The Case of Israel
Beginning in 2008, most Israeli public companies were required to adopt International Financial Reporting Standards (IFRS) for financial reporting. Previously, Israel followed its own set of financial reporting standards, Israeli GAAP, which was very rules-based, in comparison to the more principles-based IFRS. Israel's process of adopting IFRS was transparent and all-inclusive. Israel is a highly industrialized country with a significant public company presence in the high-tech, biomedical, healthcare, pharmaceutical, and defense technology industries. It is home to more than 4,000 high-tech companies, and more than 70 Israeli companies are traded on the Nasdaq stock exchange.
The process by which Israel made its transition to IFRS is described below, based on interviews with auditors, chief financial officers, accounting educators, analysts, and investors in Israel. The findings have potential implications for other countries, including the United States, currently undergoing or planning to undergo conversion from legacy GAAP to IFRS.
Beginning in 2008, most Israeli public companies were required to report financial results using IFRS. Previously, Israeli companies prepared financial statements in conformity with Israeli GAAP, as issued by the Institute of Certified Public Accountants in Israel and the Israel Accounting Standards Board (IASB), with further guidance from the Israel Securities Authority (ISA) under the Israel Securities Laws and Regulations.
The decision to convert to IFRS was made in a short period of time with relatively little public discussion. Whereas many previous adopting countries made regional modifications to IFRS to accommodate the local business environment, economic situation, and political climate, Israel adopted IFRS as is. The Israeli Tax Authority has not yet adopted IFRS. It still requires all companies to provide Israeli GAAP-based financial statements for tax purposes and is currently evaluating the impact and possible changes to tax reporting by public companies.
Israel is a small country in the Middle East with a population of approximately 7.5 million. Established in 1948, it has rapidly developed into a highly industrialized nation with more Nasdaq-listed companies than any other country outside of the United States (over 70), more than all countries from the entire European continent (Dan Senor and Saul Singer, Start-Up Nation: The Story of Israel's Economic Miracle, Hachette Book Group, 2009). Israeli firms are noted for innovation in the areas of computers, security, communications, biotechnology, and green technologies. In May 2010, Israel was accepted as a member in the Organization for Economic Cooperation and Development (OECD) and reclassified from an "emerging" to a "developed" market (Charles Levinson, "Israeli Firms Gird for Their Emergence," Wall Street Journal, May 13, 2010; "Israel's Accession Agreement to the OECD," www.oecd.org/document/56/ 0,3343,en_21571361_44315115_45557176 _1_1_1_1,00.html). Israel ranked as the ninth-largest emerging market in the world prior to this reclassification. Furthermore, government policies in the past 10 years have made the country desirable for venture capital and foreign investment. Thus, one motivation for requiring financial statements to be prepared in conformity with international standards would be to attract more foreign capital.
It appears at first glance that Israeli regulators did not foresee some of the problems associated with the quick, "as is" adoption of IFRS. Various issues were raised by companies and auditors as they became more familiar with IFRS, while they were trying to make the conversion in a timely and cost-effective manner. In addition, it appeal's that not enough analysis was conducted on the implications of 3FRS adoption on Israeli companies.
The authors believe that Israel's IFRS conversion process may be compared and contrasted to those in countries that have already undergone conversion to IFRS as well as those anticipating conversions in the near future. …