Academic journal article Journal of Accountancy

Financial Reporting Goes Global; International Standards Affect U.S. Companies and GAAP

Academic journal article Journal of Accountancy

Financial Reporting Goes Global; International Standards Affect U.S. Companies and GAAP

Article excerpt

EXECUTIVE SUMMARY

* THERE IS A CLEAR TREND TOWARD ADOPTING IFRS as the single body of internationally accepted financial reporting standards. In the next few years, thousands of companies will move to IFRS as a primary basis of financial reporting.

* THE IFRS MANDATE WILL AFFECT U.S. COMPANIES. Some may be required to adopt IFRS to meet the reporting requirements of an international parent or investor company, while others may recognize the need to voluntarily supplement their current financial reporting with IFRS to allow for an accurate comparison with foreign competitors.

* A U.S. COMPANY WILL HAVE TO REPORT UNDER IFRS if it is the subsidiary of a foreign company that must use IFRS; has a foreign subsidiary that must report according to IFRS; has operations in a foreign country where IFRS use is mandatory; or has a foreign investor that must report according to IFRS.

* THE CONVERGENCE EFFORTS OF FASB AND THE IASB already have changed U.S. GAAP. As these efforts continue, their effects on U.S. GAAP will multiply. Both boards have issued exposure drafts relating to the near-term convergence of their goals, and the IASB has published several statements that narrow the differences between U.S. GAAP and IFRS.

Cross-border investors often find it difficult to understand financial statements that foreign companies prepare using their respective nations' accounting principles. But greater uniformity and efficiency are coming to the international investment community now that most public companies domiciled within the European Union (EU) will be required to use international financial reporting standards (IFRS) beginning in January 2005. This article will show CPAs how to assist their employers and clients in preparing for the impact of the EU requirements on their financial reporting.

IFRS is a body of accounting and financial reporting standards developed by the International Accounting Standards Board (IASB) (see "Players and Roles," page 44). Every major nation is moving toward adopting them to one extent or another. The European Union requires their use, the United States and Canada are converging their versions of GAAP with IFRS and some companies in other countries are using them voluntarily.

This trend may dramatically affect the financial reporting of U.S. companies that own, are subsidiaries of or have other relationships with foreign entities directly subject to an IFRS reporting requirement, such as that of the European Union. Many foreign companies registered with the SEC are headquartered in countries that require them to begin using IFRS in 2005; while these companies are subject to the U.S. regulatory environment, they also will have to adopt IFRS. And because U.S. regulators and rulemakers are actively supporting convergence, U.S. GAAP will evolve in tandem with IFRS and thus affect even U.S. companies with no overseas ties.

CPAs' clients and employers will need help assessing the effects these requirements will have on them. This article therefore will help practitioners explain to companies' management how IFRS may affect their reporting obligations.

INCREASING USE OF IFRS

A growing number of jurisdictions require public companies to use IFRS for stock-exchange listing purposes, and in addition, banks, insurance companies and stock brokerages may use them for their statutorily required reports. So over the next few years, thousands of companies will adopt the international standards.

Countries in many parts of the world already require companies to adopt IFRS or will do so soon. The European Commission (EC)--the European Union's legislative and regulatory arm--issued a rule that, with a few exceptions, requires all public companies domiciled within its borders to prepare their consolidated financial statements in accordance with IFRS beginning January 1, 2005. This requirement will affect about 7,000 enterprises, including their subsidiaries, equity investees and joint venture partners. …

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