If the Securities and Exchange Commission decides to force American companies to abandon U.S. generally accepted accounting principles in favor of international financial reporting standards, how will investors react? They will be “underwhelmed,” says Aaron Anderson, director, IFRS policy and implementation at IBM. Anderson made the prediction on Tuesday at an accounting conference sponsored by Pace University’s Lubin School of Business.
“When I look at the impact on IBM and compare it to whether investors will care, frankly, I don’t think they will,” said Anderson, one of four executives participating in a panel discussion on global accounting standards. He pointed out that if the company moves all of its financial reporting to IFRS — and some of its foreign subsidiaries are already reporting under the international standards — the change wouldn’t be material in areas that investors “care about,” such as service contracts and product backlog, which are “numbers that are not reported in GAAP, anyway.”
Panelist Linda Mezon, chief accountant at The Royal Bank of Canada, said whether or not changing to IFRS will be material “depends on where you are coming from.” RBC is “in the thick” of converting to IFRS, she said, as Canada has already mandated the switch. Using international standards to account for revenue, for example, won’t produce any material differences at RBC, but likely will have a big effect on how the bank accounts for financial instruments, said Mezon.
Mezon recalled that when the European Union called for a switch to IFRS in 2005, the conversion caused banks to rework the way they booked derivatives, “so the balance sheet changed significantly” in terms of the transition adjustments. In some cases, those balance-sheet changes affected capital, she said, and “in the banking industry, capital is pretty much everything.” Mezon said she is also keeping an eye on how adopting IFRS may change accounting for loan losses, an issue that will be dealt with in upcoming draft rules.
Jack Klingler, director of accounting research and IFRS implementation at Alcoa, agreed that the impact of IFRS would vary by industry. For his company, international standards pertaining to inventory valuation, research and development costs, and pensions may result in major adjustments, he said. In particular, Klingler said that Alcoa won’t bless a conversion to IFRS until issues around inventory accounting are settled. Currently, Alcoa and other U.S. companies receive a tax benefit from using the last-in, first-out (LIFO) accounting method, which is banned by IFRS. Being forced to dump LIFO could cost those companies significant cash tax payments.
Alcoa executives are also concerned with understanding how hedging rules will change, said Klingler, since the company is a commodities supplier. However, “everything else will be small numbers” with respect to accounting adjustments, he said.
For international banking giant HSBC, which already adopted IFRS for its year-end 2005 consolidated financial statements, a major benefit of the accounting switch is cost reduction, said the bank’s chief accountant, John McGinnis. Reporting U.S. results in IFRS would produce significant efficiencies for the bank, he said, because it would be able to “file under one set of standards.”
IBM’s Anderson noted that converting to IFRS would be an opportunity to take a new look at some old processes. He said IBM may be able to create new global shared-service centers for accounting by moving the whole company to IFRS, or perhaps institute accounting policies (such as a standard goodwill impairment test) that are currently impossible to implement, because subsidiaries are following local GAAPs. Such moves could lead to “greater efficiencies and stronger controls,” he said.
The cost of conversion is another sticking point for companies opposing a move to IFRS. Anderson conceded that switching to international standards will require “a lot of work,” but added that IBM, which has already started the process of preparing for a switch, knows “within a tight range” what it will cost — and in relative terms, “it won’t be very much.”