Coming to America: IFRS for U.S. companies

by Kurt Schulzke on February 1, 2008

Most corporate accounting and finance people are heavily engaged this time of year slogging through audits and preparing data for tax returns. The furthest thing from their minds are huge changes in accounting standards now lurking at the SEC. And I don’t mean the Southeastern Conference.

The Securities and Exchange Commission is moving quickly to adopt IFRS financial accounting standards for U.S. domestic filers, most likely on a mandatory basis. That’s right. The U.S. GAAP that we have all grown to know and love for its bright lines (and despise for it’s complexity) is on the verge of being mothballed in favor of International Financial Reporting Standards promulgated by the International Accounting Standards Board.

About six weeks ago, on December 13 and 17, 2007, the SEC held two roundtables to get public input on the transition process. At the same time, on December 13, I made a GSCPA (Ga Society of CPAs) presentation on IFRS. You can see a copy of my presentation here.

The archived webcasts of the SEC roundtables — together with confirmatory industry scuttlebutt — indicate it’s no longer a question of whether the U.S. will move to IFRS. The only question is when. My sense is that this is going to happen fast. The momentum supports the move and the SEC needs to get IFRS in place to facilitate implementation of XBRL reporting. It doesn’t make sense to invest time fitting XBRL to U.S. GAAP if U.S. GAAP will be mothballed in a year or two. So on with the show!

If you take a close look at the webcast of Part 1 of the December 17 round table, you’ll catch the SEC’s John White at a revealing moment (9:30-10:00 of the tape) as he tries to unsay that the purpose of the roundtable is to facilitate “the process of transitioning to IFRS reporting in the U.S.” The truth will out.  My view — which I expressed last year in a letter to the SEC — is that IFRS will be a good thing for U.S. markets.

What does all of this mean for privately-held companies? Probably a lot. As the SEC implements IFRS reporting for public companies, the IFRS will trickle down. First, the markets will demand IFRS financials as a requirement for IPOs. Second, accounting educators can’t cover both U.S. and IFRS bases. They’ll have to choose one system or the other. Given the shortage of accounting faculty and the tightly packed accounting curriculum, there’s really no way to support a dual-standards system. IFRS will find you, no matter what your size or location in the market.

Which brings us to the issue on every auditor’s mind: How does this affect my risk? I’d say the risk definitely goes up, but so do the potential rewards. The risk goes up because IFRS don’t offer as many bright lines or as much detailed guidance as does U.S. GAAP. Fewer bright lines makes it easier to mount a legal attack on a set of financial statements. At the same time, however, because IFRS demand a higher level of professional judgment, auditors who stay in the game should be able to charge a higher fee to compensate for the additional risk. It’s definitely not a business for the faint of heart, but it should offer rewards.