On August 27th, the SEC announced a plan to shift all listed companies in the United States from “GAAP” (Generally Accepted Principles of Accounting) to “IFRS” (International Financial Reporting Standards and set forth a roadmap by which the SEC could mandate the use of IFRS for all US issuers beginning in the 2014 fiscal year. An evaluation of the roadmap will be done in 2011 and the SEC may at that time adopt a phase-in for compliance with the new standards for some firms.
Many large multinational firms have been pushing the SEC to make this move for some time because it will allow them to compete more effectively in the global market and will allow them to keep one set of books for their entire organization. The SEC believes this change will also provide investors with the ability to evaluate investments more effectively by allowing them to review financial statements of companies in multiple countries without having to engage an interpreter to explain the differences in accounting standards.
So what is IFRS? It is a principle-based set of standards with only about 2,000 rules that is being used in approximately 100 countries. The standards are set and maintained by a governing board called the International Accounting Standards Board (“IASB”), which is made up of fourteen members from nine countries. The IASB is funded by companies and audit firms.
In contrast GAAP is rules-based, with approximately 25,000 rules, and is primarily used in the United States, although a few other countries have their own versions of GAAP. U.S. GAAP rules are set by policy boards such as the Federal Accounting Standards Advisory Board (“FASB”), Accounting Principles Board and the SEC. FASB is funded by public company fees.
Other differences in the two standards include the valuation of investments, revenue and expense recognition, and industry specific standards.
The SEC plan is posted in the Federal Register and is open for public comment for sixty days ending October 28, 2008. The transition to this plan will most likely carry other regulatory modifications and little is known at this point as to how this may impact specific firms. As always, Regulatory Compliance will keep you apprised about specific changes as they unfold and provide guidance on how they will affect your firm.
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