While U.S. companies have followed the guidelines of U.S. Generally Accepted Accounting Principles (GAAP) for years, there is a shift toward future transition of International Financial Reporting Standards (IFRS) as a single set of global accounting standards. Until recently, foreign companies who used IFRS were required by the SEC to reconcile their reports to GAAP in order to be listed on the U.S. exchanges.
In November 2007, the SEC announced that IFRS statements will be accepted from foreign registrants for 2007 and later years. The SEC is also considering whether U.S. companies should be allowed to use IFRS in lieu of GAAP. Would this mean the end of U.S. GAAP? The SEC is working to eliminate the current reconciliation requirement and continues to explore the option of allowing U.S. companies to report financial results using international standards.
In recent years, much attention has been given to the idea of defining one set of standards, thereby eliminating differences between these two reporting standards. This would cut costs greatly for the foreign companies, who in effect have to keep two sets of books. The long-term goal would be a single set of standards, but in the meantime there are still some inherent issues with having two sets of standards. If foreign companies are allowed to use IFRS, then many have suggested that U.S. firms should also have that option. Given that option, then GAAP and IFRS would have to exist side by side in the U.S. In order for this to work, the SEC would have to recognize IASB as an authoritative body for setting accounting standards, which could cause conflict with the Sarbanes-Oxley Act.
The goal of getting to a global set of accounting standards is achievable, yet the timeframe is difficult to predict. The single set of standards would simplify the world of accounting, but it will take a process to achieve it. In the next few issues, we will be taking a closer look at this so-called “convergence” of U.S. GAAP and IFRS and its status.