IFRS or U.S. GAAP – Scenarios for the Future

In developing its comment letter to the SEC on its proposed roadmap, the Financial Accounting Standards Board used the report "Global Accounting Convergence and the Potential Adoption of IFRS by the United States: An Analysis of Economic and Policy Factors." The research was conducted by professors from Wharton, the University of Chicago and MIT's School of Management.

The research study outlines several scenarios for the evolution of financial reporting standards in the U.S. The report notes that the scenarios presented are neither exhaustive nor mutually exclusive. The scenarios include:

• Maintain U.S. GAAP with acceptance of IFRS from foreign firms
• Maintain U.S. GAAP with continued convergence between IFRS and U.S. GAAP
• Allow choice between IFRS and U.S. GAAP, but require reconciliation
• Allow unrestricted choice between IFRS and U.S. GAAP
• Adopt "U.S.- Specific IFRS"
• Set conditional timetable to fully Adopt IFRS
• Create international U.S. GAAP (I-GAAP)

The study does an excellent job summarizing tradeoffs between the scenarios. Based on comment letters received by the SEC on its roadmap, it appears many individuals and organizations support maintaining U.S. GAAP with continued convergence between IFRS and U.S. GAAP. Cooperation between the U.S. FASB and the IASB has led to improvements in both sets of standards. Continued convergence will result in even more improvements.

One concern about adoption of IFRS in the U.S. is that it would eliminate competition between standard setters and grant monopoly status to the IASB. The research study lists a number of potential problems this could create which includes lack of incentives to innovate and mounting political pressure as consensus must be reached across a wide range of political regimes and interests.

The discussion regarding creation of an international U.S. GAAP (I-GAAP) is very interesting. Under this scenario, the U.S. would develop a set of standards that would compete directly with IFRS. Whether this idea has legs is debatable.

The idea of allowing unrestricted choice between IFRS and U.S. GAAP - perhaps after a period of time to allow for more convergence of the standards - may have merit to some observers. Both standards are considered high-quality. Why not let market forces drive the decision? Doing so keeps competition alive between the standard setters and would result in a more orderly transition to IFRS for U.S. companies.

What do you think about the scenarios outlined in the study, the importance of competition between standard setters and the need to allow for more time for convergence?

- Paul Parks|www.IFRS.com

Comments

[Legal advance funding]

The requirement to reduce the amount of revenue recognized for the estimated portion that may be un collectible includes situations in which an entity enters into contracts with customers and expects a proportion of them to default,but it does not know which specific customers will be default.

[outlook add ins]

GAAP and IFRS follow different approaches for the determination of specific amounts as well as the amounts are recognized in financial statements and within the notes. One of these instances occurs in the measurement of inventory. Unlike GAAP which accepts the FIFO, LIFO, and weighted-average methods, IFRS does not accept LIFO. Also, the inventory is recorded on the balance sheet and IFRS requires that it reported at the lower of historical cost or Net Realizable Value. Also,GAAP requires inventory to be reported at the lower of historical cost or replacement value. Another difference occurs in the measurement of property, plant, and equipment. Property, plant, and equipment are originally measured at cost. After recognition, GAAP and IFRS have variations in treat these assets. GAAP does not allow for any revaluation after recognition.

[Bill of Rights]

Move along with it as long as liberty and the free market is solid with your ideals.

[Home Business]

Competition is definitely good! I agree with the "Why not let the free market decide" post. Also, you don't want monopoly status to the IASB.

[neverfull]

I think that the US will definitely have to move towards IFRS reporting. Otherwise, there are bound to be problems with the discrepancy between different reports. Hopefully, they will make the right decision.

[Michael]

Very good and interesting article posted...Specially "One concern about adoption of IFRS in the U.S. is that it would eliminate competition between standard setters and grant monopoly status to the IASB."
http://www.hotfileseek.com

[Patrick Gouffran]

A recent survey addressing U.S. executives shows that:

* To convert to IFRS, U.S. companies expect to pay more than their European counterparts.
* The total cost estimated for this work can be split three ways: 40%-50% for technology, 30%-40% for processes and about 20% for technical accounting work.

A key point is the capacity to have at one's disposal a technology which facilitates the project, whatever the chosen scenario. This particularly applies here because this technology covers reconciliation, audit trail, traceability, and data quality assurance—features required by all the ongoing regulations for better governance. So, all these scenario issues can be seen as opportunities to re-examine the financial and accounting systems. Technology is ready!

Patrick Gouffran
SVP, FSI Strategy
Axway

[Joe Jefferis]

Competition is good. Competition works. Competition will get you a better quality product at a lower price. Somebody is trying to sell us something; mandatory International Financial Reporting Standards. The problem is the benefits of adopting ("buying IFRS") versus the costs ($32MM per public company) are difficult to justify. It is obvious that those who prefer early, quick, and mandatory adoption are positioned to gain financially from early, quick and mandatory adoption. If I had to select a path, permitting choice between IFRS and GAAP, but requiring reconciliation makes the most sense as a transitional step toward a single standard. Financial matters should be based on factual intelligence and experience, not mythical destinations.

[Stephanie Campion]

Does anyone honestly believe that this is an area in which competition is relevant? For what purpose? We're not trying to sell anything...

[Michalina Pietas]

Many companies may soon be required to report in multiple accounting standards if the US does not either accept or move toward IFRS. Multiple standard reporting provides no value to anyone, other than to increase accounting and auditing costs needlessly. Most countries are moving toward IFRS (over 100 currently), and if the US moves away from IFRS, multi-national companies will be reporting their primary reports in IFRS, creating parallel reports in US GAAP, which will lead to more auditing fees and errors, and for some small segments of their companies which would normally accept IFRS, they would be reporting in local GAAP. This type of financial shuffling serves no one.