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Bridging the Gap: GAAP to IFRS

Brian J. Sharkey, CPA, CVA, CEPA
Brian J. Sharkey, CPA, CVA, CEPA Director-in-Charge, Transaction Advisory & Business Valuation

“How might IFRS impact me?” “Will it change the way I run my business?” “Will it change the way I report earnings?” “Should I be doing anything now so that I’m ready for it?” “What will it mean for me and my company?”

These questions may run through your head as you hear the whispers of the potential change of accounting rules to International Financial Reporting Standards (IFRS).

IFRS, a set of accounting standards developed by the Internal Accounting Standards Board (IASB), is slowly becoming the global standard for accounting and reporting. Approximately 120 countries have already begun permitting the preparation of financial statements in accordance with IFRS and about 90 of those countries now require reporting in accordance with IFRS.

Today, U.S. companies report their financial results based on U.S. GAAP, which is currently promulgated by the Financial Accounting Standards Board (FASB).  Since 2002, the IASB and FASB have been working together to address differences between the standards with the ultimate goal of creating one set of global standards to facilitate the comparison of financial statements around the world.  The IASB and FASB have gradually chipped away at the number of differences between the sets of standards, however, there are still many differences that need to be resolved, including, but not limited to.

(1)   Inventory—While permitted under U.S. GAAP, LIFO is not allowed under IFRS.

(2)   Leases—IFRS rules result in many more capital leases than under U.S. GAAP.

(3)   Intangibles—Certain development costs may be capitalized under IFRS, while development costs are expensed under U.S. GAAP.

(4)   Post-employment benefits—IFRS and U.S. GAAP differ with respect to both liability and expense recognition.

(5)   Goodwill—There are significant differences in the identification and measurement of impairment losses.

The Securities and Exchange Commission (SEC) has committed to announcing by the end of 2011 whether it intends to continue its support of convergence initiatives.  Without the SEC’s support, it is highly likely that the use of IFRS by U.S. companies will be limited to companies with foreign reporting requirements or foreign companies that file with the SEC.  Additionally, even if the SEC announces its continued support, it will be years before the largest U.S. companies begin reporting under IFRS, and perhaps many more before owners of and lenders to private businesses begin accepting financial reports based on IFRS.

Despite this long timeframe, it is important to continue to monitor changes because the ultimate conversion effort will be monumental.  By keeping up with the proposed changes in standards and assessing their potential impact, you should be able to position yourself and your organization for a smooth transition toward the unified set of rules—whenever they arrive.

Brian J. Sharkey can be reached at Email or 215.441.4600.

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Brian J. Sharkey, CPA, CVA, CEPA

Brian J. Sharkey, CPA, CVA, CEPA

Director-in-Charge, Transaction Advisory & Business Valuation

Manufacturing & Distribution Specialist, M&A/ Transaction Advisory Services Specialist, ESOPs Specialist, Business Valuation Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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