U.S. Companies Prepare for IFRS Even as They Oppose It

Global corporations may be anticipating the possible adoption of International Financial Reporting Standards in the United States, but U.S. companies raised in a world of U.S. Generally Accepted Accounting Principles don't see as much upside and are skeptical that it will ever happen.

At the Compliance Week 2011 conference in Washington last week, top accounting executives at Credit Suisse, Microsoft, and Xerox discussed the accounting changes that have emerged from efforts to converge U.S. accounting standards with international ones and the outlook for adoption of IFRS in the United States.

Rhoda Dhar, head of accounting policy in the Americas for Credit Suisse, said that the global investment bank has been considering and preparing for a full-scale transition to IFRS since 2008. That was soon after the Securities and Exchange Commission eliminated the requirement for non-U.S. companies to reconcile their financial statements to U.S. GAAP, so long as they follow the standards written by the International Accounting Standards Board.

Although Credit Suisse is allowed to quit reporting under GAAP and move all of its global accounting to a single ledger of IFRS, it hasn't pulled the trigger yet because it wants to remain comparable with its leading U.S. financial institutions, Dhar said. That said, about two-thirds of Credit Suisse's global operations do report under IFRS, and the company would be glad to see GAAP accounting come to an end. “It's really only in the Americas region that we're not reporting under IFRS,” she said. “Part of the incentive [of adopting IFRS] is to get rid of two sets of books and records.”

Accounting policy leaders at U.S.-based giants like Microsoft and Xerox aren't as eager to see an end to GAAP in the United States, and they doubt it will ever happen. To prepare for possible IFRS adoption “is a lot of work but probably not a lot of benefit for Microsoft,” said Bob Laux, senior director of financial accounting and reporting at Microsoft.

The company is taking steps to prepare for IFRS, should the SEC decide to adopt it here at some point, but Laux is not enthusiastic about efforts to make U.S. rules more similar to international rules. “I think [the convergence effort] has taken a little away from actually improving financial reporting,” he said. “It's going from one set of GAAP to another set of GAAP. But really, it's GAAP.”

Gary Kabureck, chief accounting officer at Xerox, said IFRS has been sold to major companies on the basis that it can streamline accounting by eliminating a set of books. “The cost benefit payback for U.S.-centric companies just isn't there,” he said. Companies will still have multiple sets of tax records for different jurisdictions, he pointed out. “It makes some sense to have a unifying body of language that accountants around the world would use. But just to convert to IFRS—I'm not there.”

Still, Kabureck and Laux said preparing for a shift to IFRS—even if they oppose it—is important, just in case it happens. At Xerox, some 40 professionals spent four months identifying all the differences between IFRS and GAAP, and compared them with internal accounting policies. They found several differences that would affect the company's accounting practices in material ways, with accounting for compensation, taxes, restructurings, impairments, and research and development at the top of the list, Kabureck said.

“I think [the convergence effort] has taken a little away from actually improving financial reporting. It's going from one set of GAAP to another set of GAAP. But really, it's GAAP.”

—Bob Laux,

Senior Director of Financial Accounting and Reporting,

Microsoft

For example, Kabureck said, differences in accounting for R&D would have a significant effect on Xerox since it devotes a large amount of resources to new product development. Under GAAP, all R&D costs are expensed through earnings as they are incurred. Under IFRS, however, research is expensed, but development is capitalized and written down over time. Therefore, if IFRS were adopted in the United States, it would require significant new data gathering and analysis to distinguish between the two phases, establish amortization methods for development activities, and account for them properly.

Be Prepared

GAAP-reporting companies should be studying IFRS to determine such effects on their own accounting, Kabureck said. They also should follow the activity of the Financial Accounting Standards Board and the International Accounting Standards Board as they continue to revise rules to make them more alike, he added, but now is not the time to take definitive action. “At the moment, IFRS is far enough on the other side of the horizon. So there's no need to do a ton of work yet,” he said. “Every time we talk to the SEC, they say, ‘We'll give you plenty of lead time.' My experience would tell you the exact same thing.”

Microsoft has performed a similar analysis and has put some significant focus on the changes that are in store for revenue recognition, Laux said. FASB and IASB are writing a new standard that would replace more than 200 pieces of historical guidance in U.S. GAAP, focusing the recognition of revenue on when a company satisfies a performance obligation to a customer. For companies that bundle products and services into a single deliverable to a customer, like Microsoft, that would change the timing of revenue recognition significantly, Laux said.

Since current rules defer the recognition of revenue for certain deliverables, and new rules would accelerate such recognition and apply it to prior periods where it was actually earned, Microsoft would expect as much as $10 billion of deferred revenue to suddenly rush through the financial statements if and when the new standard is adopted. It would not, however, flow directly to the income statement, Laux said. Instead, it would flow through retained earnings because it would be applied to prior periods, a complexity that has some in the executive suite scratching their heads. “They think someone is trying to walk out of the building with a $2 million sack over their shoulder,” he quipped.

At Credit Suisse, Dhar is watching closely to see whether FASB and IASB will eliminate the major differences in how balance sheet netting—or presenting rights and obligation in net rather than gross amounts—for financial instruments is permitted. GAAP generally allows more netting for derivatives and other financial instruments, but IFRS is much more restrictive, she said. With no difference in the risk profile, the two accounting approaches result in very different presentation, she added. “In our initial review, we found if we would have to move to an IFRS presentation, our balance sheet would almost double.”

Based on Credit Suisse's experience in preparing for a possible transition to IFRS, Dhar said companies must get outside auditors involved when they begin preparing for the potential move to IFRS. She cautioned, however, that she often had to go to audit professionals outside the United States to get the best answers on IFRS. “The accounting firms are learning IFRS as the market develops,” she said. “One of our challenges was we were educating our auditors.”

Laux said Microsoft decided to hire a separate audit firm to assist with IFRS readiness because the company wanted more consulting than its own external auditors, confined by independence rules, could provide. Kabureck said Xerox kept the process mostly in-house. He has some worries that audit firms may be pushing IFRS to a greater degree than appropriate because they view it as an opportunity to generate revenue. “I really believe that,” he said.