IFRS Conversion in the U.S.: Standards, Impacts & GAAP

Introduction to IFRS and Its Global Role

International Financial Reporting Standards (IFRS) can be described as a set of global accounting standards that specify how particular kinds of transactions and other events should be presented in financial statements. These international accounting standards are issued by the International Accounting Standards Board (IASB). Notably, IFRS serves as the replacement for 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, realizing this objective is relatively difficult because every country has its own specific set of rules and regulations that govern the process. Consequently, harmonizing international accounting standards throughout the world remains a continual process within the global accounting community.

Since January 1, 2011, IFRS has been the required framework for most financial markets across the globe (Stahlin, Harris, Arnold & Kinkela, 2013). The adoption of this framework was preceded by the introduction of several new and revised accounting standards by the IASB. These standards were introduced to enhance guidance for current preparers and to promote greater 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 also improve students' understanding of GAAP.

Currently, more than 12,000 companies in 113 countries have implemented these standards to some extent, while other countries are slowly adopting the rules each year. The conversion to IFRS is geared toward 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, not just within their own country or region. As companies in various countries adopt these accounting rules, recent initiatives have sought to educate professionals, students, and investors about them (Smith, 2009).

While several countries have already adopted IFRS, the United States remains in a conversion stage, meaning the actual date of implementation has not yet been determined. The process of IFRS conversion in the United States has attracted significant concerns and debates from the country's accounting community. These concerns have led the Securities and Exchange Commission (SEC) to weigh whether to pursue full conversion or convergence, and as a result, the SEC has delayed IFRS conversion in the United States.

Arguments Regarding IFRS Adoption in the U.S.

The adoption of IFRS in the United States has attracted concerns regarding the effectiveness and potential impact of these accounting rules. The debate has produced 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 contend that the world is becoming smaller economically, which necessitates the implementation of a universal set of accounting standards.

Opponents, however, argue that the enforcement of these standards varies from country to country even when financials are 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 advocate for rejecting a global accounting standard that serves as a universal financial language. In addition, the removal of differing accounting systems through IFRS adoption may exert pressure on countries where strict financial reporting standards have historically been lacking (Subler, 2012).

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

Due to these arguments and concerns, financial executives both within the country and around the world question whether the United States will ever become a complete IFRS convert. Some financial executives and managers have stated that IFRS adoption faces resistance at the SEC (Quinn, n.d.). Some do not recommend IFRS adoption at this time because of the amount of interpretation and discretion involved in the process, preferring to wait until market conditions stabilize.

Since IFRS adoption has been characterized by several unresolved issues, there are concerns as to whether the process is dying a slow death in the United States. The answer depends largely on who is asked, especially because the SEC has been slow to state its short-term and long-term expectations about IFRS. The process is further hindered by the SEC's seeming inability to clarify whether it will eventually require conversion or convergence, and within what timeline. This uncertainty is evidenced by the agency's near silence regarding IFRS since the publication of its proposed roadmap.

That silence has cost stakeholders unnecessarily in terms of operational efficiency, credibility, and financial resources. The main question stakeholders want answered is when companies will be required to transition from GAAP to IFRS. Based on current events, it seems unlikely that companies will be compelled to do so unless the SEC addresses the major questions and concerns surrounding IFRS adoption. Notably, IFRS is not considered superior to GAAP, which further hinders the ongoing efforts to bring the two accounting frameworks together. Therefore, the United States financial sector lacks a compelling reason to adopt IFRS in the same way other countries have.

Key Structural Differences Between IFRS and GAAP

Generally Accepted Accounting Principles have long been the main basis for financial reporting in the United States. While the SEC has proposed a roadmap for transitioning to IFRS, the two sets of standards are frequently compared in terms of their complexities, benefits, and impacts. As American companies become more aware of IFRS, it is important to understand the major similarities and differences between the two frameworks, particularly with regard to their structures.

One of the major structural differences between IFRS and GAAP concerns revenue recognition. IFRS is principles-based, while GAAP is both principles-based and rules-laden. These differences are shaped by the ways companies package goods and services in the marketplace. GAAP contains extensive revenue recognition guidance comprising a large volume of literature provided by multiple standard setters in the United States. In contrast, IFRS has two basic revenue standards that classify revenue transactions within four categories: sale of goods, services rendered, construction contracts, and the use of a business's assets ("IFRS and U.S. GAAP," 2012).

Revenue guidance within GAAP focuses on the realization or earning of revenue, requiring that revenue be recognized only when an exchange transaction has occurred. In contrast, IFRS revenue recognition guidelines for each of the four categories incorporate the likelihood that economic benefits linked to the transaction will flow to the business, and require that both the revenue and associated costs can be measured reliably. Unlike GAAP, IFRS specifically requires consideration of both the probability of future economic benefits and the ability to reliably measure associated costs.

Multiple-deliverable revenue arrangements under GAAP are divided into several accounting units if they meet specified criteria, with revenue recognition evaluated independently for each distinct unit. U.S. GAAP incorporates a hierarchy for determining the selling price of a deliverable. Under IFRS, however, revenue recognition criteria are normally applied separately to each transaction.

In some cases, IFRS requires the division of a transaction into identifiable components to reflect 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 way that the commercial effect can only be understood by considering the transactions as a whole.

Under IFRS, loyalty or award programs in which a customer earns credits based on purchases of goods or services must be accounted for as multiple-element arrangements. These rules require deferring and separately recognizing the fair value of award credits once the relevant criteria for revenue recognition are met. This applies regardless of whether the credits are redeemable for goods and services provided by the company itself or by a third party.

Under U.S. GAAP, accounting for customer loyalty programs differs because two very different methods are in use. Some businesses use a multiple-element accounting method, allocating revenue to award credits based on their relative fair value. Others use an incremental cost model, treating fulfillment costs as expenses accrued on that basis rather than being deferred based on relative fair value. Because these two approaches are distinct, they can produce significantly different accounting outcomes.

As noted above, IFRS is principles-based while GAAP is rules-based (Forgeas, 2008). A key characteristic of a principles-based framework is the potential for varying interpretations of the same transaction, which creates uncertainty and necessitates broader disclosures in financial statements. A rules-based framework, by contrast, contains more exceptions. From a conceptual standpoint, IFRS and GAAP also differ in their methodology for evaluating an accounting treatment: IFRS requires a more thorough review of the facts pattern, whereas research under GAAP is primarily focused on the existing literature.

Another significant structural difference between GAAP and IFRS is in consolidation. IFRS favors a control model while GAAP favors a risks-and-rewards model. As a result, some entities consolidated under FIN 46(R) may need to be presented differently under IFRS.

GAAP generally supports the presentation of comparative financial statements, though a single fiscal year may be presented in certain situations. Public companies must adhere to SEC rules that generally require balance sheets for the two most recent fiscal years, along with other financial statements covering the three-year period ending on the balance sheet date. Under IFRS, comparative financial information must be presented for at least the previous fiscal period for all amounts reported in the financial statements.

U.S. GAAP does not prescribe a specific layout for balance sheets or income statements, though public companies must comply with the requirements of Regulation S-X. While IFRS also does not mandate a standard layout, it provides a list of minimum required items that is less prescriptive than Regulation S-X ("U.S. GAAP vs. IFRS," 2011). GAAP and IFRS also differ with respect to the classification of expenses, extraordinary items, and the presentation of discontinued operations in income statements.

The SEC defines certain key measures and requires the presentation of specific headings and subtotals under GAAP. Public companies are prohibited from disclosing non-GAAP measures in financial statements and related notes. IFRS, by contrast, promotes diversity in practice with respect to headings, line items, and subtotals, since certain conventional concepts such as operating profit are not defined under IFRS. Disclosure of performance measures under IFRS is therefore based on what is relevant to understanding a company's financial performance.

The two frameworks differ in the presentation of debt as current versus non-current on the balance sheet. Under IFRS, debt linked to a breach of a lending covenant must be classified as current unless the lender waived the breach before the balance sheet date. Under GAAP, debt associated with a covenant violation may be presented as non-current provided there is a lender agreement to waive the repayment demand for at least one year before the financial statements are presented.