The future of International Financial Reporting Standards in the United States
The Securities and Exchange Commission says IFRS Adoption in the US is unlikely
Based on recent discussions at the Securities and Exchange Commission (SEC), US public companies will not be required to adopt International Financial Reporting Standards (“IFRS”) any time soon. Some of the key issues contributing to this are the undefined role of the US Financial Accounting Standards Board (FASB) in the global accounting standard setting process, the focus of the SEC on other required rule making such as Dodd-Frank, difficulties finding stable sources of funding to assure the International Accounting Standards Board’s (IASB) independence, and questions about the ability of the IASB to provide timely interpretive guidance and react to changes needed to respond to changes in the economic environment. However, among standard setters at the FASB and SEC there continues to be a long-term vision of a single set of high-quality, globally accepted accounting standards.
An outright move to international standards in the US may be off the table but a converged set of standards is likely to continue to evolve. With the completion of the revenue recognition standard there are two remaining joint convergence projects on leases and insurance contracts. After these are complete, the boards are likely to return their focus to improving the quality of their respective standards and preventing any further divergence between US GAAP and IFRS.
Then why is IFRS aptitude important?
Despite a lack of total adoption of IFRS in the near future, there are many valuable reasons for being financially bilingual. The importance of IFRS to US companies of all sizes, whether public or private, is rapidly increasing in our global economy. Some of the primary drivers for IFRS in the US include:
- Reporting needs of stakeholders not based in the US – Many US companies have investors or stakeholders not based in the US. These stakeholders may require financial reporting under IFRS. In our practice we see many companies entering the US that are owned by a foreign parent. These companies often times are required to report to the parent company or to the parent company auditors using IFRS as their accounting and reporting framework.
- IFRS reporting needs for non-US subsidiaries – Multinational companies with subsidiaries in other countries need to monitor the IFRS activity of non-US subsidiaries and may have IFRS reporting requirements for a subsidiary’s local statutory reporting.
- On-going US GAAP and IFRS convergence efforts – IFRS has had a significant impact on US GAAP over the past 6 years or more. Accounting changes from the Boards’ joint efforts will continue and the focus on achieving a single set of high quality global standards will affect future standard setting activity by the FASB and IASB.
- Capital raising, global investment opportunities, and mergers and acquisitions activity may involve cross-border activity and the use of IFRS. Despite the coordination and convergence attempts of the FASB and IASB, there are still differences in bottom line impacts and disclosures. It is important in any transaction to understand the differences and their effect on deal metrics and ongoing financial reporting requirements.
What is the impact on my company?
We believe that although the full adoption of IFRS by US companies is unlikely, it will continue to be important to remain aware of financial reporting changes as the FASB and IASB continue their standard setting efforts going forward. The continued evolution of a global economy will drive an ongoing focus on a single set of global standards. In addition, there will be time and effort needed in the near term in order to properly manage the adoption of new converged standards over the next several years.
Resources at Clayton & McKervey, P.C.
We have staff educated in IFRS including an individual who has earned the AICPA IFRS Certificate of Educational Achievement. We stay involved in the standard setting processes of both the FASB and IASB so Clayton & McKervey, P.C. can offer an understanding of the significant impacts on businesses that may arise from the standard setting processes. Clayton & McKervey, P.C. specializes in servicing middle-market entrepreneurial companies who have foreign operations, are owned by foreign companies, or have significant foreign activity. We have dedicated our resources to gain specialized knowledge in international accounting and tax reporting services.