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SEC Prepares to Close the GAAP

Companies Brace for New International Reporting Standards


NEW YORK - A lot of people are wondering when the U.S. will adopt the same international standards for financial reporting that Europe and the rest of the world seem to be moving toward.

The rule-based, Generally Accepted Accounting Principles (GAAP) have been around in the U.S. for years, but differ from the principle-based International Financial Reporting Standards (IFRS) that the European Union adopted in 2005. Currently more than 100 countries have moved to incorporate or are allowing IFRS, according to the global tax and advisory service firm Ernst & Young, in a presentation last week.

While neither GAAP nor IFRS is a perfect system, having two separate systems is costly and confusing for global companies. Most financial experts agree that a universal accounting standard would strengthen overall global markets.

"Virtually everyone is saying yes, the U.S. should join IFRS and get on the bandwagon," said Lisa Filomia-Aktas, a partner and financial services and accounting advisory services leader for Ernst & Young.

However, it is more likely there will be a convergence of standards, rather than the U.S. abandoning GAAP altogether and converting to the international standard, she said.

"It is clear that the world is not moving to adopt the U.S. standards," she said.

The Securities and Exchange Commission is seriously considering the international standards, and plans to host a roundtable today, Aug. 4, to compare how both GAAP and IFRS performed during the recent period of market turmoil.

"This roundtable will provide the Commission with valuable insights from investors, issuers, auditors and others about the way that both IFRS and U.S. GAAP performed in the context of the current pressures on the marketplace," said SEC Chairman Christopher Cox. "We are particularly interested in how the two sets of standards dealt with the key accounting issues in the subprime crisis, including off-balance sheet entities and fair value."

The meeting will be open to the public and will include representatives from the Financial Accounting Standards Board and the International Accounting Standards Board, as well as other investors, issuers, auditors and various parties with experience in financial reporting. The roundtable will also be broadcast on the SEC website.

Filomia-Aktas said she thinks the SEC will issue a roadmap sometime this summer, with a probable implementation date of 2013 for public companies and a later date for all other U.S. companies. She said it is likely the SEC will allow companies to convert to IFRS prior to 2013, but they may have to use both IFRS and GAAP until the changes take effect.

"Companies with a lot of legacy systems will have to make a lot more changes," Filomia-Aktas said. "U.S. domestic companies that don't have global customers will be asking, 'Why are we incurring these costs?' Boards are asking, 'What does this do for my company? How much of my accounting will have to change? How much do I have to spend? Will it be painful?'"

The changes in taxes and accounting will be so significant, business schools will have to change their curriculum and CPAs will have to be retrained, she said.

A lot of companies are already scheduling internal awareness sessions this fall to answer these questions for board members and key stakeholders, she said, though many are still waiting for the SEC to make a move and set a date.

"This is not going to be confined to the accounting department," she said. "It will touch on every part of your organization."

The hardest part will be making the switch. The next few years will include more reporting and incremental costs than on the scale of when the Sarbanes-Oxley Act of 2002 was passed, but almost everyone agrees that a common language for international financial reporting will be a huge step forward with long-term benefits.

"Reporting bogs down time and energy and sucks up resources," said Aaron Visse, portfolio manager for the Kensington Global Infrastructure Fund. "When you have to report something eight different ways, it adds to your general and administrative costs. Of course, our dream would be to have one universal accounting standard that actually makes sense."

Visse said the accounting standards and conventions differ between IFRS and GAAP, and companies should be careful to assimilate analysis in all three areas: income statements, balance sheets and balance flows.

"A lot of unrealized gains and losses are coming from income statements," he said. "We call that phantom income. You need to be aware of these differences. Analysts don't include unrealized costs and gains, but that's what really drives stock valuations. Forward numbers are much cleaner than real world numbers. Be sure to read the footnotes."

Bob Wallace, global head of fund services for Citi, said mutual funds won't be directly impacted by a change to IFRS, but they will certainly feel the effects indirectly. Investors will benefit the most from the changes.

"IFRS can help bring harmonization to reporting standards and facilitate effective communication among sponsors and investors," Wallace said.

Even though the SEC hasn't set a date yet, the changes are coming and companies should be prepared for it, Filomia-Aktas said.

She likes to joke that the acronym IFRS, pronounced "iffers," should really be called "when-ers," because the changes are a foregone conclusion.

"A lot of people are waiting for the SEC to make a move," she said. "You may think it's way off, but if you start looking at it and see how much has to happen, there's really not that much time."

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