adoption of IFRS in the UK for statutory reporting purposes for fiscal years beginning on, or after, January 1, 2012. For calendar year end companies, this means that the IFRS opening balance sheet will be January 1, 2011 — which means that conversion analysis and decisions may need to be made in 2010.

Developments in the US
Towards the end of 2008 the SEC issued a proposed roadmap for adopting IFRS which slated initial adoption for 2014. That date however, is likely to slide back as the SEC, rightly, continues to focus on concerns driven by the current economy and the regulatory environment. Despite this delay, the US government’s acknowledgment of the need for a single set of high-quality global standards, echoed by market participants’ strong support of such standards, and the SEC’s ongoing, thoughtful approach to assessing IFRS adoption, point to the inevitability of IFRS ultimately replacing US GAAP.

Although 2014 may seem a long way into the future, our experience indicates that a period of 18 to 24 months is a reasonable time for companies to start to capture information for the initial comparatives needed at the time of actual adoption. Even now though companies will see changes in financial reporting as key components of US GAAP and IFRS are converged. To keep pace with changes and be ready for adoption companies need to start preparing now.

What companies can do now
Independent of when the United States ultimately adopts IFRS, those standards are already having a significant impact on companies reporting in the US. The impact will only increase in the next several years as convergence takes place and eventual adoption of IFRS draws closer. In the near term, four main challenges require companies’ attention on the IFRS front:

  • Keeping pace with an unprecedented rate of financial reporting change as converged standards roll out in roughly a dozen key areas between now and the end of 2011
  • Monitoring and managing subsidiaries’ adoption of IFRS as more countries move to a single set of global reporting standards
  • Understanding the ways in which the structure of deals and transactions with non-US counterparties (particularly vendors and customers) may be influenced by those counterparties’ increased interest in IFRS accounting outcomes
  • Continued focus on longer lead-time differences between IFRS and US GAAP, since convergence projects will not eliminate all current differences between the two sets of standards

To successfully face these challenges, companies should assess the potential impact of convergence and, ultimately, of IFRS adoption. They should also oversee the adoption of IFRS at overseas subsidiaries, ensuring appropriate accounting policy elections and transition and timing strategies.

By staying focused on aspects of convergence and adoption that have a long lead-time, companies can stay ahead of the game, while also pursuing small one-off projects and “easy wins” where desirable.

Chris Mutter is a senior manager at PricewaterhouseCoopers, and came to Philadelphia in 2004. He has worked with companies in both the UK and US reporting under IFRS. Steve Haffner is PwC Philadelphia’s IFRS partner champion and is focused helping companies adopt and implement IFRS.

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