In August, the SEC introduced a roadmap that would eventually require all U.S. companies to follow International Financial Reporting Standards (IFRS) instead of Generally Accepted Accounting Principles (GAAP). The SEC's proposal sets out a multi-year plan that would allow some large, multi-national companies to report its earnings using IFRS beginning in 2010 and require all U.S. companies to report earnings using IFRS beginning in 2014. The proposal may be finalized later this year. According to the SEC press release announcing the proposal, the SEC believes a change to IFRS is necessary because the increased integration of the world's markets requires a common accounting language in order to provide investors with greater comparability of all companies worldwide. Basically, the SEC wants to make sure that U.S. companies and international companies are speaking the same language.
If the SEC does adopt IFRS, it will most certainly change how U.S. companies report earnings. There are some very basic and fundamental differences between GAAP and IFRS. IFRS is based on broad principles, provides less guidance and tends to be more flexible compared to GAAP. Consequently, it is significantly less voluminous than GAAP. According to Pricewaterhouse Coopers, GAAP consists of 25,000 pages, compared to 2,500 pages of IFRS. GAAP and IFRS also differ in certain specific accounting practices. For example, under GAAP, research and development expenses generally are recorded as expenses when they occur and under IFRS, such costs are spread out over time when the project goes into development. Also, under GAAP, the value of real estate is not revised upward but under IFRS, companies can revalue certain assets to fair value.
The switch to IFRS will cost U.S. companies a significant amount of time and money. Experts believe that companies will need five to seven years to switch to IFRS, taking into account education and training time for accounting professionals. Companies will also incur significant expenses making the transition to IFRS. Similar to the Y2K problem and Sarbanes-Oxley, companies will have to engage public accounting firms to assist in conforming their books to IFRS. However, in the end, multinational companies will save money on their accounting bills because such companies will only have to prepare one set of books.
All U.S. companies, not just multinational companies, need to be prepared for a possible switch to IFRS. The SEC has not yet adopted IFRS and it is possible, with a new administration likely to be appointed in 2009, that the SEC will change its direction and stay with GAAP. However, it is likely that a switch to IFRS will occur at sometime. In order for companies to make a smooth transition to IFRS, they should consult with their accounting and legal professionals on a regular basis on the status and timetable of such transition.