Globalization has changed nearly every aspect of how companies manage their business—sourcing, distribution, consumer pricing, raising of capital, and so much else. Financial reporting has also been greatly influenced by globalization. In fact, it is not an overstatement to say that a financial reporting revolution is now under way. Increasingly, International Financial Reporting Standards (IFRS) is how most of the world talks to investors and other stakeholders about corporate performance. Changing to IFRS alters how companies prepare and report their financial results and necessitates that investors understand any forthcoming changes. Anticipating that the US will soon join the rest of the world by allowing or mandating a move to IFRS, some leading US companies are already beginning to prepare for IFRS adoption. Even if your company is not yet ready to embrace IFRS, it makes sense for senior management to take action so they can understand how a move to IFRS will impact reporting of financial performance, operations, and communications with investors.

IFRS: The world’s new reporting framework

The message is clear: IFRS is becoming the global accounting language. Virtually all major territories other than the US use or are moving to IFRS. Approximately 12,000 public companies around the world already use IFRS in territories such as the European Union, Australia, Singapore, and Hong Kong. China, Canada, Japan, and South Korea have announced their intention to convert to IFRS in the not-too-distant future. Although IFRS only recently has made headlines in the US, the US standard setter, the Financial Accounting Standards Board (FASB), has been deeply involved with the London-based International Accounting Standards Board (IASB) and with IFRS since their inception in 2001. In the past five years, the IASB and FASB have worked to improve and converge both US GAAP (Generally Accepted Accounting Principles) and IFRS, with an increasing focus on the end goal of achieving high-quality, globally understood reporting standards.

The year 2007 brought a new perspective to that goal for US constituents. Would adoption of IFRS in the US make sense? In a global economy, do the reasons for adoption outweigh the reasons for retaining our own US standards? And then this intriguing question: Would adoption of IFRS help to eliminate many of the difficulties in US GAAP, which in certain respects has come under increasing and well-taken criticism? The answers to these questions are now being weighed. The US Securities and Exchange Commission (SEC) has already taken preliminary steps that history will almost certainly show to have been tipping points in the course of events:

• The SEC no longer requires foreign private issuers to reconcile their IFRS filings to US GAAP so long as they use IFRS as issued by the IASB.
• The Commission is studying whether US companies should have the option of reporting under IFRS rather than under US GAAP.

As early as spring 2008, the SEC may issue proposed rules that designate a date for optional and/or mandatory adoption of IFRS by US public companies. The speed with which a move to IFRS has progressed—from a mere possibility to inevitability—has landed this topic squarely on the radar screen of many multinational companies and their boards. However, some pioneering US companies that recognize the inevitability of IFRS are not just talking about it— they are actively beginning the conversion process.

This article looks in broad terms at the shift from US GAAP to IFRS and at the emerging best practices of leading US companies that view IFRS reporting as not only inevitable, but also beneficial. These companies are aware of the challenging scope of implementation. They want to be ready to seize the advantages and make a smooth transition. And they want to control the costs of doing so.