A One-Two Accounting Punch?

Next year U.S. public companies will find out if they have to adopt international accounting standards – just as they are implementing a host of ne...
Marie LeoneMay 18, 2010

Will American companies have to go through a major accounting-standards overhaul twice? Some finance executives think so. They say the project to converge American and international standards is at odds with the push to introduce a host of new U.S. accounting rules over the next year, and warn that chaos could result.

That alarming prospect was raised last month during a panel discussion at a conference held by Pace University’s Lubin School of Business. The problem will become more apparent in mid-2011, when American companies will be digesting at least 10 major new generally accepted accounting principles issued as joint projects of the Financial Accounting Standards Board and the International Accounting Standards Board. The areas covered include fair value measurement, accounting for financial instruments, leases, and revenue recognition (see list below).

Around the same time, the Securities and Exchange Commission is expected to announce whether public companies will have to abandon U.S. GAAP and adopt international financial reporting standards. If the answer is yes, it’s likely that the regulator will require American companies to make the switch in 2016, just a few years after adopting the changes to U.S. GAAP.

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Such a one-two punch would be costly and time-consuming, noted panelist Aaron Anderson, director of IFRS policy and implementation at IBM. Anderson hoped the SEC would allow companies to make the switch early and avoid the GAAP changes. The computer giant already reports results using IFRS at some of its subsidiary companies, Anderson said.

John McGinnis, chief accountant at HSBC North America, said that while he understood the need for “due process,” he also believed that “early adoption [of IFRS] would be very helpful.” Several HSBC subsidiaries already use IFRS, he said.

Regardless of the call from companies and foreign regulators to allow early adoption of IFRS, the SEC is not about to rush its decision. SEC chief accountant James Kroeker, who also spoke at the conference, said it was “too early” to comment on the progress of the commission’s decision whether or not to abandon U.S. GAAP, although the SEC has promised to provide periodic updates starting in October.

Other groups publicly oppose the rapid pace of rulemaking and what a Financial Executives International committee characterizes as the “quality versus speed trade-off.” In a letter to FASB, members of FEI’s Committee on Private Company Standards said they were worried about private-company executives becoming “overwhelmed” by poring over exposure drafts while doing their day jobs.

Aware of the burden that both public and private companies face, FASB is considering “staggering” the rule implementation dates so the changes are rolled out more slowly, noted FASB technical director Russ Golden while speaking at an April industry meeting sponsored by the Zicklin School of Business at Baruch College.

“No one standard is an issue in and of itself,” says Kelley Wall, senior consultant at accounting and financial advisory firm RoseRyan. “But the timing of all of them being issued in such a short time frame would be a significant strain on companies.” Adds Jay Hanson, McGladrey & Pullen national director of accounting, “For companies that thought that [Sarbanes-Oxley] implementation was hard, implementing the new FASB rules will be even worse.”

But Wall isn’t too concerned about switching to IFRS after FASB issues its collection of new rules. She points out that all 10 rules currently in the exposure-draft stage are part of the IASB-FASB joint convergence project, meaning that in most cases, the IASB would be issuing a standard similar to the new FASB rules.

In fact, she believes the flood of new FASB rules may be in response to the SEC’s notion that convergence should be complete before it decides whether to switch the country to IFRS. “Although implementing a host of new accounting standards in such a short time frame would be painful, it would make the eventual adoption of IFRS in the U.S. easier,” says Wall.

The Joint Projects Are Jumpin’
Joint FASB/IASB Projects (Final rules due first half of 2011, unless otherwise noted)
Fair value measurement (due Q4 2010)
Consolidation: Policy and procedures
Accounting for financial instruments
Financial instruments with characteristics of equity
Financial statement presentation
Insurance contracts
Revenue recognition
Statement of comprehensive income
Reporting discontinued operations
Balance sheet offsetting
Emissions trading schemes (due date TBA)
Source: FASB Website, May 2010