Academic journal article Review of Business

Case Study "Tomsel Corp." First-Time Adoption of International Financial Reporting Standards by U.S. Company

Academic journal article Review of Business

Case Study "Tomsel Corp." First-Time Adoption of International Financial Reporting Standards by U.S. Company

Article excerpt

Executive Summary

Recent developments in global financial reporting have increased the likelihood of U.S. public companies being allowed or even required to adopt International Financial Reporting Standards (IFRS) in the not-too-distant future. In preparing for the transition from U.S. Generally Accepted Accounting Principles (U.S. GAAP) to IFRS, it is useful for firms, auditors, educators and students to consider an example of a company going through the U.S. GAAP-to-IFRS transition exercise. Although a growing number of U.S. companies have been affected by IFRS, especially as subsidiaries or investees of international companies using IFRS, real-life examples of IFRS adoption for primary reporting purposes are rare and limited to foreign entities in IFRS jurisdictions using previously U.S. GAAP instead of their national GAAP for financial reporting purposes.

We undertook an educational case study designed to highlight issues related to the adoption of IFRS by U.S. issuers. The purpose of the case study is to illustrate the U.S. GAAP-to-IFRS transition using a fictitious company, Tomsel Corporation, which is loosely based on a large European conglomerate that changed its basis of accounting from U.S. GAAP to IFRS in 2007. This paper showcases an example of the transition from one accounting system to another with respect to accounting for leases. This example has been selected because it highlights differences between rule-based U.S. GAAP and principles-based IFRS.


On November 19, 2008, the U.S. Securities and Exchange Commission (SEC) issued for public comment a proposed 'roadmap' that could lead to the use of International Financial Reporting Standards (IFRS) by U.S. public companies beginning in 2014 (SEC, 2008). In the roadmap the SEC proposed a phased-in approach depending on company size. Mandatory IFRS adoption, however, would not be automatic. In 2011, the Commission would evaluate the progress of IFRS against certain defined milestones and make a decision on whether to go ahead with adoption starting in 2014, after 2014, or not at all. The comment period on the proposed roadmap ended on April 20, 2009. Although the roadmap was put on a back burner for a while due to the financial and economic crisis, the SEC has turned its attention once again to the question of adopting IFRS now that the financial crisis has shown signs of abatement. In February 2010 the Commission unanimously approved a Statement, which provides an overview of the SEC's IFRS activities to date and directs staff to carry out a work plan (SEC, 2010). The document does not provide any details of potential transition date or approach, but confirms that the Commission will make a decision about incorporating IFRS into the U.S. financial system in 2011. Because commenters on the proposed roadmap stated that a switch to IFRS would take them approximately four to five years to accomplish, the SEC does not expect first-time issuers to report under IFRS before 2015. The exact timeline for IFRS adoption, if the SEC decides to incorporate IFRS in the U.S. reporting system, is still under evaluation.

The SEC's roadmap comes at a time when over 100 countries require or allow the use of IFRS for the preparation of financial statements by listed companies, including the Member States of the European Union, Australia and New Zealand, which transitioned to IFRS in 2005. (1) Countries that require or allow the use of IFRS by listed companies may also allow or require the use of IFRS for local regulatory/statutory financial reporting or disclosure purposes by non-listed companies. Recently, several more countries have adopted IFRS or announced their commitment to 'joining the IFRS club' soon. For example, Israel has required IFRS for public companies, except banks, since 2008, while Canada and South Korea are among the countries with plans to adopt or converge with IFRS by 2011. Mexican and the first Indian companies listed are required to comply with IFRS by 2012, while Japan's Financial Services Agency has decided to let some domestic companies use IFRS beginning in March 2010, leaving the U. …

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