Goodbye GAAP

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

Nor should U.S. companies contemplating a changeover act in haste if the SEC gives the go-ahead. They risk wasting time if they provide detailed training for their finance teams too early and the knowledge then atrophies before it can be put into practice. SEC staffers learned that the hard way when they underwent extensive IFRS training twice before embarking on a review of foreign companies’ IFRS filings, according to Carol Stacey, former chief accountant of the SEC’s Division of Corporation Finance. The anticipated flood of such filings materialized much later than expected, when EU companies began meeting IFRS requirements.

One advantage U.S. accountants could have over Europe’s experience is GAAP itself. It is apparently much easier to transition from a more prescriptive set of standards to one that allows more judgment. “The differences tend to be idiosyncrasies, which makes it easier to switch from GAAP to IFRS than the other way around,” says John Ramsay, CFO of Syngenta, a Switzerland-based agribusiness that uses IFRS and was filing GAAP reconciliation reports until this year.

It Never Stood a Chance

Accounting experts wax nostalgic about the days when the concept of converged accounting standards was first introduced. Initially, the expectation was that rulemakers would take the best aspects of GAAP and IFRS to create the highest-quality standards possible — no matter how long it took. “We seem to have lost patience somewhere along the line,” says Charles Niemeier, a member of the Public Company Accounting Oversight Board.

The truth is that U.S. GAAP never stood a chance of prevailing as the global standard, according to Herz. “We do have the best reporting system, but the rest of the world will not accept it,” he says. “It’s too detailed for them.”

If the rulemakers have given up on GAAP, then timing is the major issue facing the SEC. Institutional investors and analysts have criticized the commission for what they consider its premature allowance of IFRS for foreign companies, before those standards are fully converged with GAAP. They’re wary of letting U.S. companies adopt IFRS within three to five years, as has been projected. In response, SEC chairman Christopher Cox has said that GAAP will stick around for many years.

IFRS is much less voluminous than GAAP, lacking the incrustations that GAAP has acquired through years of interpretation. Accounting experts will simultaneously praise the international rules for their brevity and deride them for giving companies too much leeway. That discrepancy could undercut the comparability that regulators tout as a benefit of IFRS. Under the footnote-lite international rules, “you don’t really know what the differences [between companies] are,” says H. David Sherman, an accounting professor at Northeastern University and a former SEC academic fellow.

Indeed, opinions are split over whether convergence has progressed to the point that both standards are interchangeable today. Says Grant Thornton’s Illiano, “If you think that the accounting standards in the U.S. and the accounting standards in IFRS are going to match up word for word, they’re never going to get there.”

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