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International Financial Reporting Standards ("IFRS") To Replace GAAP Reporting by 2010

Until only recently only U.S. subsidiaries of foreign parent companies were faced with the task of converting financial statements prepared in accordance with Generally Accepted Accounting Principals ("GAAP") into standards acceptable under local law. This was common among U.S. companies that were part of a consolidated global group of companies owned by a common German corporate parent who reported in accordance with local standards. This was commonly referred to a conversion from HBI (a single entity reporting under local standards) to HBII (German accounting and reporting standards). Pursuant to German commercial and tax standards, the primary focus was on the balance sheet, HB was an abbreviation for Handelsbilanz.

For many years Powers & Company was retained by Carl Zeiss, Inc., the U.S. subsidiary of the Zeiss (worldwide), located in Oberkoken, GE to perform a detailed analysis of  the U.S. accounts of Zeiss (US), make reclassifications, transfers and valuation adjustments where required, and report the information to Germany where the data was converted to Marks. Almost simultaneous with the adoption of the Euro as its unit of currency, Zeiss adopted International Accounting Standards ("IAS") along with other members of the European Economic Community and global subsidiaries were required to convert local financial reporting to IFRS. Although there were many similarities between HBII and IFRS, there are many differences as well which required an exhaustive study of the new IAS and IFRS by foreign subsidiaries.

Although IAS differs from GAAP in many ways, the primary difference lies in the amount of detail that is necessary, amounts which must be expensed currently and reserves that are required to be established. It is generally viewed as presenting a more accurate means of reporting current operating results, requiring a greater threshold of certainty for the recognition of income as well as greater reserves for costs and expenses which often result in lower annual net operating results when comparing IAS to U.S. GAAP. As a result, it eliminates many of the Book/Tax differences that presently exist as IAS are in fact more "in tune" with U.S. income tax reporting, and under IFRS a detailed disclosure and analysis of existing Book./Tax differences is required.

Although recent changes in GAAP reporting now requires greater transparency and disclosure in the footnotes of financials, the Department of the Treasury (to which the IRS reports) has been working closely with the Securities and Exchange Commission ("SEC") to encourage accelerated adoption of IAS and IFRS which will totally revamp the world of U.S. accounting and income tax reporting. Some U.S. have already announced that they are prepared to go "on-line" with IFRS by as early as 2009 and the Treasury is encouraging adoption of IAS and IFRS by 2010.

Although the Big 4 accounting firms have been devoting much time and resources to this, many businesses have been so overwhelmed with restating GAAP financials and generally doing more work with less personnel that (in my opinion) they simply are not prepared for the transition. To effectively transition from GAAP to IFRS a business must first develop a White Paper study to understand the scope of the change and what it will mean to their financials and SEC reports, including comparative analysis of prior years as well as future forecasts, and this information needs to be communicated to shareholders of public companies. From a hands on logistical perspective, a revamping of general ledger charts of accounts will be required, with general categories being expanded and accounts reclassified. Major transactions and restructuring plans will need to be discussed at length with accounting and tax personnel and Tax Departments will need to work closely with Accounting Departments to implement the changes which will impact both income tax reporting as well as tax provision computations and financial disclosure. IT personnel will need to be included as an integral part of the team as well.

As someone who has been involved in such a transition I can assure that  preparing for the change sooner rather than later will be paramount in determining a successful transition and the wisest plan will be to run parallel systems while the bugs are being worked out, as this transition will be far more difficult than many imagine.

 

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