Goodbye GAAP

It's time to start preparing for the arrival of international accounting standards.

One of the densest thickets of generally accepted accounting principles is revenue recognition. By one tally, more than 160 pieces of authoritative literature relate to how and when companies record revenue. Now, however, U.S. and international accounting authorities are taking a scythe to the rules. They will mow down “broad swaths” of GAAP, says Robert Herz, chairman of the Financial Accounting Standards Board, en route to producing a single set of global accounting guidelines for revenue recognition.

This slash-and-burn approach is a sign of things to come. For the past five years, FASB and the International Accounting Standards Board (IASB) have been working to merge U.S. accounting rules with international financial reporting standards (IFRS). But this so-called convergence is shaping up to be more of a takeover than a merger of equals — many who favor a single global standard hope to wipe out GAAP altogether.

Experts at the Big Four accounting firms say a Securities and Exchange Commission mandate for all U.S. publicly traded companies to use IFRS is inevitable. The SEC does plan to release a road map in late spring for transitioning U.S. public companies to the international standards, but it has not yet said whether adopting IFRS will be mandatory. Still, many SEC watchers expect the agency to eventually scrap GAAP.

“If I’m reading the tea leaves right, it’s not a question of if but when,” says Jeffrey Keefer, CFO of chemical giant DuPont. Large U.S. companies could start using IFRS instead of GAAP in three years, say accounting firms and finance chiefs, while a mandatory conversion could take effect in five years. Auditors urge CFOs to keep a weather eye on the IFRS movement. “It’s going to be bigger than anybody expects,” says Gary Illiano, a partner at Grant Thornton. Adds Deloitte & Touche partner Joel Osnoss: “From the smallest public companies to the largest, everyone should at least be thinking about what the potential of this will be.”

Large Benefits

Audit firms and multinationals have been pressuring the SEC to keep the global-standards movement on the fast track ever since the end of 2007, when the agency began allowing foreign companies to submit their IFRS-prepared filings without reconciling them to GAAP. That effectively blessed IFRS as high-quality, notes Margaret Smyth, vice president and controller of United Technologies Corp., some of whose international subsidiaries use the global standards. “If it’s good enough for the SEC, I would think it’s good enough for most people,” she says.

And good enough especially for large multinationals, whose CFOs are tired of using more than one accounting system for regulatory purposes here and abroad. “It’s really not cost efficient to maintain two sets of books on different standards,” says Richard Fearon, CFO of Cleveland-based Eaton Corp., which has manufacturing sites in 30 countries.

To eliminate the extra work of adhering to U.S. GAAP as well as to other countries’ accounting rules, Fearon would consider using consolidated global accounting rules. But he has reservations. For one, the current form of IFRS is too principles-based for his taste; he would prefer more specificity in the rules, à la GAAP. Also, he believes the global standards have spawned too many variants among the more than 100 countries that use IFRS-based standards (see Insight, “One Standard, Many Laws“).

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