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The Current and Future Status of IFRS, Research Paper Example

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Research Paper

Introduction

As commerce becomes increasingly global, it is becoming increasingly important that investors can have uniform expectations about the ways that companies report their financial information, and the ways that financial performance can be documented. Globalization of capital market has led to a sharp increase in the importance of international financial reporting regulations in recent years. Accountants worldwide no longer speak national languages but one international language. The common language of accountants is International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB).

The momentum toward IFRS for public companies in the United States and elsewhere seems strong. The Financial Accounting Standard Board (FASB), IASB, Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA), big accounting firms, and others support this movement. A recent survey of chief financial officers (CFOs) and other financial professionals by Deloitte reports that although many of the companies are delaying plans for IFRS as they wait for the SEC to clarify its position, 70 percent favor adopting IFRS as porposed in the SEC roadmap. They want the SEC to set a firm date for adoption of IFRS (Deloitte.com, 2011). As noted earlier, the FASB and the IASB reaffirmed their commitment to intensifying the effort the complete and the major convergence projects described in their memorendum.

Current and Future Status of IFRS

After a slow start with the new administration in Washington, the SEC under Mary Schapiro, President Obama’s choice as chair of the SEC, seems ready to support at least convergence of U.S. GAAP and IFRS. The SEC’s draft Five-Year Strategic Plan, released in October 2009, includes support for a single set of high-quality accounting standards and promotes the convergence effort of the FASB and the IASB (AccountingWeb, 2009). The SEC reaffirmed in February 2010 its intention to make a decision in 2011 as whether to require IFRS beginning in 2015 (Defelice, & Lamoreaux, 2010).

As noted previously, some important accounting organizations including the National Association of State Boards of Accountancy (NASBA) (NASBA.org, 2009) and the New York Socity of CPAs (NYSS-CPA) have opposed the SEC roadmap (New York CPAs Slam IFRS Roadmap, CFO.com, March 6, 2009). However, they would appear to be in the minority. A survey of accounting professionals by the AICPA taken after the SEC’s roadmap was released shows the sentiment in business moving toward IFRS. Fifty-five percent majority of CPAs at firms and companies nationwide are preparing in some way for adoption of IFRS (up from 41 percent previously). Forty-five percent are not preparing yet for the IFRS (down from 59 percent previously) (McCann, 2009). While the existing report shows that IFRS is currently responding to SEC’s request for comment by the deadline of July 31, 2011 (Deloitte.com, 2011).

The Chair of the IASB, Sir David Tweedie, met with Schapiro in an attempt to keep the roadmap on track (Accountacy Age, 2009). Tweedie says, “IFRS are in full swing toward becoming the worldwide language of monetary reporting, and that is the main reason why leaders of the G-20 states in London called for considerable progress toward worldwide accounting principles” (Dzinkowski, 2009). He also cites specific plans for IFRS in Japan, India, and Korea as evidence of momentum in Asia.

Critics make valid points, but it seems unlikely that they will prevail. Historically, a major criticism of IFRS had been that it essentially endorsed all the accounting methods then in wide use, effecting becoming a “lowest common denominator” set of standards (Mackenzie, et al, 2011, p. 5). The trend in U.S. GAAP had been to narrw the range of acceptable alternatives, although uniformity in accounting had not been anticipated as a near-term result. The IOSCO agreement energized IASC to improve the existing standards by removing the many alternative treatments that were then permitted under the standards, thereby improving comparability across reporting entities (MacKenzie et al, 2011, p. 5).

Another critic, Peter Walton (2009, p.44) argued, leaving aside the special case of 100 or so companies that the SEC thinks could move early to adopt IFRS, companies should know at the end of 2011 whether they will have to move to IFRS. According to current thinking, according to Peter Walton, the likelihood is that they will have to adopt IFRS. Companies should not wait for 2011 but should (a) make an assessment as to what impact the adoption will have on the financial statements, investors, systems, and contracts, and so on and (b) plan how to carry out the transition as soon as possible based on the impact assessment. When the 2011 decision comes, companies need to have an action plan ready to go (Walton 2009, p. 44).

Owing to the large number of companies and the detailed rules of the IFRS  the demand for IFRS-specific expertise is huge. Whatever the final timing of the SEC roadmap, the FASB-IASB convergence efforts and joint standards are closing the gap between U.S. GAAP and IFRS and companies are planning for the transition.

Many companies account for under IFRS without being legally obliged to this. This is often referred to as ‘voluntary’ IFRS-compliant reporting. This is not always strictly accurate, however, since indirect obligation often results from demands of cutomers, suppliers, banks, other business partners and/or investors.

The IFRS are also gaining wider acceptance within the United States. Non-U.S. companies are allowed to file reports and interim reports with the SEC that have been compiled according to IFRS, without being obliged to translate them according to U.S. GAAP standards.

Conclusion

While the changes in the accounting standards will have significant effects on the valuations of companies, particularly the new way in which computer software is to be classified, capital market theory is all about perceived risk and reward.  Earnings per share could be affected by the new software classification rules, the more stringent requirements for capitalizing development expenditures, and the requirements that must be met before revaluation can occur.  However, companies that take a proactive approach to these changes can easily minimize the impact on earnings per share, actually giving themselves a boost within the capital markets.  As most financial professionals will attest, proper management of risk and reward is one of the few ways to gain financial certainty.

Over time as the joint IASB-FASB efforts continue, many differences will be reduced or eliminated. The IASB and FASB are collaborating on the many convergence topics, including the ambitious and the convergence agenda. By reducing differences between U.S. GAAP and IFRS, the convergence efforts will facilitate the adoption of IFRS should the SEC decide in 2011 to mandate IFRS.

References

Accountancy Age. (2009). IASB’s Tweedie Meets New SEC Chairman. Retrieved September 10, 2011 from http://www.accountancyage.com/aa/news/1755964/iasbs-tweedie-meets-sec-chairman

Defelice, Alexandra, & Lamoreaux, Matthew, G. (February 24, 2010). No IFRS Requirement Until 2015 or Later Under New SEC Timeline. Retrieved September 10, 2011 from http://www.journalofaccountancy.com/Web/20102656.htm

AccountingWeb.com (2009). Most CFOs Favor Approval of IFRS. Retrieved from http://www.accountingweb.com/topic/cfo/most-cfos-favor-approval-ifrs

Dzinkowski, Ramona. (November 2009). What’s Ahead for Global Standards. Strategic Finance. Retrieved September 10, 2011 from http://www.acg.ru/what_s_ahead_for_global_standards

Mackenzie, Bruce, & Coetsee, Danie, & Njikizana, Tapiwa, & Chamboko, Raymond. (2011). Wiley Interpretation and Application of IFRS. John Wiley and Sons, pp. 5-10. ISBN: 1111803709X

McCann, David. (March 6, 2009). New York CPAs Slam IFRS Roadmap. CFO.com. Retrieved September 10, 2011 from http://www.cfo.com/article.cfm/13254066/c_13252677

NASBA.org. (February 19, 2009). Response to SEC Roadmap, NASBA.org. Retrieved from http://www.nasba.org/files/2011/03/LETTER_IFRS_East_Breakout_2-19Feb09.pdf

NASBA.org (June 1, 2011). IRFS in the US: Responding to the Challenge. Retrieved from http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/AERS/us_aers_IFRS_US_Responding_to_the_challenge%20_1June11.pdf

Walton, Peter. (2009). An Executive’s Guide for Moving from U.S. GAAP To IFRS. Business Expert Press, pp. 44-50.

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