IFRS 101

Lesson 1: Follow EU’s lead, but learn from their mistakes.

January 8, 2009
by Sukanya Mitra

There’s no turning back. The gavel has come down and like it or not, U.S. publicly-held companies will soon have to convert and rely on IFRS (International Financial Reporting Standards) and say good-bye to U.S. GAAP (Generally Accepted Accounting Principles). In the last six months, awareness has grown multi-fold from users to preparers to investors to auditors, noted Nancy Salisbury, CPA, at a recent AICPA Webcast. Salisbury, a partner at Ernst & Young LLP, was joined by fellow-panelists, D.J. Gannon, CPA, partner, Deloitte & Touche LLP and Robert Tarola, CPA, President, Right Advisory LLC. If you’re wondering — like many others — why IFRS are considered by some to be more effective than GAAP, consider the following: “[What] IFRS is trying to do, in many respects, is to have accounting outcomes that are more reflective of what is actually happening economically,” explained Gannon. “From an investor perspective, you’re getting better information,” he added.


“In June of 1973, Sir Henry Benson brought together nine accountancy bodies from around the world to put together a worldwide effort to come up with a single set of uniform accounting standards,” explained John Hudson, CPA and moderator of the AICPA Webcast.

In 2005, over 8,000 companies in the European Union adopted IFRS, a global set of standards for financial accounting and reporting. IFRS has become the predominant accounting framework outside of the U.S. (see chart for a breakdown of which countries have adopted IFRS).

Top 10 Global Capital Markets

United States United States

U.S. GAAP — moving towards IFRS

Japan Japan

Convergence to IFRS

United Kingdom United Kingdom


France France


Canada Canada

Convergence to IFRS

Germany Germany


Hong Kong Hong Kong

HKFRS (equivalent to IFRS)

Spain Spain


Switzerland Switzerland


Australia Australia

AIFRS (equivalent to IFRS)

(Source: AICPA)

“If you’re a company that is multinational in nature, it’s a good chance that you have to deal with IFRS today, notwithstanding what is happening in the U.S.,” said Gannon. “If you are a company that is starting to raise capital outside the U.S., there’s also a good chance that you’ll have to deal with an IFRS-reporting requirement now,” he added. This also holds true for a non-US entity or associate that is domiciled outside of the U.S. with whom your company deals with because that entity will have to deal with IFRS.

Proposed SEC IFRS Roadmap for U.S. Issuers

The SEC proposed — and not ruled — in November a roadmap to IFRS for U.S.-based companies reporting in the next several years, said Tarola. The SEC encourages a limited early use of IFRS.

In brief, the SEC (U.S. Securities and Exchange Commission) is trying to “establish a single set of high quality accounting standards to promote investor protection and the efficiency and effectiveness of capital formation and allocation of assets,” explained Tarola.

The mandatory transition to IFRS for all U.S. public companies as set up by SEC’s roadmap:

  • Will identify milestones that the SEC will consider before making a final decision in 2011;
  • Will require further rulemaking by the SEC to propose mandating the use of IFRS;

Interestingly, the future role of the FASB has not been addressed and both investment companies and broker-dealers have also been excluded from the companies being addressed in the roadmap.

Some of the proposed milestones include improvements in accounting standards “and whether or not the International Accounting Standards Board (IASB) has the funding, the accountability, the resources and the standards capability to reach this evaluation of being one capable set of high-quality standards,” clarified Tarola. Accountability and funding of the IASC Foundation, improvement in interactive data (XBRL) for IFRS reporting and education and training are all proposed milestones as set by the SEC. The timing of these proposals are next year.

For those companies that wish to begin an early use and transition into IFRS, the SEC has also issued as part of the Roadmap, a rule that would allow early adoption of IFRS for fiscal years ending on or after December 15, 2009 by a limited number of companies. Under the rule proposal:

  • IFRS reporting would start with annual report on Form 10-K (not interim reports, registration statements or proxy statements);
  • The first year of IFRS financial statements would include three years of audited financial statements in accordance with IFRS in first filing:
    • Requests comment on an alternative — three years of U.S. GAAP financials and two years of IFRS in the year of adoption;

IFRS vs. GAAP … What’s the Difference?

The image below should at least get a chuckle out of some of you on the main difference between the two standards:

(Source: AICPA)

A quick comparison might make you think that there are a lot of standards missing in IFRS, but that really is not the case. Page to page, IFRS has only 2,000 pages, whereas U.S. GAAP has 20,000-plus, Gannon says with IFRS you need to make your own judgments. To do so successfully, he suggests you need to create a framework to “process the facts, understand the economics, understand the practices and go beyond just speaking with accountants.” Another important part of this is the disclosure area.

There are different requirements. However, this does not necessarily mean different outcomes. In other words you must analyze the impact of the different requirements. Gannon also pointed out the following key differences in a nutshell:

  • Level of convergence. Even “converged” standards have different requirements and relatively few areas where there is no convergence (see chart)
  • Ways that differences in outcome may arise. There are policy alternatives elected under IFRS and there are differences in the detailed application of the general principles; and
  • Differences resulting from first-time adoption of IFRS. Impact of exemptions from retrospective application.

Last Thoughts

So what can you learn from the EU’s follies? “You can’t start too soon!” quipped Salisbury. Some of the lessons you can learn from European countries that have already changed over to IFRS include:

  • Do start early. Salisbury notes that the companies that were surveyed said that they were under pressure towards the end to make the change and had to go back and redo much of the process later. She strongly advises starting the process early.
  • Don’t save the financial reporting disclosure portion till the end.
  • Don’t forget this is not just about accounting. There are strong “project management” and cultural elements and companies need to think early about staff education/training.

And as Tarola advises, “Don’t panic and be ready!”

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Sukanya Mitra is Managing Editor of the Insider™ e-newsletter group.