Article: IFRS - Where Are We Now?
By Renee Ford
The spotlight of the U.S. accounting industry in the next decade will unquestionably be positioned on the convergence with, and ultimately the adoption of, International Financial Reporting Standards (IFRS). The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working together since 2002 to improve both sets of accounting standards with the goal being convergence of the two as much as possible. A formal commitment established between them, the Memorandum of Understanding, identified 9 major accounting areas needing improvement under both GAAP and IAS (IFRS) and a plan to fully converge the two sets of standards by 2011.
The first joint project, Business Combinations, was completed in 2007 and resulted in the issuance of FAS 141(R) and 160 and IFRS 3. The remaining projects include Financial Instruments, Other Comprehensive Income, Fair Value Measurement, Revenue Recognition, Insurance, Leases, Consolidations, and Financial Statement Presentation. While the portions of the convergence project that involve fair value have received considerable attention in this publication, there are a number of other areas in which preparers and users of financial statements need to be ready for changes. For all but Consolidations and Financial Statement Presentation, exposure drafts or discussion papers are outstanding and comment periods have now closed, so we can expect to see some significant traction on these issues in 2011.
The Revenue Recognition project has the most potential to result in sweeping changes in current practice. The exposure draft currently outstanding, when finalized, will replace all current guidance with respect to revenue recognition, including all industry-specific guidance. The fundamental element of the new standard will be the identification of a performance obligation in each revenue-producing transaction, the satisfaction of which is requisite to the recognition of the related revenue. Extensive bifurcation of contracts with multiple elements will be required so that unique performance obligations can be identified for each element.
Additionally, the proposed standard introduces the concept of measuring revenue at net of expected uncollectible amounts, in contrast to the current practice of measuring revenue at sales price and any uncollectible portion subsequently as bad debt expense based on an allowance or other method. It is expected that these changes will be required to be applied retrospectively to all periods presented, but will likely not be effective until 2013.
Another sweeping change, though not as pervasive as revenue recognition, will be accounting for operating leases. An exposure draft issued in August 2010 proposes that all lease obligations, including those that don’t currently qualify for capital lease treatment, be accounted for by the lessee on the balance sheet as an asset and a liability. The asset will be referred to as a “right-to-use” asset to be amortized over the lease term. Similar treatment will be required by the lessor, resulting in a lease receivable and a corresponding deferred revenue account.
The Consolidations project will be an interesting one. FASB’s Consolidation of Variable Interest Entities has been met with much criticism because of its complexity and impracticality in practice. Under IFRS, consolidation is driven by “ability to control,” a more manageable attribute than its GAAP-equivalent “primary beneficiary,” and triggers consolidation regardless of whether such ability to control is actually exercised. Although still in its infancy, early indications on this project are that we’ll end up with a control-based model that won’t yield results much different than those of the variable-interest-entity model, but will be easier to navigate.
In the midst of all this convergence activity, the SEC has continued its exploration of adoption of IFRS for public companies, announcing in February 2010 that a decision on adoption would be made in 2011. The earliest possible year adoption will be required is 2015, according to the announcement, and in the meantime the previous early-adoption provision has been withdrawn. At the same time, a Blue Ribbon Panel appointed in 2009 consisting of members of the AICPA, FASB and NASBA is expected to issue a recommendation in early 2011 that a separate set of accounting standards be developed for U.S. private companies. With the future of the FASB itself at stake in a post-adoption scenario, one might wonder how and if this private company standards initiative will ultimately play out, particularly in light of the fact that IFRS has a pre-existing set of standards for small business – IFRS for Small and Medium-Size Entities (SMEs). It seems likely that if public companies will be required to adopt IFRS, the private sector will quickly follow suit.
However, some will argue that successful convergence will eliminate the need for adoption of IFRS, ultimately. Opponents to adoption also believe that the litigious nature of the U.S. business sector will only be further provoked by a more malleable, principles-based set of accounting standards like IFRS, which contains very little industry-specific guidance. Proponents, however, point out that while converged standards will be similar, similar is not identical, and as further interpretations are issued by the FASB, the two sets of standards will again diverge in many subtle but significant ways. The G-20, a group of global financial leaders that includes the U.S., has repeatedly called for all major economies to support and adopt IFRS as the single set of high-quality accounting standards needed to achieve global comparability of financial information.
Clearly there is tremendous pressure for the U.S. to make a decision in favor of IFRS. There are countless unknowns at this point, however, with respect to an adoption scenario in the near term. As already noted, how will private companies be affected? Is IFRS sufficiently developed? How will accounting professionals as well as investors be educated quickly enough on the changes adoption would bring? How will it affect U.S. securities regulation? And even more importantly, what will be the ongoing role of the FASB? While uncertainties abound, U.S. companies can take comfort in the fact that continued convergence between now and 2015 should alleviate much of the perceived costs and implications of an adoption of IFRS. And strategically, the U.S. will want to secure a position of stature in global standards setting, so we can likely expect the control currently wielded by the FASB to remain a force to be reckoned with.
The contents and opinions contained in this article are for informational purposes only. The information is not intended to be a substitute for professional accounting counsel. Always seek the advice of your accountant or other financial planner with any questions you may have regarding your financial goals.
By Renee Ford