Goodbye GAAP

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

Still, Fearon’s 2008 agenda includes an investigation into the differences between GAAP and IFRS, particularly how the changes in revenue recognition, taxation, and hedge accounting would affect his balance sheet and income statement. Fearon isn’t alone: finance departments at other multinationals, such as PepsiCo and Procter & Gamble, are conducting similar internal studies.

Another possible benefit from IFRS is better-looking financial statements. More often than not, a company’s earnings are higher under the international standards, according to a recent study of 129 IFRS-GAAP reconciliation reports of foreign companies (see “Showing a Better Side” at the end of this article). Daimler AG, for one, reported higher revenues, net income, and earnings per share (by 68 cents) when it reported its financial results under IFRS for the first time in April 2007. Without the reconciliation reports, “no one will know why foreign company XYZ typically has a better return on equity than [U.S.] company ABC under GAAP,” says Jack Ciesielski, publisher of The Analyst’s Accounting Observer.

Costly Conversion

For smaller U.S. businesses, especially those with no foreign subsidiaries or competitors, the benefits of convergence aren’t so clear. “The question, obviously, for the companies that don’t have international operations right now is, How do you justify it?” says Christine DiFabio, vice president of technical activities for Financial Executives International (FEI). “It’s going to be expensive.”

How expensive? The large accounting firms won’t estimate how much it would cost companies to convert from GAAP to IFRS, but they acknowledge it won’t be cheap. “It’s too difficult to put down any kind of range,” says Illiano. Kenneth Nielsen Goldmann, partner and managing director of capital-markets services for auditor JH Cohn, says it would be “extremely costly.” Procter & Gamble hasn’t pinned down an exact number, but expects a conversion project would cost tens of millions of dollars, according to comptroller of corporate accounting Mick Homan.

U.S. companies can get a better idea of the cost from their European counterparts. The Institute of Chartered Accountants in England and Wales estimates that European companies with revenue between 500 million euros and 5 billion euros spent 0.05 percent of their revenue in their first year of switching from their local GAAP to IFRS.

As for timing, auditors estimate that installing a new, IFRS-based accounting system will take U.S. companies 18 to 24 months to complete. During that period companies will have to evaluate their entire financial infrastructure — from which departments will be affected to who will need training on a new accounting language to relationships with outside groups that are used to GAAP, including bondholders, banks, and credit-rating agencies.

For the Greater Good?

Despite the cost and effort required, IFRS supporters maintain that CFOs should warm to convergence for the greater good of financial reporting.

“It would be a disservice for companies to sit back and not do anything,” says DiFabio of FEI. A single set of worldwide accounting standards, the thinking goes, would result in more-comparable financial statements across industries and borders, and maintain U.S. companies’ status as competitive global players. “A global set of standards will improve consistency among regulators, capital markets, and the investment community,” DuPont’s Keefer says.

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