Financial accounting and reporting in the U.S
Financial accounting and reporting in the U.S. are changing at a high rate. There has been an issue of twelve new and launched online by the Financial Accounting Standards Board, the primary accounting standard setter in the U.S., which organizes existing GAAP into 90 topics (FASB, 2009). At the same time, a significantly more dramatic change is on the horizon for accounting professionals, company executives, and financial statement users.
Consistent with the SEC’s 2008 proposal entitled, “Roadmap for the Potential Use of Financial Statements Prepared by International Financial Reporting Standards by U.S. Issuers,” (Roadmap) in approximately five years, public companies likely will have to utilize IFRS, instead of U.S. GAAP (SEC, 2008). Some large global U.S.-based entities are permitted to early-adopt IFRS starting in 2009. The SEC expects to reach a final decision regarding the mandatory adoption of IFRS in 2011 (SEC, 2008).
If the U.S. adopts IFRS as the required standard for financial accounting and reporting, the U.S. will join the more than 100 nations worldwide that currently permit or mandate the use of IFRS. For example, starting with the 2005 reporting period, all European public companies listed on any European stock exchange must prepare IFRS-based financial statements. Other nations, such as Canada, are planning to adopt IFRS shortly.
Currently, U.S. GAAP and IFRS are not identical. However, since signing their Memorandum of Understanding, commonly referred to as the “Norwalk Agreement,” in 2002, FASB and the IASB have been working together to develop a set of high-quality globally acceptable financial accounting standards and to bring about the convergence of U.S. GAAP and IFRS. Since the Norwalk Agreement was signed, many new and revised standards issued by FASB and the IASB have served to eliminate existing differences, and many variations removed, others persist.
Accounting for and reporting by global entities is quite complicated. The U.S., as well as international accounting rules, require that a parent company consolidates its subsidiaries’ financial statements with the parent company’s financial statements. New standards issued by the IASB and FASB have eliminated many differences between U.S. GAAP and IFRS in accounting for business combinations and financial reporting for consolidated entities. However, some significant gaps continue to exist.
What will vital financial ratios be affected by the adoption of FAS 141R and FAS 160? What will be the likely effect?
Adoption of FAS 141R and FAS 160 likely will decrease the company’s debt to equity and debt to asset ratios. These occur because ownership increases through the reclassification of the non-controlling interest. The likely increase in assets and investment due to the revaluation of higher market values will further decrease these ratios for subsequent acquisitions.
Could any of the recent and forthcoming changes affect the company’s acquisition strategies and potentially its growth?
Future acquisition value will depend on the full market value. These will increase goodwill, non-controlling interest, and, undervalued assets, increase assets. If assets overvalued, assets will decrease by the total amount. High costs typically are associated with acquisitions. These will have to be expensed as incurred, reducing income. If an entity is trying to meet earnings targets, this could affect the acquisition decision.
What were FASB’s primary reasons for issuing FAS 141R and FAS 160?
The FASB’s main objective in the issuance of FAS 141R and FAS 160 was to improve the information reported about a business combination and to achieve global convergence with the IASB and IFRS 3 (IASB, 2008). The FASB worked closely with the IASB to promote international convergence of accounting standards. Exhibit 2 summarizes the significant differences between FAS 141 and FAS 141R.
What were FASB’s primary reasons for issuing FAS 141R and FAS 160? (Research question)
As expressed in FAS 141R and FAS 160, FASB issued the standards to improve the relevance, reliability, and comparability of financial statements. Besides, FAS 141R and FAS 160, as well as the revisions to IFRS 3, were part of the FASB/IASB joint projects to facilitate convergence in this area of accounting (FASB, 2007).
What is qualifying SPE’s? Do they exist under IFRS? What is FAS 166, eliminating the concept of qualifying SPEs on the convergence of accounting standards?
According to the FASB Codification, qualifying SPE’s are trusts or other legal entities that meet the conditions outlined in FAS 140 (FASB, 2009, www.fasb.org). These entities typically involve securitization of mortgages. IASB does not recognize the concept of qualifying SPEs. Thus, the elimination of eligibility SPEs by FAS 166 facilitates convergence in this area of accounting.
If the company adopts IFRS, what changes should management be aware
Administrative and Accounting Changes
Complying with IFRS standards requires several significant changes in accounting departments’ collection, classifying, and presenting financial data.
Financial Statements and Periodic Reporting
Preparing financial statements under IFRS is similar to GAAP guidelines, but with a few significant differences. IFRS recognizes the same set of standard financial statements, including the income statement, balance sheet, and statement of cash flows.
Accounting for Assets and Inventory
IFRS presents a few significant changes that can affect how a U.S. business offers its assets and inventory. The last-in, first-out method of inventory costing is prohibited under IFRS, for example, which can radically change the way a U.S. business accounts for its inventory.
Revenue Recognition Principles
Revenue recognition standards, in general, are more uncomplicated and more straightforward under IFRS, which can require significant differences for financial reports based on GAAP. The definition of revenue is the fundamental difference between the two.
What are the principle differences between IFRS and U.S. GAAP?
A significant difference between GAAP and IFRS is that GAAP is rule-based, whereas IFRS is principle-based.
With a principle-based framework, there is the potential for different interpretations of similar transactions, which could lead to extensive disclosures in the financial statements. Although the standards-setting board in a principle-based system clarifies unclear areas, these could lead to fewer exceptions than a rule-based system.
Another difference between IFRS and GAAP is the methodology used to assess accounting treatment. Under GAAP, the research is more focused on the literature, whereas, under IFRS, the review of the facts pattern is more thorough.