Goodbye GAAP

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

Keefer’s enthusiasm isn’t widely shared among finance executives, according to surveys by auditing firms. The majority of finance executives trained in U.S. GAAP are reluctant to let it go, the firms report. According to a fall Deloitte & Touche poll of 300 companies (ranging in annual-revenue size from under $100 million to more than $10 billion), only about 20 percent of CFOs would consider adopting IFRS if given the choice.

“I don’t see a lot of U.S. filers adopting it unless they have substantial foreign operations dominating their overall business that are already using IFRS,” says Tim Mammen, CFO of IPG Photonics, a Massachusetts-based manufacturer of high-power fiber lasers and amplifiers with facilities in Germany, Russia, and Italy. He is skeptical of the idea that GAAP could one day disappear from the U.S. accounting landscape.

Others are taking a more active role in the convergence process, in hopes of influencing regulators. For example, Smyth of United Technologies told the SEC that inventory accounting that eliminates LIFO (last in, first out) accounting could be a deal breaker in whether her company would adopt IFRS. International standards bar the use of LIFO accounting, which confers sizable tax benefits to users like United Technologies. “We obviously are not going to switch to IFRS if it means cutting a big check to the IRS,” says Smyth. Sooner or later, though, United Technologies will have to switch.

The European Experience

Advocates for early adoption of IFRS say companies could make the switch in three years, a projection based largely on the experience of European companies. For their 2005 consolidated financials, all 7,000 of the European Union’s listed corporations switched from their home-country GAAP to IFRS. They had nearly four years to plan for the change. To ease investors into the new system, companies tucked a narrative in their 2003 filings on how IFRS would affect their future financials, followed by another report quantifying their forecast of the changes under IFRS. Last, they did away with their local GAAP when putting together their 2005 statements.

In 2003, Daimler launched a four-year project for converting to IFRS that included crafting internal guidelines for applying IFRS, assessing how the new rules would affect its performance measures, and making changes to its technology systems. (Companies like Daimler that were listed on a U.S. stock exchange were given two additional years to switch accounting rules.) The auto giant trained more than 3,000 employees for the conversion, including those in accounting, controlling, treasury, investor relations, and tax.

The EU’s smaller companies, with less exposure to IFRS, took longer to respond to the mandate. Many didn’t get serious until the year before filings were due. “People don’t want to address [changes] until they become imminent,” Illiano says. “No amount of browbeating on the part of accountants was able to overcome that [reluctance], so there was a bit of a fire drill toward the [deadline for] implementation.”

Still, there’s something to be said for taking a wait-and-see approach and letting the standard-setters continue to work on convergence, which has at least another five years to go. (Difficult projects lie ahead for FASB and the IASB, including revenue recognition, accounting for pensions and leases, and financial-statement presentation.) “The more similar the standards are, the fewer differences there are and the less work it will be for U.S. companies when it comes time to convert,” says Danita Ostling, a partner and Americas IFRS leader at Ernst & Young.

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