The global impact of US isolation on
accounting standards demands stakeholder education, according to
William Kowals, a partner at Nexia International
firm JH Cohn. As every capital market embraces IFRS, US business
leaders must get to grips with the implications or risk being left
behind in the global marketplace.
Every major capital market is moving towards IFRS. Driven by the
globalisation of the capital markets and the need for enhanced
comparability of financial statements, IFRS is clearly here to
The Securities and Exchange Commission (SEC)
has issued its proposed road map for the adoption of IFRS by US
registrants but they have yet to fully commit to IFRS.
US-domiciled businesses do not function in a
vacuum and the co-existence of different accounting platforms has
far-reaching implications for thousands of businesses globally. It
affects everything from business practices to valuations, IT and
systems, internal controls, key performance indicators, reward
structures, disclosures, and investor relations – with major
The divergence of IFRS and US accounting
standards and its impact on business practices demand the attention
not only of CFOs and finance teams in US-based entities with an
international presence, but for a whole range of other stakeholders
around the world. Customers, vendors, employees and sources of
finance for these companies require greater insight into how these
differences can impact business practices.
IFRS as issued by the International
Accounting Standards Board (IASB) has the momentum of worldwide
adoption. Although the SEC has issued its proposed road map, many
reporting entities have chosen to ignore, at least for the present
time, the differences between IFRS and US GAAP.
These differences include, but are not limited
to, revenue recognition, fair value accounting, accounting for
leases and share-based compensation, all of which can significantly
impact business practices.
According to the US Council
Foundation, there are over 2,200 US multinational parent companies
with a majority interest in a foreign entity. These companies have
approximately 24,000 foreign affiliates, which have to report in
their home country GAAP or IFRS, with implications at the parent
Further, there are approximately
11,000 US entities with a minority stake in one or more non-US
entities. Additionally, there are the more than 9,000 entities
around the world which own close to 12,000 US entities. Again, all
of these entities have to report under GAAP and/or IFRS in their
home country, and this can have a significant impact at the US
Furthermore, there are over 800 foreign
companies listed on US exchanges and over 200 US entities listed on
IFRS is also highly relevant to US domiciled
businesses seeking capital or targeting foreign acquisitions, or
those that are targets for acquisition by foreign domiciled
Who is affected?
CFOs and finance teams, together
with their advisers, will shoulder the largest burden in
determining how IFRS might impact accounting and reporting systems,
debt covenants, budgeting, acquisitions and contingent
consideration (earn-outs), leases and tax planning. The basis of
accounting that will be employed will be critical when negotiating
agreements that give consideration to future financial results (for
example, debt covenants, contingent rentals, contingent
consideration in an acquisition and employee incentive
compensation). Management needs to be aware that existing
agreements may require renegotiation, which may also require the
attention of legal advisers.
But the ramifications go far beyond finance
departments and the need for training and new systems to capture
the necessary financial accounting and information for reporting
Owners and boards of directors should be aware
that the basis of accounting used in financial statements could
have an impact on business valuations. Significant differences in
reported revenues, net income, net assets, and net worth can arise,
potentially impacting a valuation.
Audit committees need to be aware that an
orderly transition to IFRS will require modifications to accounting
policies, IT systems, business processes and internal controls.
They should be discussing the implementation plans for adopting
IFRS, if and when required, with their CEOs and CFOs. They should
also be aware of any local statutory IFRS financial reporting
requirements and related costs.
CEOs and strategic management teams may need
to rethink key performance indicators, such as those which may
affect loan covenants or employee compensation, if a different
basis of accounting is contemplated for use. Further, these
stakeholders may need to consider certain commercially sensitive
disclosures that may be required by IFRS.
Companies may also need to consider that
standard revenue arrangements created to allow for revenue
recognition under US GAAP could significantly impact the way an
entity goes to market. They may also need to rethink compensation
arrangements, both cash incentive compensation and share-based
Nexia International member firms have
extensive experience in the implementation and conversion to IFRS
and ongoing financial reporting under IFRS in those jurisdictions
where IFRS is now a well-established legal requirement for certain
entities (as in the EU) or where accounting practice is
substantially the same as IFRS (for example, Hong Kong, New
Zealand, Australia and Singapore).