International Financial Reporting Standards

What is IFRS?

International Financial Reporting Standards (IFRS) are a set of accounting standards, developed by the International Accounting Standards Board (IASB), that are becoming the global standard for the preparation of public company financial statements. In the United States, the Securities and Exchange Commission (SEC) is considering taking steps to set a date to allow U.S. public companies to use IFRS, and perhaps make its adoption mandatory.

What is the IASB?

The IASB is an independent accounting standard-setting body, based in London. It consists of 14 members from nine countries, including the United States. The IASB began operations in 2001, when it succeeded the International Accounting Standards Committee. It is funded by contributions from major accounting firms, private financial institutions and industrial companies,central and development banks, and other international and professional organizations throughout the world. The AICPA was a founding member of the International Accounting Standards Committee.

How widespread is the adoption of IFRS around the world?

More than 12,000 companies in almost 100 nations have adopted IFRS, including listed companies in the European Union. Other countries, including Canada and India, are expected to transition to IFRS by 2011. Some estimate that the number of countries requiring or accepting IFRS could grow to 150 in the next few years.Other countries, such as Japan and Mexico, have plans to converge (eliminate significant differences) their national standards.

What is the possibility of the Securities and Exchange Commission substituting IFRS for GAAP?

Many people believe that acceptance of IFRS in the United States by the SEC for public companies is inevitable. For many years the SEC has been expressing its support for a core set of accounting standards that could serve as a framework for financial reporting in cross-border offerings. In recent years, it has supported FASB and IASB efforts to develop a common set of high-quality, global standards. And most recently, it issued a Concept Release seeking input on allowing U.S. public companies to use IFRS when preparing financial statements. SEC Chairman Christopher Cox also announced that later this year the SEC staff will formally propose to the Commission an updated “roadmap” that will lay out a schedule and appropriate milestones for continuing U.S. progress toward acceptance of IFRS.

The bottom line is that CPAs need to begin to prepare for the day in the not-so-distant future when the SEC could designate a date for voluntary, or even mandatory, adoption of IFRS by all U.S. public companies.

What are the advantages of converting to IFRS?

By adopting IFRS, a business can present its financial statements on the same basis as its foreign competitors, making comparisons easier. Furthermore, companies with subsidiaries in countries that require or permit IFRS may be able to use one accounting language company-wide. Companies also may need to convert to IFRS if they are a subsidiary of a foreign company that must use IFRS, or if they have a foreign investor that must use IFRS. In addition, companies may benefit if they wish to raise capital abroad.

What could be the disadvantages of converting to IFRS?

Despite a general consensus of the inevitability of the global acceptance of IFRS, many people also believe that U.S. GAAP is the gold standard, and that something will be lost with full acceptance of IFRS. Further, certain U.S. issuers without significant customers or operations outside the United States may resist IFRS because they may not have a market incentive to prepare IFRS financial statements. Some other U.S. issuers may have to stick with U.S. GAAP because it is required for filings with other regulators and authorities, thus resulting in extra costs than currently incurred by following only U.S. GAAP.

Another concern is that worldwide, many countries that claim to be converging to international standards may never get to 100 percent compliance. Most reserve the right to carve out selectively or modify standards they do not consider in their national interest, an action that could lead to incomparability – one of the very issues that IFRS seek to address.

Who are the key players in the United States regarding the development and adoption of IFRS?

The Securities and Exchange Commission, which is responsible for the supervision and regulation of the securities industry, the Financial Accounting Standards Board (FASB), an independent board that establishes and interprets GAAP, and the IASB, which is working with FASB on the convergence of GAAP and IFRS. Through its Accounting Standards Executive Committee, the AICPA has provided thought leadership to the IASB on financial reporting topics.

Have any major U.S. companies begun transitioning to IFRS?

Until the SEC issues a rule allowing or requiring U.S. public companies to adopt IFRS, they must continue to prepare their financial statements under GAAP. Several large multinational corporations, such as Procter & Gamble, however, have started using IFRS for their foreign subsidiaries where allowed by local law. Also, some private companies owned by foreign companies are using IFRS to obtain financing in the U.S.

When comparing IFRS and GAAP, what are some overall key differences I should be aware of?

The biggest difference between U.S. GAAP and IFRS is that IFRS provides much less overall detail. Its guidance regarding revenue recognition, for example, is significantly less extensive than GAAP, and it contains relatively little industry-specific instructions.

Probably the best evidence of how much less detail IFRS contains is that IFRS fit into one book, about two inches thick. In contrast, the FASB paperbacks of pronouncements, plus the paperback version of the FASB Emerging Issues Task Force consensuses, measure about nine inches thick, and that doesn’t include all of the U.S. authoritative accounting literature.

What are some of the most important specific differences between IFRS and U.S. GAAP?

Because of longstanding convergence projects between the IASB and FASB, the extent of the specific differences between IFRS and GAAP has been shrinking. Yet significant differences do remain, most any one of which can result in significantly different reported results, depending on a company’s industry and individual facts and circumstances. For example:

  • IFRS does not permit Last In First Out (LIFO).
  • IFRS use a single-step method for impairment write-downs rather than the two-step method used in U.S. GAAP, making write-downs more likely.
  • IFRS has a different probability threshold and measurement objective for contingencies.
  • IFRS does not permit curing debt covenant violations after year-end.

Is the possible conversion to IFRS from U.S. GAAP solely a financial reporting issue?

Most CPAs will be affected somehow because this is an issue that will have an impact far beyond just financial reports. It will affect many aspects of a U.S. company’s operations, from information technology systems, to tax reporting requirements, to the tracking of stock-based compensation.

What other areas of the profession will IFRS affect?

As IFRS grows in acceptance, most CPAs, not just auditors, will have to become knowledgeable about the new rules. Others, such as actuaries and valuation experts who are engaged by management to assist in measuring certain assets and liabilities, are not currently taught IFRS. They will also have to undertake comprehensive training. Professional associations and industry groups will be integrating IFRS into their training materials, publications, testing, and certification programs, and colleges and universities will be including IFRS in their curricula. When IFRS is accepted as GAAP in the United States, it will be included in the Uniform CPA Examination.

What are the likely costs of converting to IFRS?

The costs would be determined largely by the size and nature of the respective company. While the initial cost to identify and quantify the differences between U.S. GAAP and IFRS, staff training, and implementing IT support could be significant, the conversion also might result in a reduction of capital and financial reporting related operation costs.

What should I do now?

Be aware that the way financial statements are prepared differs based on whether a company is using IFRS, U.S. GAAP, or another country’s GAAP. Keep abreast of SEC developments regarding IFRS and its potential adoption by U.S. companies, and of the various efforts to allow nonpublic companies to use IFRS as well. Two good sources of information are the American Institute of Certified Public Accountants’ website at, and the SEC website at

If the United States mandates IFRS for publicly traded companies, will private companies and not-for-profit organizations be required to adopt IFRS?

The simple answer is no. All the discussion thus far about the possibility of the SEC designating a future date for voluntary, or even mandatory, adoption of IFRS has been for U.S. public companies only.

That said, many privately held companies adopted provisions contained within the Sarbanes-Oxley Act, such as the formation of independent audit committees. Many might take similar action regarding IFRS, even if they are not mandated to do so.

What actions are being taken that could allow private companies to follow IFRS?

The AICPA’s governing Council is about to consider amending rules 202 and 203 of the Code of Professional Conduct to recognize the IASB as an international accounting standard setter. That would remove a potential barrier and give U.S. private companies and not-for-profit organizations a choice to follow IFRS.

What might make some private companies or non-profit organizations in the United States adopt IFRS?

The eventual adoption of IFRS by small businesses and not-for-profit organizations is likely to be market driven. The IASB is developing a version of IFRS for small and medium-size entities that would minimize complexity and reduce the cost of financial statement preparation, yet allow users of those entities’ financial statements to assess financial position, cash flows, and performance.