International Financial Reporting Standards (IFRS)

International Financial Reporting Standards (IFRS) can be described as a set of global accounting standards that show how specific kinds of transactions and other events should be presented in financial statements. These set of international accounting standards are issued by the International Accounting Standards Board. Notably, the International Financial Reporting Standards act as replacement of International Accounting Standards that were issued between 1973 and 2000. The main objective of IFRS is to provide a basis for easy international comparison of financial reporting. However, the realization of this objective is relatively difficult because every country has its specific set of rules and regulations that govern the process. Consequently, harmonizing international accounting standards throughout the world is a continual process in the global accounting community.

IFRS Conversion in the U.S.A.:

Since January 1, 2011, International Financial Reporting Standards (IFRS) has been the required framework for most of the financial markets across the globe (Stahlin, Harris, Arnold & Kinkela, 2013). The adoption of this framework was preceded by the introduction of several new and transformed accounting standards by the International Accounting Standards Board. These accounting standards were introduced in attempts to enhance guidance for current preparers and also enable huge consistency among standard setters throughout the globe. As a result, the adoption of IFRS accounting guidelines is significant because it offers an alternative accounting method that can be used to improve students' understanding of GAAP.

Currently, there are more than 12,000 companies in 113 countries that have implemented these standards to a certain extent while other countries are slowly implementing the rules every year. The process of conversion to International Financial Reporting Standards is geared towards enhancing the comparability of financial statements. This will in turn enable investors from across the globe to invest in the best financial instruments anywhere in the world other than their own country or region. As companies in various countries adopt these accounting rules, there have been recent initiatives to educate people about them including professionals, students, and investors (Smith, 2009).

While several countries have already adopted IFRS accounting rules, the United States is in a conversion stage, which implies that the actual time of implementing these rules in America is not yet determined. However, the process of IFRS conversion in the United States has attracted huge concerns and debates from the country's accounting community. These concerns have forced the Securities and Exchange Commission to consider whether to choose conversion or convergence. Due to these concerns, the Securities and Exchange Commission has delayed IFRS conversion in the United States.

Arguments Regarding IFRS Adoption:

As previously mentioned, the adoption of International Financial Reporting Standards in the United States has attracted some concerns regarding the effectiveness and potential impact of these accounting rules. In essence, the debates have resulted in the emergence of divergent arguments between proponents and opponents of the process. One of the major arguments raised by proponents in support of IFRS adoption is globalization. They argue that the world is becoming smaller economically because of globalization, which necessitates the implementation of a universal set of accounting standards.

On the contrary, opponents of the adoption have argued that the enforcement of these standards vary from country to country though the financials may be prepared according to similar IFRS procedures. This implies that the reliability and integrity of financial data will also vary significantly. Notably, these opponents do not necessarily propose the rejection of a global accounting standard that serves as a universal financial language regardless of the validity of their argument. In addition, the removal of differing accounting systems through IFRS adoption may exert pressure on countries where strict financial reporting standards have been lacking (Subler, 2012).

Private and public companies across the United States have used Generally Accepted Accounting Principles (GAAP) for years. These GAAP guidelines were established and introduced by the Financial Accounting Standards Board to guide the process of preparing financial reports and statements. As part of IFRS adoption, the U.S. Securities and Exchange Commission provided a roadmap for American public companies to transit to IFRS in late 2008. However, U.S. SEC did not establish a timeline on the transition though it has issued two progress reports regarding IFRS adoption.

Due to these arguments and concerns, financial executives within the country and around the world wonder if the United States will ever become a complete IFRS convert. Actually, some financial executives and managers have stated that IFRS adoption faces some resistance at the Securities and Exchange Commission (Quinn, n.d.). Some of them do not prefer or recommend IFRS adoption now because of the amount of interpretation and discretion involved in the process. They prefer the adoption of International Financial Reporting Standards after calming of the markets.

Since IFRS adoption has been characterized with several issues, there are concerns on whether the process is dying a slow death in the United States. The answer to this question mainly depends on who is asked, especially because Securities and Exchange Commission is moving slowly in stating its short-term and long-term desires and expectations about IFRS. Furthermore, this process of adoption is also hindered by the seeming inability by SEC to clarify whether it will eventually require IFRS adoption or convergence and within what timeline. The seeming inability by SEC to clarify issues regarding the process is evident in the fact the agency has remained extremely quiet regarding IFRS since its publication of proposed roadmap.

The silence by the Securities and Exchange Commission has cost stakeholders unnecessarily, especially with regards to operational efficiency, credibility, and monetarily. The main question these stakeholders would like answered is when companies will be required to transit from the current GAAP guidelines to International Financial Reporting Standards. Based on the current events, it seems like companies will never be required to do so unless SEC addresses the major questions and concerns regarding IFRS adoption. Notably, IFRS is not considered to be better than GAAP, which hinders the ongoing efforts to bring the two accounting bases together. Therefore, the United States financial sector does not have a compelling reason for adopting IFRS like other countries.

IFRS v. GAAP:

Generally Accepted Accounting Principles have been the main basis for financial reporting in the United States for a long period of time. These principles were introduced by the Financial Accounting Standards Board to guide the process of preparing financial statements and reports. While SEC has proposed a roadmap for transiting to International Financial Reporting Standards, the universal accounting standards are compared to GAAP in terms of their complexities, benefits, and impact. Since IFRS has been a major point of focus by the Securities and Exchange Commission, American companies are becoming more aware of these standards in their ongoing projects. However, these are some major similarities and differences between GAAP and IFRS, especially with regards to their structures.

The similarities and differences contribute to the difference in structure between Generally Accepted Accounting Principles and International Financial Reporting Standards. Some of the major differences in structure between the two accounting standards include & #8230;

Revenue Recognition:

One of the major differences in the structure of IFRS and GAAP is the concept of revenue recognition where IFRS is principles-based while GAAP is principles-based and rules-laden. Notably, the differences in the structure of GAAP and IFRS in relation to revenue recognition are influenced by the manner with which companies operate, particularly their ways of packaging several goods and services in the marketplace. GAAP contains an extensive revenue recognition guidance that includes a huge volume of literature provided by several standard setters in the United States. On the contrary, IFRS has two basic revenue standards that classify revenue transactions within sale of goods, services rendered, construction contracts, and extra use of a business' assets ("IFRS and U.S. GAAP," 2012).

Revenue guidance within GAAP focuses on the realization or earning of revenue since revenue should only be recognized until the occurrence of an exchange transaction. In contrast, revenue recognition guideline for each of the four categories within IFRS incorporates the likelihood that financial benefits linked with the transaction will flow to the business. Furthermore, the criterion is based on the possibility that every revenue transaction and its associated costs can be measured reliably. However, extra revenue recognition guideline applies within every broad category, which implies that the principles are applicable without additional significant rules and/or exceptions. Unlike GAAP, IFRS specifically requires the consideration of the likelihood of financial benefits flowing to the business and the capability to reliably measure the associated costs.

Multiple-element Arrangements:

Multiple deliverables revenue arrangements within GAAP are divided into several accounting units if these deliverables meet the specified criteria as stipulated in the guidance. This is followed by an independent evaluation of revenue recognition of each distinct accounting unit. The U.S. Generally Accepted Accounting Principles incorporates a pecking order for determining a deliverable's selling price. However, the criteria for revenue recognition under IFRS are normally applied separately to every transaction.

In some cases, IFRS requires the division of a transaction into identifiable elements to replicate the substance of the transaction ("IFRS and U.S. GAAP," 2012). In other circumstances, IFRS requires the combination of two or more transactions when they are linked in a manner that the commercial impact can only be understood through referring to the transactions as a whole.

Customer Loyalty Programs:

Under IFRS accounting standards, loyalty or award programs in which a customer earns credit depending on their purchase of goods and/or services should be accounted for as multiple-element arrangements. Therefore, these accounting rules necessitate deferring and distinct recognition of the fair value of the award credits after the realization of every applicable criterion for revenue recognition. These guidelines are applicable regardless of whether the credits can be redeemed for goods and services issued by the business or those supplied by another business.

On the contrary, accounting for customer loyalty programs within U.S. GAAP is characterized with some differences since there are two very dissimilar methods used by entities. While some businesses use a multiple-element accounting method, others employ an incremental cost model. The multiple-element accounting method is where allocation of revenue to the award credits is based on seeming fair value. In contrast, incremental cost model is the fulfillment costs are considered as expenses and accumulated on that basis instead of being deferred in relation to relative fair value. Since they have different approaches, the two accounting methods for customer loyalty programs can result in significantly varying accounting.

Conceptual Approach:

As previously mentioned, IFRS and GAAP differ in their conceptual approaches where the former is principles-based while the latter is rules-based (Forgeas, 2008). The essential characteristic of a principles-based accounting framework is the likelihood of different interpretations for the same transactions. This not only implies second-guessing but also generates uncertainty that necessitate broad disclosures in the financial statements. Unlike a principles-based framework, a rules-based framework has more exceptions. From a conceptual perspective, IFRS and GAAP differ in relation to the methodology of evaluating an accounting treatment. IFRS has a more thorough review of the facts pattern whereas research under GAAP is mainly focused on the literature.

Consolidation:

The other significant difference in the structure of GAAP and IFRS is consolidation where IFRS prefers a control model while GAAP favors a risks-and-rewards model. This implies that under IFRS, some business consolidated with FIN 46(R) may need to be displayed differently.

Required Financial Periods:

GAAP accounting principles basically support presentation of comparative financial statements though a single fiscal year may be presented in certain situations. During this process, public companies must adhere to the rules of Securities and Exchange Commission that generally require balance sheets to the two latest financial years. In addition SEC rules require presentation of other financial statements covering the 3-year period completed on the date of the balance sheet. In contrast, under IFRS, comparative financial information must be presented in light of the previous fiscal period for the total amounts reported in the financial statements.

Balance Sheet and Income Statement Layout:

The United States Generally Accepted Accounting Principles do not specify a particular layout or general requirement for preparing balance sheet and income statement. However, public companies must comply with the stipulated requirements in Regulation S-X. While IFRS does not provide a standard layout for this process, it provides a list of minimum items that are seemingly less prescriptive than Regulation S-X requirements ("U.S. GAAP vs. IFRS," 2011). GAAP and IFRS also differ with regards to classification of expenses, extraordinary items, and discontinued operations presentation in income statements.

Performance Measures Disclosure:

The Securities and Exchange Commission defines some major measures and requires presentation of some headings and subtotals under GAAP. In addition, public firms are banned from disclosing non-GAAP measures in the financial statements and associated notes. In contrast, IFRS promotes diversity in practice regarding headings, line items, and subtotals because some conventional concepts like operating profit are not defined. Therefore, disclosure of performance measures under IFRS is based on what is relevant to the company's understanding of financial performance.

Debt Presentation:

The two accounting rules differ in presentation of debt as current vs. non-current in the balance sheet. Under IFRS, debt liked to breach of agreement must be shown as current unless the lender covenant was reached before the date of the balance sheet. On the contrary, debt associated with agreement violation may be presented as non-current as long as there is a lender agreement to relinquish the demand for repayment at least one year before presentation of the financial statements.

IFRS Conversion Process:

The process of transiting from GAAP to IFRS in the United States has followed a relatively different path than other countries that have already adopted the global accounting rules. In comparison to other countries, the FASB and ISAB have been working on IFRS convergence in the United States for many years. Notably, the process of transiting to IFRS was re-emphasized by the recent SEC proposal. IFRS conversion in the United States is slowly taking place despite of the belief by many accountants that GAAP would develop to become the only set of accounting standards throughout the world.

The process of IFRS conversion in the United States from GAAP started in 2005 after the European Union and some regions in Southeast Asia and the Pacific adopted or move towards the global accounting rules. Actually, it was expected that nearly all companies (except U.S.-based entities) in Fortune Global 500 companies would report using IFRS by 2011. Since then, the momentum towards IFRS for U.S. companies has continued to grow to an extent that serious concerns have been raised regarding duration it will take for the United States to completely adopt IFRS rules.

The culmination of these efforts was when the Securities and Exchange Commission proposed a roadmap of 2014 -- 2016 for IFRS adoption though the actual date of this conversion is yet to be announced. Consequently, several companies, especially those in the banking and capital markets industry have become more interested in IFRS and its potential impacts on financial results and operational efficiency ("Converting to IFRS," 2009).

IFRS conversion generally begins as an accounting change but rapidly saturates the entire company by affecting major operational processes like product development, treasury, human resources, taxation, performance management, and information technology. This implies that a company's transition to IFRS requires the involvement of several functional areas at the beginning of the conversion in order to avoid negative implications on the firm's operations. As a result, the senior management should be engaged in establishing a conversion philosophy and provide the focus through the multi-year initiative.

While it is unlikely that Securities and Exchange Commission will require or permit the global accounting standards for domestic public companies in the foreseeable future, FASB and IASB have continued to move towards completion of accounting standards on financial instruments, leasing, and revenue recognition. In the past few years, the two accounting boards have concluded significant converged approaches for leases and revenue recognition. Furthermore, there are expectations that a converged ultimate revenue recognition standard will be provided within the first half of this year as well as a re-exposure of the combined leases proposal within the same period ("U.S. GAAP Convergence and IFRS," 2013).

As part of their initiatives to enable IFRS conversion in the United States, IASB and FASB have widely agreed on measurement and classification of debt instruments though they have temporarily converged on varying models of impairment. While the FASB described its impairment model in December 2012, the IASB targeted to expose its impairment model in the first quarter of the year. Consequently, the Financial Accounting Standards Board continues to use its new impairment model and is on the verge of providing an exposure draft. Moreover, FASB is moving towards re-exposing its proposed model in early 2014 whereas IASB recently exposed restricted alterations to its measurement and classification standard.

The Financial Accounting Standards Board and International Accounting Standards Board have made some major decisions in their attempts to issue exposure drafts and final standards ("U.S. GAAP Convergence and IFRS," 2013). One of the major concepts that occupied much of their combined initiatives is revenue recognition since they were involved in addressing several re-deliberation issues. Even though the boards have reached converged methods for some major financial operations like leases and revenue recognition, a converged solution for insurance contracts is yet to be obtained. This is despite of the lengthy debates and deliberations that the boards have been involved in though they were expected to expose their latest insurance proposals in the first half of 2013.

Despite of these attempts by FASB and IASB to enable IFRS conversion in America, companies should remain involved in the process of setting standards. In addition to having a good understanding of the changes in financial reporting, these companies require new systems that help in developing and evaluating complex estimates. Moreover, companies may need to provide stakeholder and investor communication and education. However, the need for new systems is dependent on the firm's understanding of financial reporting changes since some companies are likely to be impacted more than others.

The process of IFRS conversion in the United States has mainly revolved around convergence initiatives by the Financial Accounting Standards Board and International Accounting Standards Board. However, the United States Securities and Exchange Commission is yet to determine whether to convert or converge with International Financial Reporting Standards. Actually, SEC announced that it would make the final decision in 2011, which implies that the earliest year that IFRS would be implemented through conversion would be 2015 (Wright & Hobbs, 2010, p.21).

The decision on whether to converge on convert with IFRS would be based on the guidelines established by Securities and Exchange Commission for the transition. These guidelines are seven milestones that would influence SEC decision on IFRS conversion or convergence. The seven milestones listed by the agency are improvements in accounting standards, IFRS education and training in the United States, enhancement in the ability to employ interactive data for IFRS reporting, and comparability for U.S. investors. The other milestones include expected timing of future rulemaking by SEC, execution of the mandatory use of IFRS, and accountability and financing of International Accounting Standards Committee Foundation.

Following the approval of the transition in 2011, Securities and Exchange Commission provided a timeline for IFRS conversion in the United States between 2014 and 2016. According to the timeline, companies are likely to start a staged transition in early 2014 that will enable them to develop a transition plan to be carried out while lessening costs. One of the major advantages of the staged transition is that it would promote timely planning and enable firms to make IFRS transition when it's operationally and financially sensible. This is unlike the period when companies were forced to conform by requirements of the Sarbanes-Oxley Act immediately (Smith, 2009).

Through the staged transition, accelerated filers would start publishing financial statements in 2014 and would be required to file financial statement for 2012 and 2013 for the required three years comparability. The second group of accelerated filers would be required to file starting with the year 2015 together with comparable IFRS financial statements for 2013 and 2014. The final filing would involve non-accelerated filers who will start filing in 2016 and provide comparable financial statements for 2014 and 2015.

The main reason for the staged transition provided by Securities and Exchange Commission is that a staged rollout provides an opportunity for companies to lessen the costs of the shift to issuers as well as resource demands on consultants, auditors, and other financial stakeholders. However, the Commission also recognizes the likelihood of a staged transition to result in lack of comparability of financial information. As stated in its document, SEC acknowledges that the staged rollout is likely to temporarily create a two-fold reporting system that require investors to familiarize themselves with GAAP and IFRS. In order to address these potential challenges, the roadmap provides two alternative proposals with which American issuers that use IFRS would disclose GAAP information ("SEC Road Map for Transition," 2008).

In the first alternative i.e. Proposal a, an American issuer who chooses to file IFRS financial statements would offer the reconciling information from GAAP to IFRS referred to under IFRS 1. IFRS 1 will be presented as a footnote for first-time adoption of International Financial Reporting Standards to the issuer's audited financial statements. Under Proposal B. i.e. The second alternative, American issuers that choose to file IFRS financial statements would provide GAAP to IFRS reconciliation information required under IFRS 1 and disclose some unaudited supplemental GAAP financial information on an annual basis for three years.

When releasing the roadmap for IFRS transition, the Securities and Exchange Commission highlighted the significance of uniformly applying the global accounting rules. This implies that any decision taken to extend the use of IFRS to American issuers would require SEC's evaluation on whether international developments support the affirmation of IFRS as the only set of high-quality internationally accepted accounting standards that is used constantly across countries, industries, and companies.

One of the notable things regarding the proposed roadmap for IFRS conversion in the United States is that the Commission does not address the method it would employ to mandate IFRS for United States issuers. According to the proposal, one of the alternatives would be for the Financial Accounting Standards Board to continue being the designated standard setter. This would help in establishing the financial reporting standards in issuer filing with the Securities and Exchange Commission. Based on the alternative, FASB would probably include all provisions within IFRS and all future alterations to IFRS directly into GAAP. The use of this approach is based on that fact that several jurisdictions used it when adopting IFRS as the model for financial reporting in their capital markets.