What's needed to move to IFRS?

• Author: Malwitz, Mike
• Position: International Financial Reporting Standards

The march toward a global set of accounting and reporting standards has been underway for a number of years, with Europe, most of Asia and other countries adopting International Financial Reporting Standards. Canada has a 2011 transition planned and the United States is contemplating a transition within five years. While moving to IFRS may make life easier for analysts and investors in comparing and analyzing the financial health of global companies, the transition will cause challenges for accounting and finance staff who must report results in local generally accepted accounting principles as well as IFRS during the transition period.

Changes Under IFRS

The shift from rules-based U.S. GAAP to principles-based IFRS is intended to improve transparency and comparability in global markets. In addition, some say, the principles-based approach is supposed to deliver higher quality reporting.

Research conducted by Citigroup Inc. in 2007 found that IFRS has boosted income, investment returns and other financial measures for European-based companies. The study, which analyzed the differences between IFRS and U.S. GAAP for 73 European companies that traded on U.S. exchanges and report under both IFRS and U.S. GAAP, found that more than 80 percent of the companies had higher net income and returns on equity under IFRS.

For example, Bayer AG's profits under IFRS were 525 percent higher than under U.S. GAAP; and Lloyds Banking Group showed IFRS profits 54.4 percent above the U.S. GAAP equivalent.

Some say IFRS does a better job of recognizing the fair value of corporate assets--essentially "unlocking value" of the corporation by recognizing previously unrecognized, cash-generating assets under U.S. GAAP. For example, impairment reversals are allowed under IFRS, thanks to the expansive application of fair-value accounting concepts.

Fair-value accounting, a key practice in IFRS, is somewhat familiar to U.S. finance executives because current FASB accounting rules require fair-value accounting for such items as investments, intangibles and employee stock-option grants. However, applying fair-value concepts to all accounts will be new to the U.S. financial community.

For example, IFRS eliminates longstanding practices, such as 'last-in-first-out" (LIFO) accounting for inventory valuation, which will be replaced with "first-in-first-out" (FIFO) or cost averaging, which is more in line with fair-value concepts. The theory goes that LIFO accounting can lead...