If given the choice, would U.S. companies prefer to report their financial results using long-standing but complicated U.S. Generally Accepted Accounting Principles? Or would they flock to the upstart, less prescriptive International Financial Reporting Standards spreading like wildfire throughout the rest of the accounting world?

The Securities and Exchange Commission has hinted it may well offer American companies that option as it works toward dropping its requirement for foreign companies to reconcile their international reports to GAAP. If non-U.S. companies can report in U.S. markets using international standards, the thinking goes, then U.S. companies might as well be allowed to do the same.

Deciding which reporting system to use is a decision fraught with complicated choices. Regardless, experts say, a few considerations rise to the top as early, obvious factors.


The first question a company is likely to ask: “What’s the impact on their numbers?” says D.J. Gannon, a partner with Deloitte & Touche and leader of the firm’s IFRS Center of Excellence for the Americas. “How will it impact their financial position and net income?”

The analysis, however, should go much deeper, says Chris Wright, managing director for consulting firm Protiviti. “Companies might initially be inclined to see which of the two choices affords them the opportunity to present their financial statements in a better light,” he says. “But as they move forward with the process they have to consider not only which standard looks better, but whether they have the organizational structure, the systems, the data, and the staffing to sustain reporting under whichever system applies to them.”

If the SEC follows through and truly gives companies a choice of which accounting standards to follow, Gannon says early IFRS adopters are likely to be large U.S. companies that have large global competitors already reporting under IFRS.

“My sense is that it’s going to be driven very much by industry,” he says. “In sectors like telecommunications and pharmaceuticals, there are a lot of players outside the U.S. where competitors are reporting under IFRS. That may give more incentive for U.S. companies to move to the IFRS reporting regime to make their numbers more comparable.”

Companies with significant global operations that already report under IFRS might also be inclined to make the switch, Gannon adds. “If you can drop GAAP, you can streamline your operations and your systems.”

There are numerous rule-specific comparisons companies will want to make to determine which accounting standard they'll follow, according to Wright. He gives the example of revenue recognition, where companies may like the flexibility that international rules offer over the complexities of GAAP. Companies with significant derivative activity, however, may find that GAAP’s short-cut method allows more flexibility than international rules.

Other Considerations For IFRS

Samir El-Gazzar, accounting professor at Pace University, says that beyond a broad cost-benefit analysis, management may also have to weigh debt covenants and how they might be affected by a change in accounting standards.


“Most debt covenants or restrictions are based on accounting rules and accounting measures, so there may be some modifications to existing lending agreements where lenders are going to insist on using U.S. GAAP or amending the existing agreement,” he says. If companies choose to change accounting standards and therefore modify lending agreements, there are sure to be related transaction costs.

In addition, El-Gazzar says management may also take into account its own compensation or stock option plans. “How much is management compensation based on accounting income versus market performance? They don‘t necessarily go together,” he says. “If compensation is linked to the bottom line, management will consider that.”


Gary Illiano, a partner with Grant Thornton, says even companies motivated to adopt IFRS may move slowly because the market doesn’t have the expertise to get there quickly. A genuine opportunity to choose between GAAP and IFRS “would result in a huge educational effort both for the preparers of the financial statements and their auditors. The U.S. accounting firms are only in the beginning stages of educating their people,” he says. “It’s likely that will change as a function of demand, but I don‘t think we’ve gotten to the tipping point just yet.”

Neri Bukspan, a managing director at Standard & Poor’s, says companies should be cautioned against making a decision based solely on trying to mask something in their financial results.

“Companies will announce their choice, and in doing so it will not be unreasonable to expect companies to tell us why they did it,” he says. “We have quite a concern it will be done for the wrong reasons, that companies will want to be less transparent rather than more transparent. It will probably be the exception rather than the norm, but when it happens, analysts and others like ourselves will be all over it.”

Bruce Pounder, president of Leveraged Logic, says companies assessing the prospects should focus on the longer-range issues. “Each set of standards will continue to change significantly and converge with each other,” he says. “What management should focus on is preparing now to implement country-neutral accounting standards within the next five years.”


If GAAP remains country-specific for too long, U.S. companies may become more motivated to switch to IFRS, Pounder says. On the other hand, the Financial Accounting Standards Board may make rapid progress in converging GAAP with international standards. “In either scenario, companies will need to be ready to make major changes in the next few years if they are using U.S. GAAP now,” he says.

Gannon at Deloitte agrees that the market needs to focus on the bigger prize: that eventually only one accounting system will exist. “Whether you call it GAAP or IFRS, it’s the same requirement, at least at a high level,” he says. “At some point down the road, the key thing is having financial reporting standards that result in transparent financial information. Whether you call it IFRS or GAAP really doesn't matter.”