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
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
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.