International Financial Reporting Standards (IFRS) have been much talked about in the business community over the past year. While the recent economic crisis briefly stalled the IFRS debate, it seems that the spotlight has returned. As capital markets continue their long trend toward globalization, the question of whether the United States should join most of the rest of the world in adopting IFRS and creating a single set of high quality global accounting standards is being analyzed on many fronts. To help you better understand the issues being debated, we offer the following answers to our clients’ frequently asked questions. 

What Are IFRS?

IFRS are the international counterpart to U.S. generally accepted accounting principles (U.S. GAAP) and represent an accounting framework that’s used in more than 100 countries throughout the world. Most major economic markets either currently require public companies to prepare their financial statements in accordance with IFRS or have a plan to switch to IFRS in the coming years. For example, public companies in the European Union have been using IFRS since 2005, while those in Canada will be making the change in 2011. 

Can IFRS Be Used Now?

Domestic public companies that file financial statements with the SEC are still required to prepare those financial statements using U.S. GAAP and are not permitted to follow IFRS. On the other hand, foreign private issuers (that is, non-U.S. companies whose securities are registered in the United States) can currently file their financial statements with the SEC in accordance with IFRS. Previously, these companies were also required to reconcile their IFRS financial results to U.S. GAAP; however, that requirement was recently eliminated.

Nonpublic companies in the United States do not have any legal or regulatory requirements that mandate the use of U.S. GAAP to prepare their financial statements. As such, these companies, assuming the users of their financial statements are willing to accept IFRS financial statements, can prepare them in accordance with the international standards. As an alternative, most nonpublic companies also have the option of using IFRS for small and medium-sized entities (SMEs), which is a simplified version of IFRS. IFRS for SMEs is a self-contained alternative to the full set of international standards that omits some of the more complex requirements in IFRS and includes a reduced list of required disclosures. 

How Do IFRS and U.S. GAAP Differ?

From a big picture perspective, IFRS and U.S. GAAP appear to be similar financial reporting models. Both standards require presentation of similar financial statements (for example, a balance sheet, statement of operations, and statement of cash flows), and the accounting requirements for complex standards like business acquisitions are based on common principles. However, there are many significant differences between the two sets of standards when you look at the specific technical accounting requirements under each. By some measures, there are currently more than 400 differences between IFRS and U.S. GAAP.

The differences between IFRS and U.S. GAAP are varied and aren’t limited to one particular industry or type of transaction. For example, one of the most significant differences relates to the accounting for product development costs, which are capitalized under IFRS and expensed as incurred under U.S. GAAP. Other differences are simply related to the timing of when transactions such as contingent liabilities are recognized in the financial statements. In addition, U.S. GAAP is a “rules-based” set of standards, whereas IFRS is based on broad principles that leave more room for interpretation. This fundamental difference in how the standards are developed is further testament to the divergence between U.S. GAAP and IFRS. 

How Will IFRS Affect My Company’s Financial Statements?

Given the numerous differences between IFRS and U.S. GAAP, it’s difficult to make general predictions about how the adoption of IFRS will affect a company’s financial statements. Based on the experience of adopting IFRS in the European Union, more than half of the adopting companies experienced higher earnings under IFRS and reported an increased amount of equity. However, this means that there were also significant numbers of companies that reported lower earnings and equity figures under IFRS. The best way to determine the effect that IFRS will have on your company’s financial statements is to perform an impact assessment. 

Should I Consider Converting to IFRS?

Making a change to prepare financial statements in accordance with IFRS is an important decision. Many forward-looking business owners and executives are looking at IFRS as the future of financial reporting and are already beginning to prepare their organizations for the change.

It’s important to understand that a change to IFRS is not simply an exercise in changing accounting policies. The adoption of a new set of financial reporting standards will affect information technology systems, internal control processes, employee compensation and benefit arrangements, sales contracts, loan agreements, and many other aspects of the organization. Many companies that have adopted IFRS also used the change process as an opportunity to re-evaluate various aspects of their businesses and to make improvements, thereby leveraging the investment. 

We Can Help

With the IFRS debate back in the spotlight, now is the time to begin thinking about how IFRS will affect your organization. Plante & Moran has a team of international accounting specialists who can help you evaluate what a change to IFRS will mean for your organization, including IFRS impact assessments, implementation planning, conversion assistance, and ongoing technical support. Feel free to contact us for more information. 


IFRS: Is Simpler Better? Plante & Moran’s David Grubb, Michael Colella, and Jon Woods recently held a webinar to discuss the pros and cons of IFRS and help businesses understand the benefits and trade-offs. To view the webinar, go to http://IFRS2009.plantemoran.com.