IFRS: What's on the Horizon for Private Companies
With the proposed change in reporting requirements for U.S. public companies from U.S. GAAP to IFRS, it is time to examine what this conversion means for the millions of private companies.
November 20, 2008
Sponsored by Becker CPE
by Patty Lobingier, PhD,
Written exclusively for Becker CPE
With the proposed change in reporting requirements for U.S. public companies from U.S. GAAP (GAAP) to International Financial Reporting Standards (IFRS), it is time to examine what this conversion means for the millions of private companies in the U.S. Though public companies have a proposed time frame for adoption and can plan the conversion process, the impact on private companies moving to IFRS is a bit more uncertain. Private companies do not fall under the jurisdiction of the SEC, yet most currently report using GAAP in order to facilitate transactions and to remain competitive with their public counterparts. The question that exists at the moment is how private companies in the U.S. will report under an IFRS environment.
Will private companies follow the same IFRS standards as public companies? This question has not been specifically answered but there are three obvious possibilities. One option is that private companies will continue to report using GAAP. This option presents a difficult situation from a comparability standpoint. Having two sets of standards would make comparison between private and public companies more onerous and would likely impede many business transactions, particularly those on a global setting. As U.S. public companies move toward IFRS, and the majority of all other countries already require reporting under IFRS, global knowledge, and possibly acceptance of, U.S. GAAP will decline. A second option is that private companies will adopt IFRS in the same vein as public companies. This is a definite possibility but would result in a similar situation to what is currently in place where many private companies have to implement standards that are not applicable or pertinent to a non-public company. In addition, for smaller private companies, the cost of implementing complex standards can be significant. A third option is that a simplified version of IFRS, similar to the one proposed currently by the International Accounting Standards Board (IASB) for small- and medium-sized entities, will be utilized as an acceptable reporting mechanism for private companies. The IASB’s proposed standards for private companies remove or simplify some of the more complex reporting requirements.
Regardless of which option comes to fruition, private companies must move toward IFRS reporting. Without specific requirements for a move to IFRS by a regulatory environment, what would precipitate a change to IFRS by private companies? The short answer is market forces as the move toward IFRS is market driven. Our economy is a global one and companies of all sizes raise capital and transact business irrespective of country borders. Merger and acquisition activity, synergistic contracting, client attainment and capital growth are activities that are no longer limited to a company’s home country. Currently, many private companies are being approached by international companies that want to facilitate either buy or sell transactions. This often leads to credit granting situations that will require knowledge of, if not reporting under, IFRS. In addition, the current weakness of the U.S. dollar is making U.S. companies more attractive to foreign investors seeking acquisition. These investors typically want the U.S. target company to produce IFRS statements for review. Also, any private company that is a subsidiary of a parent company that reports under IFRS will need to adopt IFRS to facilitate annual filings. The bottom-line is in order to remain competitive, private companies will need to move to reporting under IFRS.
Adoption of IFRS by private companies is not without costs or difficulties. The first road block is that many private companies may not have sufficient resources to conduct an adequate review of the impact of IFRS adoption and subsequently make the appropriate changes to processes and controls. The training and education required for implementation will likely require the need for outside expertise, particularly for smaller private companies. In addition, the impact of IFRS adoption goes beyond reporting and companies must be knowledgeable of the full effect on areas such as compensation contracts, debt covenants, taxes and legal aspects.
Private companies will need to follow closely the timeline established for the adoption of IFRS by their counterparts in the public sector. A global economy and competition for capital and other resources will necessitate that private companies move toward IFRS as well, however it takes time, an average of three to five years based on the experiences of companies in the European Union (EU), to prepare for the conversion and to begin IFRS reporting. Even though there is not a proposed timeline nor are there definitive reporting requirements, private companies must move forward with plans for implementation of IFRS in order to remain competitive.
Patty Lobingier, PhD, is currently at Virginia Tech, and will be joining the faculty at the University of Michigan — Dearborn. She is very active in the area of IFRS. Her work in the IFRS area includes empirical research projects, educational materials, presentations at numerous conferences, CPE instruction and consulting to both small and large businesses. In addition, Lobingier has published articles in the areas of executive compensation, bankruptcy prediction, legislative tax incentives as well as pedagogical issues. She has also consulted on many projects including financial and market analyses for venture capital and e-business firms.
About Becker CPE
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