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Upheaval in Accounting Standards: The SEC Announces Support for IFRS

We are living through a period of rapid change in the accounting standards landscape.  For some time, the gold standard for accounting in the United States has been the Generally Accepted Accounting Principles (US GAAP).   At one time GAAP was used quite a bit in other countries, which valued its requirements for transparency.  However, in recent years, much of the rest of the world has gone its own way and increasingly follows the International Financial Reporting Standards (IFRS).

The SEC Announcement

Now the United States Securities and Exchange Commission (SEC) has voted to allow some very large companies to file their corporate reports using IFRS, and it aims to move all corporate filing over to IFRS between 2014 and 2016.  SEC Chairman Christopher Cox has been pushing for this move, and succeeded in obtaining unanimous approval from the SEC commissioners last month.

This development is a sign of the times; the era of total U.S. dominance of the world economy is fading to a memory.  With IFRS gaining acceptance in 100 countries, the SEC became alarmed that clinging to GAAP was starting to isolate the U.S. economically.  The commissioners accepted Cox’s contention that getting the country on board with IFRS is imperative to maintaining economic competitiveness.

Pros and Cons

The supporters of this proposed change offer an additional argument to bolster their position: They project that it will benefit overall global economic development.  They point out that it will lower costs that multinational companies incur by maintaining two sets of books, and will remove a barrier that discourages firms that would like to go multinational but are unable to bear the costs.  In theory, it also will make it easier for investors to compare a U.S. company to a company in another country.

The plan has detractors.  US GAAP gap lays down very precise rules, while IFRS is a set of general principles.  GAAP’s precision leaves little wiggle room in financial reporting.  There is concern that IFRS leaves too much open to interpretation, leading to excessive variance in how companies conduct their accounting.  That kind of inconsistency can mislead investors who are comparing one company’s financial statements with another’s.  Studies have been published that reveal that many companies that report using both standards show substantially higher earnings using IFRS.  Critics contend that this is evidence that IFRS permits too much manipulation.

Accounting Standards Convergence

With the inexorable trend to economic globalization, international convergence on accounting standards was probably inevitable.  At one time, GAAP was considered the favorite to become the basis of a global standard.  However, GAAP grew to 25,000 pages, while IFRS, with less attention to detail, is approximately 2,500 pages.  The sheer size of GAAP has become an issue, and the U.S. is simply not in a position to dictate to the world.

The U.S. Financial Accounting Standards Board (FASB) maintains the GAAP standard, while the International Accounting Standards Board (IASB) is in charge of IFRS.  In 2002, FASB and IASB initiated an effort at collaboration.  In 2006, they signed a memorandum of understanding (MOU) committing the two organizations to work together toward a single accounting standard. Over the past few months they updated the MOU, pledging to redouble their efforts.  The hope is that this collaboration will drive updates to IFRS that will soften the impact on U.S. companies when they switch over to the international standard.

In any case, this is a momentous change that will affect corporate governance, investment practices, business education, and enterprise software. 

Upcoming Blog: The Impact on XBRL

In an upcoming blog, I’ll discuss the ramifications of this change for XBRL (eXtensible Business Reporting Language).  XBRL is an XML-based business reporting standard that a number of jurisdictions including the U.S. are in the process of making mandatory for electronic corporate filings to regulatory authorities.

4 Comments
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  • Hi David,

    AICPA has been pushing XBRL since 2000 with very little to show for it. IFRS seems to be making more progress, but it  won't replace US GAAP by any means. US companies will slowly adopt it, but it will be just another mandatory fee on their audit expense line. Instead of pushing XBRL on the GL level, it would be more helpful to have some kind of reconciliation with the US Income Tax code. I haven't seen anything either from AICPA or SEC or US Treasury on that, but I still have a hope.

    • Greg,

      Thanks for your response.  Sorry, for some reason I didn't see a flag indicating that a response had been posted; otherwise I would have responded sooner.  I'll try to respond to each of your points here.

      Regarding AICPA having little to show for pushing XBRL since 2000: It seems that is about to change, since the SEC has announced plans to mandate XBRL for corporate filing.

      Regarding IFRS not replacing US GAAP: So are you saying that, even when the SEC mandate for IFRS and been fully rolled out circa 2014 or 2016 and GAAP is no longer accepted by the SEC, companies will continue to use GAAP internally for their own reasons?  Or are you saying that the SEC will eventually back off its stated intention to phase GAAP out by 2014 or 2016?

      When you talk about pushing XBRL on the GL level, are you referring GL as in XBRL-GL, where GL standards for Global Ledger, or are you referring to GL in its usual generic sense as meaning General Ledger?  This overloading of the GL acronym causes confusion sometimes.  The XBRL taxonomies that are the subject of the SEC mandate are taxonomies for "roll-up" data for financial statement reporting.  There also exists an XBRL taxonomy for "drill-down" data, which includes detailed ERP transactional data.  The SEC is not mandating the XBRL-GL taxonomy.  It's only mandating the XBRL US GAAP taxononmy, which is a "roll-up" taxonomy.

      Regarding reconciliation with the US Income Tax Code: I'm not sure what you mean.  Could you elaborate?

      Thanks.

      --David

  • Hi David,

    I greatly appreciated your article and it is good to see that SAP has XBRL again on its radar. I have been involved since 1999 in the XBRL community (believe it or not but I was with SAP America at that time and represented SAP on the global steering committee as one of the founding members of the XBRL International organization).

    I have since been very busy in the XBRL world and was lead-architect/TechMgr of one of the largest XBRL solutions to date (the Dutch XBRL project).

    I'd like to add a few words to your blog on the 'scope of use' of XBRL, which is seen much broader in Europe and Asia-Pac then in the US. The Dutch project for instance was concerned with the collection of information of ALL government tax filings (private persons and business), ALL financial statements (from multinationals to SME) and ALL business statistics. We also started a pilot in Dept. of Agriculture where the collected information was not at all financial.

    I see it as somewhat unfortunate that there is so much focus on the financial reporting aspect and not on the other kinds of information... XBRL is about BUSINESS reporting and not just FINANCIAL reporting.

    Recently to myself and a colleague in the XBRL community have devised a new method of modeling with XBRL that lends itself very well to storage in data warehouses. The method is based on the familiar multi-dimensional modeling concepts and that makes it a prime candidate to collect information for analysis in the SEM suite. (Which was the group in which I was working at the time and the development SEM/BIC - module was the reason for joining the XBRL initiative).

    Anyhow I'll keep an eye on your blog entries
    as I am always interested to see "What's up with XBRL in SAP"

    Best regards

        Raynier van Egmond
        XBRL Consulting Partners LLC.
        Seattle (WA) USA