Goodbye GAAP

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

Sarah Johnson is a senior writer at CFO.

Not If, But When

2001: The International Accounting Standards Board (IASB) is established to work on international financial reporting standards (IFRS).

2002: U.S. and international standard-setters issue the Norwalk Agreement to make their current rules compatible.

2002: The European Union (EU) announces its member states must use IFRS for their 2005 financial statements.

2005: SEC chief accountant Donald Nicolaisen releases a road map for allowing IFRS filings without GAAP reconciliation for foreign firms by 2009 (or earlier).

2006: The IASB and FASB agree to work on all major projects jointly.

2007: In April, President Bush announces IFRS will be recognized in the United States within two years as part of an agreement with the EU. In November, the SEC makes that prediction a reality.

2008: The SEC will vote on a proposal mapping out a timeline for moving U.S. companies to IFRS.

2009: The IASB will end its moratorium for when companies need to adopt its new accounting standards. The board had frozen its rules while more countries adopted IFRS.

2011: The earliest that accounting firms and U.S. multinationals estimate large U.S. companies could begin to use IFRS rather than GAAP. Canadian, Indian, and Japanese companies are slated to begin using the global standards.

2013: The earliest projection by accounting firms for mandating that U.S. companies convert their financials to IFRS, with 2015 being the first year smaller companies could follow suit.

Switching Systems

Accounting experts say companies should start thinking now about whether to use international financial reporting standards (IFRS) instead of U.S. GAAP, so they could act quickly if given the option. Their advice:

  • Gather a team to analyze the issues involved. Large multinationals are using their controllers as their point person and turning to their IT, investor relations, and treasury departments for input.
  • Look over the International Accounting Standards Board’s agenda (on Decide which of its critical projects need to be finished before you would begin taking on a new accounting language, suggests Mary Tokar, head of the IFRS group for KPMG International.
  • Compare IFRS and GAAP. How will your balance sheet, financial-reporting process, and disclosures be affected? Tokar recommends you identify your 10 biggest issues, rate each of them by its impact, and divvy them up to project teams that can forecast how much work each would take.
  • Expect more disclosures, especially during the transition. To make up for the move from a more rules-based system to one that allows more judgment, companies will need to make up the differences with footnotes.
  • Take a new look at contracts and debt covenants that require the use of GAAP and may need to be renegotiated.
  • Evaluate your people. Who would need to be trained, and how long would it take?
  • Look over your shoulder. What are your competitors doing?
  • Don’t forget investors. The investor-relations groups at EU companies spent late nights scrambling to get stakeholders up to speed, Tokar says. When that first round of IFRS financials comes out, you want to “focus on the operations of the company and not have an accounting training session,” she adds. — S.J.

Some companies whose 2006 earnings declined when their IFRS statements were reconciled with GAAP


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