Global Business

Vive le GAAP

Despite regulators' swift move toward international accounting standards, the U.S. rules won't be disappearing from American companies' books anyti...
Sarah JohnsonSeptember 11, 2008

Advocates of moving the United States toward international accounting standards say the switchover from GAAP let investors more easily compare U.S. and international companies and put all companies worldwide on a level laying field. Plus, they claim, the elimination of GAAP will put an end to accountants’ years of confusion over lengthy, unwieldy rules.

However, that day, if it comes, is a long way off even if the Securities and Exchange Commission plunges forward with plans to require all U.S. publicly traded companies to use international financial reporting standards by 2016 at the latest. The term “generally accepted accounting principles” and the metrics and ratios it generates are embedded in many places outside of SEC regulations, including state rules, tax policies, and companies’ own contracts with their employees and lenders.

“People running their numbers under GAAP are going to keep doing that for some time,” says Amy Greer, a partner in Reed Smith LLP’s securities and litigation enforcement group. She adds that the largest of U.S. companies, which may be able to use IFRS for their SEC filings as early as next year, will still have to reconcile their financial results with GAAP as other areas of the U.S. financial reporting system play catch-up to the regulator.

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Furthermore, even smaller companies, which will have a longer lead time before they must begin using IFRS, need to begin thinking how the movement toward the international rules will affect them, experts say. For now, they suggest that all companies at least compare how their GAAP-prepared financial statements will differ under IFRS. “It’s important for companies of all sizes to really begin to think long and hard about the ramifications and implications of IFRS on their business, both from a pure accounting and reporting standpoint and an operational standpoint,” says Chris Mann, a managing director in the financial advisory practice of consultancy MorganFranklin.

In part that means keeping in mind how the accounting changes could affect long-term projects, such as contracts being negotiated now that will terminate in 10 years. After all, “just about every significant commercial agreement, such as bank loan agreements and merger documents, contain the requirement that financial statements are prepared in accordance with generally accepted accounting principles,” notes John Rodney, a partner with Thorp Reed & Armstrong LLP’s business practice group.

As for existing contracts, experts say companies will need to review them and consider whether they need to be renegotiated. Their terms could be changed to say “international financial reporting standards” will be used, or there could be a new line of text saying the company is considering whether to change its method of accounting. Promises made in the agreements, such as a debt-to-cash flow ratio, may have to be adjusted to make up for the differences between GAAP and IFRS.

Indeed, companies will need to reset their debt covenants if the international standards give them a materially different result, says Rachel Rawson, a partner in Jones Day’s banking and finance practice. On the other hand, they could provide lenders with a GAAP-reconciled report after making an IFRS-prepared filing with the SEC.

Still, despite the SEC’s enthusiasm for IFRS, and that of the large multinationals eager to eliminate their GAAP-filing requirements, the U.S. rules are not going anywhere anytime soon. “The most important thing is assuring the transparency and comparability for investors, and the fact is that the investor piece of that will require that GAAP be around for several years following a mandatory transition date,” Greer says. “And we’re not looking at a mandatory transition date until 2014 at the earliest.”