GAAP vs. IFRS laws: Is convergence on the horizon?
Following a May 28th conference between two of the world’s largest accounting regulatory agencies, members from both groups issued new joint standard they hoped would help smooth out discrepancies between the U.S.’s Generally Accepted Accounting Principles (GAAP) and the International Finance Reporting Standards (IFRS). While the leaders aimed to create a middle ground that combined the GAAP’s specific protocols (there are currently over 100 specific rules for various transactions and industries) with the IFRS’s broader scope of regulations, SEC officials remain skeptical about the success of a global set of accounting standards. Reports say the new global rules would aim to make it harder for companies to lie about their revenues to investors, and would take effect in 2017.
For over a decade, the challenge to establish a unified revenue reporting law has plagued accountants and investors comparing companies in different countries. That’s because due to variances in different countries’ compliance standards, a company may be able manipulate the “top lines” of their accounts based on what they are, and are not, required to report. For example, a company may be able to list transactions that have not yet taken place in order to boost their reported profits. Or, a company may leave certain sales off their books in order to postpone reported profits that are subject to taxes. The GAAP’s rigid structure seeks to prevent revenue exploitation with highly prescriptive accounting standards that make it difficult for software firms and other companies offering contracts and services to offer special customer discounts or upgrades without violating the rules. Allowing American companies to use the more relaxed IFRS laws would give these groups more leeway to negotiate contracts and provide more tailored services for customers. The IFRS rules are currently used in over 100 countries and mandatory in the EU.
In June, Former SEC Chair Christopher Cox expressed doubts about the U.S. ever fully adopting IFRS, saying the agency has yet to follow through on any plans for expanding the use of the laws. Having a choice of which standards to use, may eventually become an option. Foreign companies listed in the U.S. are not required to file separate accounts under the GAAP, and officials from a U.K. regulatory agency pointed to increasing convergence of the GAAP and IFRS, such as the SEC allowing global firms listed in New York to use IFRS. Supporters of the joint standards say a standardization of revenue reporting protocols not only helps investors, but saves companies time and money by making compliance easier and less expensive. Either way, a more streamlined set of international accounting rules could make it easier for investors to ‘judge’ global companies, which in turn could make for an interesting evolution in perceived risk profiles as well.
About the Author
Marcus Janus is a Vice President in William Gallagher Associates’ Executive Risk Practice. He specializes in assisting organizations and their executives with protection and advocacy for their exposures to Directors’ & Officers’ Liability, Employment Practices Liability, Fiduciary Liability, Professional Liability, Crime, and Kidnap & Ransom.