Still Waiting, Still Wondering — An Update on the Status of International Accounting Standards

Just over a year ago, the future of accounting standards in the United States seemed certain: Generally Accepted Accounting Principles (GAAP) were on the way out, and International Financial Reporting Standards (IFRS) were on track to be adopted, first for public companies, and then some years down the road, for private enterprises.

Recent events have made the future of accounting for U.S. public companies clearer (a little, anyway), but the future of accounting for U.S. private companies is more uncertain than ever.

Here’s an update on what’s been happening in the past year, and where it is leading.

Bumps in the Road

The November 2008 issuance of the Security and Exchange Commission’s (SEC) proposed roadmap for implementing IFRS coincided with the U.S. financial crisis and global recession. As a result, the SEC put its IFRS proposals on the back burner for much of the past year as it evaluated comments it had received on the proposed roadmap and dealt with more pressing issues.

Some observers thought the SEC’s enthusiasm toward IFRS was cooling. But in February 2010, the SEC issued a statement reaffirming its support for adoption of global accounting standards. At the same time, the SEC staff was directed to develop a comprehensive work plan to evaluate the potential impact of IFRS on the U.S. securities market.

Assuming completion of certain convergence projects by the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), and completion of the SEC work plan, the SEC will decide whether to incorporate IFRS into the U.S. financial reporting system, and if so, when and how. The decision could come as early as 2011 for public companies. If this happens, the earliest that large public companies would be required to use IFRS is 2015.

What About Private Companies?

Private companies are technically not affected by the SEC’s decisions. However, until recently, most observers believed that if U.S. public companies begin using IFRS, private companies would follow suit at some point in the future.

In December 2009, the American Institute of Certified Public Accountants and the Financial Accounting Foundation, the FASB’s parent organization, announced the formation of a blue-ribbon panel charged with making recommendations on the future of accounting standards for U.S. private companies. The 17 panel members represent a cross-section of private company reporting constituencies, including lenders, investors, owners, financial statement preparers and auditors. Clifton Gunderson’s CEO Krista McMasters, is a member of this prestigious panel. The panel is expected to make recommendations possibly as early as the end of 2010, on the future of accounting standards in the United States.

Among the possibilities that the panel might consider for U.S. private company reporting:

Continued use of a single set of accounting standards for both public and private U.S. entities.
Adoption of IFRS for small and medium-sized entities (IFRS for SMEs), a comprehensive accounting basis that was developed and issued by the IASB last year.

It is based on the full IFRS, but requires significantly fewer financial statement disclosures, and excludes or simplifies accounting rules on certain accounting issues infrequently encountered by SMEs.

Adoption of a separate, stand-alone set of accounting standards for U.S. private companies tailored to the needs of the users of those statements.

Gazing into the Crystal Ball

It seems likely that public companies will be required to use IFRS at some point in the future, possibly beginning as early as 2015. There has already been increased use of IFRS by U.S. subsidiaries of foreign companies, as those companies seek to use common accounting standards within their consolidated groups.

“As worldwide acceptance of IFRS continues to expand, we expect to see the continuing expanded use of IFRS by U.S. subsidiaries of foreign companies,” says Bill Drimel, partner and assistant director of assurance services for Clifton Gunderson. “However, the future of accounting for U.S. private companies is now considerably murkier.”

Drimel says he continues to advise private companies that it is too early to spend a lot of time and effort developing a plan for converting to IFRS. That is even truer now than it was a year ago.

Where Did IFRS Come From?

The movement toward a single set of high-quality, global accounting standards began to take hold in the United States in 2002. That was when the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) jointly committed to developing compatible accounting standards for use in both domestic and cross-border financial reporting. Ever since, the two bodies have been working together toward “converging,” or eliminating differences between U.S. standards and international standards.

In November 2008, the SEC issued a proposed “roadmap” for the potential future use of IFRS by U.S. publicly traded companies. The proposed roadmap called for revisiting progress made toward certain milestones before making a final decision on whether and when U.S. companies would begin using IFRS.