If a change from U.S. generally accepted accounting principles, known as Generally Accepted Accounting Principles (GAAP), to International Financial Reporting Standards (IFRS), or a convergence of the two, becomes reality, experts say the new accounting standard used by all U.S. companies (both public and private) will be significantly different from the standard they are currently using. Therefore, forward-looking business owners and chief executives should start planning now for how these changes may affect their companies.
Over the past few years, the accounting community has been bracing for the possible change in their accounting standards. Creating a single set of global accounting standards to be used worldwide will make it easier to compare and analyze financial information from companies globally. There will be more transparency and clarity when comparing companies internationally because every company will be on the same accounting standard.
But many finance professionals and chief executives are sitting back and waiting for the dust to settle before determining how their companies will adapt to whatever changes emerge. Despite the uncertainty, business owners should still be prepared. Primarily, companies should be prepared to operate within a more principles-based accounting environment. GAAP is rule-based, with extensive published guidance on how to apply the rules, while IFRS, used by many foreign countries, is principles-based, with very limited application guidance.
Recognizing that privately held small and medium-size entities represent about 95 percent of all companies worldwide, the International Accounting Standards Board, which develops and maintains the reporting standards, has created a scaled-down version of IFRS for them. This IFRS drastically simplifies many of the principles contained in the full IFRS and omits topics not relevant to small businesses, thus significantly easing the financial reporting burden of privately held firms.
The Securities and Exchange Commission will decide by the end of 2011 whether to set a firm date by which public U.S. companies must convert to IFRS.
Efforts to pave the way for conversion from GAAP to IFRS date back to 1992. But despite the potential benefits, the switch is not a slam dunk. There is also momentum building toward converging the two into a single new global accounting standard that is significantly different from each standard as it exists now.
Adapted from an article posted at: http://www.allbusiness.com/print/15136468-1-22eeq.html