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June 2008

The beginning of the end of US GAAP

By Uday Chitale, Murtuza Vajihi, Chartered Accountants
Reading Time 4 mins

Accountant Abroad

There is an increasing indicative trend that US accounting
standards — which were once considered sacrosanct for accountants the world over
— have begun to decline in terms of importance. Instead, the International
Finance Regulatory Standard (IFRS) are emerging as the most popular accounting
standard internationally.

The Financial Accounting Standards Board and the Financial
Accounting Foundation of USA plan to host a public forum in June 2008 to discuss
a new national blueprint for moving the United States to International Financial
Reporting Standards.

The forum will include participation by the American
Institute for Certified Public Accountants, the Internal Revenue Service, the
Securities and Exchange Commission, the Public Company Accounting Oversight
Board, business representatives, educators, and lawyers, who will discuss the
stumbling blocks on the way to setting up international accounting standards.

FASB Chairman noted that the board continues to work with the
International Accounting Standards Board (IASB) on their convergence project to
create “something better than either U.S. GAAP or IFRS alone.”

Developing an ‘improved version of IFRS will be a complex
process,’ and that ‘a smooth transition will not occur by accident.’ As a
result, the blueprint looks to ‘identify the most orderly, least disruptive, and
least costly approach’ to move U.S. public companies to IFRS.

Those changes include getting rid of ‘carve-outs,’ local rule
exceptions adopted by some countries that deviate from the version of IFRS that
is sanctioned by the IASB. Another adjustment supported by FASB Chairman would
be to strengthen IASB’s position as an independent standard setter by
establishing a sustainable source of funding. (It currently is supported by
private-sector donations.)

One idea is to require countries that adopt IFRS to fund the
organisation. In 2002, the Sarbanes-Oxley Act boosted FASB’s independence by
requiring government funding for the board and its parent, the FAF. Before that,
funding came from the private sector.

The call for a single set of global accounting standards will
mostly likely require a single standard setter, and that organisation may
probably not be FASB. Indeed, last week FASB member Thomas Linsmeier said the
“least important question [regarding the switch to IFRS] is what happens to FASB.”
Linsmeier, speaking at an industry conference sponsored by Pace University’s
Lubin School of Business, said that from a broad perspective, FASB’s survival
should not be what motivates the decision about moving to IFRS.

Before a transition to IFRS becomes a reality, however, other
issues will have to be addressed, including how to change the CPA exam to
coincide with IFRS, and how to rework accountant training, education, and
auditing standards to put the American system in sync with international rules.
What’s more, the industry will have to evaluate how adoption of IFRS may change
SEC policy and legal arrangements that are based on U.S. GAAP.

Next month’s blueprint meeting will also be a good
opportunity to work out which road companies eventually will take to become
compliant with IFRS. The most pressing question is whether to operate dual
accounting systems and have companies choose their adoption date within a
specified window of time, or have FASB set a specific deadline for all companies
to make the jump to IFRS.

Whichever path is taken, a few big accounting-practice issues
will have to be settled between FASB and IASB before U.S. companies adopt the
global standards. They include defining liabilities and equity, reworking
financial statement presentations, and revamping lease accounting and
revenue-recognition rules.

In the meantime, FASB will continue to work on wringing
complexity out of GAAP. For example, by the end of June, FASB’s staff is due to
release proposals on hedge accounting to resolve practice issues and make
disclosures easier to understand. Further, the staff expects to issue proposals
to eliminate qualified special-purpose entities from the accounting literature
by revising FAS 140, and improve FIN 46R, the rule on consolidating
variable-interest entities.

The SEC is also committed to moving U.S. companies to IFRS.
The commission’s chief accountant said that ‘theme’ at the SEC continues to be
to move toward international accounting standards. To quote the chief accountant
“I think to compete in the future, we will have to move to IFRS.”

(Source : CFO.Com/US)

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