International Financial Reporting Standards

International Financial Reporting Standards

Currently, the Securities and Exchange Commission (SEC) uses GAAP (or Generally Accepted Accounting Principles) as the accounting standards in the United States. Essentially, GAAP is implemented to make sure that investors have consistency from the financial statements of one company to another. This consistency makes analyzing different companies for investment purposes much easier and faster than it would be without an accepted accounting standard.

A Move to IFRS?

With that said, though, there is a possibility that GAAP could be on its way out. While the United States uses GAAP, most other countries—including all European nations, Canada, and Japan—require public companies to compile financial statements based on the International Financial Reporting Standards, or IFRS.

IFRS, established by the IASB (International Accounting Standards Board), are used more consistently around the globe than any other accounting standards. As a result, many companies have pushed for a full-scale adoption of IFRS principles in the United States—whether as a supplement to or a replacement for GAAP. The SEC has even acknowledged in the past that IFRS is likely the best candidate for ensuring accounting consistency around the world and guaranteeing that investors are better equipped to compare companies based on financial statements. However, as of yet, GAAP remains in place in the USA.

That fact could change or shift in the near future, though. According to an article published by Accounting Today in November, James Schnurr, the Chief Accountant at the SEC, “plans to recommend to SEC chair Mary Jo White that US companies be allowed to use International Financial Reporting Standards.” This recommendation would not be that the IFRS standards completely replace GAAP principles, but that companies be allowed “to provide supplement information” based on the international standards. Such a move would please the IASB, which has been encouraging a “convergence” of the IFRS and GAAP standards for years now.

Would Adopting IFRS Be a Smart Choice for Your Business?

As is noted in the FAQ section of the IFRS website, the standard is first and foremost meant for publicly traded companies. Accounting reports compliant with IFRS principles are helpful to investors because they make company-to-company financial comparisons simpler and more consistent. Investors can use reports compiled using IFRS to decide which companies they deem smart investments and which they do not. Some multi-national companies based in the United States already do some of their accounting using the IFRS principles, because those standards make it easier to do business overseas.

For smaller, non-public companies, though, there may not be much reason or “market incentive” to compile financial statements using IFRS. The implementation of IFRS, the standard’s FAQ page says, may carry “significant costs” that would call into question whether or not adopting the standard would even be worth it for small businesses. However, once implemented, IFRS could also help to simplify the process of preparing and assessing financial statements, as well as reduce the cost. GAAP stipulates more rules than IFRS does, meaning that, if the latter became an allowable standard for all US businesses, smaller companies might consider implementing it to save money and time.

How IFRS Might Impact your Company’s Processes

The most important thing to realize about IFRS is that the IASB-approved accounting standards go beyond simple accounting. While these standards would have the most effect on a business’s financial statements, the IFRS FAQ page is quick to point out that implementing the standards will also “affect many aspects of a US company’s operations.”

Indeed, any processes tied with tracking, preparing, or reporting financial information would be affected by IFRS. These processes include payroll and compensation, taxation, budgetary documents, profit-and-loss statements, stock information, and more. In turn, these processes could impact most of the departments of your business, from human resources to information technology.

The process changes and paperwork alterations that would be demanded by a switch to (or convergence with) IFRS would certainly be easier for businesses with strong document management systems in place. From updating contracts and forms to reflect IFRS policies rather than GAAP standards, to changing the way the company tracks and records different pieces of financial information, a strong DMS would greatly simplify the switch from one standard to the next—while also likely cutting down on the cost.

Good document management software also helps businesses store documents securely, providing encryption, password protection, read-only file settings, permissions, and more. At eFileCabinet, we currently advertise these features as factors that can assist in reaching GAAP compliance. Similarly, document retention and easy text-based searching are also supported by eFileCabinet—both important features for ensuring GAAP compliance. These security and auditing features form a strong foundation for any company’s accounting policies—whether they are following GAAP, IFRS, or both.

Are you interested in learning more about eFileCabinet, or in using the software to help your business stay compliant with GAAP or IFRS principles? Visit us on the web at www.efilecabinet.com to learn more.

By | 2016-12-15T11:59:13+00:00 December 7th, 2015|
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