By Rebekah Alford
Presently, U. S. Corporations and financial institutions present their financial statements in accordance with Generally Accepted Accounting Principles, or GAAP. Increased globalization in business and investing has created interest in creating one standard set of accounting principles that all corporations would follow. While the IFRS conversion to International Financial Reporting Standards has not yet taken place in the U. S., it is in the works.
Currently, U. S. GAAP is created by the Financial Accounting Standards Board, or FASB. IFRS, on the other hand, are produced and developed by the International Accounting Standards Board, or IASB. To help make the transition easier and figure out what works best, the two organizations are continuously conversing and working together.
GAAP is considered to be the best set of regulatory standards in existence at the present time. One fear is that the requirement to adopt and solely adhere to this new set of standards will result in less stringent regulatory requirement. Instead, some are voting for a means of converging the two sets of principles into one to keep them very strict.
Initially the proposed transition, whether adoption or convergence, by the Securities and Exchange Commission was for some companies to begin reporting using the new standards by the year 2014, with all companies doing such by 2016. The largest companies, with more than $700 million in revenues, would start the process. Since the SEC requires that U. S. Companies show three years worth of financial data in their statements, some corporations will need to go back and make changes to statements from 2012 and 2013.
While there are disadvantages to making the transition to this new set of standards, there are also several benefits. The advantageous part of the change includes creating financial statements that more investors and potential investors can understand, better comparability for companies that focus on acquisitions and mergers, and more harmony between international branches in a large corporation. Disadvantages, on the other hand, are the initial costs associated with the change and some of the affects to the income statement and balance sheet for the first few years.
One of the main areas in which a company making the conversion to adopt this new set of standards will need to focus is on the effect on income taxes. The direct effect on an entity's effective tax rate could be disadvantageous or beneficial, mostly resting on debt-to-equity levels. It will be important to assess the impact on future taxes and careful make a plan to combat any negative effects.
In preparation for this significant change, a company should seek to obtain proper training for all of its financial and accounting employees. There are several different programs now available that offer IFRS training and certification. It is important that the necessary people participate in one of these programs prior to the SEC-mandated date of conversion.
While the SEC continues to examine the direct effects of IFRS conversion or adoption, many companies are already making plans to transition. The effects on an entity's financial statements and taxes require careful planning and therefore cannot wait for a final decision. Employees must also be trained in the new set of standards which will take time. One thing is certain, however. There is a need for a global set of standards that allows ease of comparison between financial statements.
Currently, U. S. GAAP is created by the Financial Accounting Standards Board, or FASB. IFRS, on the other hand, are produced and developed by the International Accounting Standards Board, or IASB. To help make the transition easier and figure out what works best, the two organizations are continuously conversing and working together.
GAAP is considered to be the best set of regulatory standards in existence at the present time. One fear is that the requirement to adopt and solely adhere to this new set of standards will result in less stringent regulatory requirement. Instead, some are voting for a means of converging the two sets of principles into one to keep them very strict.
Initially the proposed transition, whether adoption or convergence, by the Securities and Exchange Commission was for some companies to begin reporting using the new standards by the year 2014, with all companies doing such by 2016. The largest companies, with more than $700 million in revenues, would start the process. Since the SEC requires that U. S. Companies show three years worth of financial data in their statements, some corporations will need to go back and make changes to statements from 2012 and 2013.
While there are disadvantages to making the transition to this new set of standards, there are also several benefits. The advantageous part of the change includes creating financial statements that more investors and potential investors can understand, better comparability for companies that focus on acquisitions and mergers, and more harmony between international branches in a large corporation. Disadvantages, on the other hand, are the initial costs associated with the change and some of the affects to the income statement and balance sheet for the first few years.
One of the main areas in which a company making the conversion to adopt this new set of standards will need to focus is on the effect on income taxes. The direct effect on an entity's effective tax rate could be disadvantageous or beneficial, mostly resting on debt-to-equity levels. It will be important to assess the impact on future taxes and careful make a plan to combat any negative effects.
In preparation for this significant change, a company should seek to obtain proper training for all of its financial and accounting employees. There are several different programs now available that offer IFRS training and certification. It is important that the necessary people participate in one of these programs prior to the SEC-mandated date of conversion.
While the SEC continues to examine the direct effects of IFRS conversion or adoption, many companies are already making plans to transition. The effects on an entity's financial statements and taxes require careful planning and therefore cannot wait for a final decision. Employees must also be trained in the new set of standards which will take time. One thing is certain, however. There is a need for a global set of standards that allows ease of comparison between financial statements.
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