IFRS and US GAAP standards systems

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The US adoption towards IFRS

SEC’s Roadmap

According to Doupnik and Perera (2009) all public limited companies in the United States have to use US GAAP for their financial statements. Since 2007, non-American companies listed on the US stock exchanges are allowed to use accounting standards from their juris-diction as long as they provide some information in accordance to US GAAP in their fi-nancial statements. As a result of the crash in the US stock exchange market in 1929, the Securities Act of 1933 and the Exchange Act of 1934 created the SEC. Before the crash there were no regulations that protected the investors. The SEC is protecting all investors, corporate and private, at the same time as they make the markets efficient and capital avail-able. The regulations that are focused on security of investors, corporations as well as individuals in the United States, agree that the financial information from companies should be official and accessible (Securities and Exchange Commission, 2010-03-28). The SEC rec-ommended that FASB should work together with IASB when establishing principles to re-duce the differences between US GAAP and IFRS. In 2002, a convergence project was created between FASB and IASB with the objective to develop and aim for a global ac-counting system (Securities and Exchange Commission, 2010-03-29b).
In 2008, the SEC presented a Roadmap as a step towards an adoption from US GAAP to IFRS. The SEC is convinced it is crucial to have a single-set of high-quality global account-ing standards that could be adopted in the United States, and has stated as follows:
“We believe that IFRS has the potential to best provide the common platform on which companies can report and investors can compare financial information”
(Securities and Exchange Commission, 2010-03-29a, p. 9).
The SEC Roadmap explains that the reason for the importance of the US adoption to IFRS is because of the large amount of American companies that have expanded outside of the United States. As a consequence, more of the investors in the United States companies are non-American at the same time as the US investors are investing in non-American companies. Therefore, it would be more beneficial for them to be able to compare the fi-nancial statements of American companies with non-American companies (Securities and Exchange Commission, 2010-03-29a). The SEC has in the Roadmap declared seven mile-stones to be achieved before a full implementation of IFRS could be done. These mile-stones are an important factor to consider before the SEC can approve the adoption from US GAAP to IFRS and are generally presented below.
1. Improvements in accounting: In accordance to the Norwalk Agreement, IASB and FASB are developing a work plan to be revalued in 2011 by the SEC. An inves-tigation by the SEC will examine if the accounting standards, presented in IFRS are of high quality and are comprehensive. Additionally, the SEC encourages a further cooperation between IASB and FASB in order to have continued high-quality ac-counting standards.
2. Accountability and funding of the IASC foundation: The SEC recognizes a large problem regarding the funding of IASB. For the IASB to be kept independ-ent, the goal from IASC to have a secure and stable funding must be solved before the United States should adopt the IFRS system. The SEC also raises the question of what organization that will be responsible for the over-sighting of US compa-nies’ usage of IFRS.
3. Improvement in the ability to use interactive data for IFRS reporting: With the usage of IFRS in the United States, the SEC requires US companies to provide their financial statements in the form of interactive data, to obtain more useful in-formation to investors. This data is not mandatory for US companies before an adoption and is therefore not available today.
4. Education and training: The proposed US adoption to IFRS requires education about IFRS for US issuers, accountants and auditors. It is also important for inves-tors to realize and understand the opportunity arising with one set of accounting standard. An adoption of IFRS by the United States will lead to easier direct com-parisons between American and non-American companies. IFRS has to be included in the Certified Public Accountant (CPA)-tests for auditors, at the same time as universities and colleges have to include IFRS in their education.
5. Limited early use of IFRS where this would enhance comparability for U.S. investors: The SEC suggests amendments in their rules and regulations, which would permit some of the largest US companies within industries, where IFRS is used, to apply IFRS before it is completely implemented. This will allow compara-bility for investors between US companies and non-US companies within the same industry to comment and evaluate IFRS before a potential full implementation.
6. Anticipated time of future rulemaking by the commission: The SEC presents recommendations for continuance of an adoption to IFRS in 2011 in order for US public limited companies to be able to prepare their financial statements in accor-dance to IFRS from 2012. The SEC further suggests a mandatory usage of IFRS, to improve the comparability between US companies and non-US companies. Since a limited number of companies can use IFRS, while other companies will continue to use US GAAP, both accounting standard systems will be in use in the United States. This would therefore cause problems and confusion in the comparison of financial statements among investors and auditors.
7. Implementation of mandatory use of IFRS: In the Roadmap, the SEC suggests conducting the US adoption to IFRS in three stages in order to create a smoother transition for small companies with few resources. By using stages, auditors and consultants are able to adopt IFRS as well. The first stage consists of ‘large acceler-ated filer’ that will start use IFRS for the fiscal year that ends in December 15, 2014, or after this date. Next stage will start in December 15, 2015 and contains ‘accelerated filer’, while the last stage will begin in December 15, 2016 and includes ‘non-accelerated filer’.6
The SEC expresses in their second part statement of the Roadmap from March 2, 2010 (Securities and Exchange Commission, 2010-03-29b) that the consideration of the adop-tion of IFRS is still in the executive process to be decided in 2011. The decision of a switch in accounting standards systems for US public limited companies is based on the continu-ance of the convergence project as well as the milestones set up by SEC, where an evalua-tion of the convergence as a feasible option to the adoption is included. Stakeholders in different industry markets have commented on the Roadmap and the comments are pre-sented in the second statement (Securities and Exchange Commission, 2010-03-29b). The time period for first implementation is extended to the earliest 2015 because of the com-ments of the Roadmap, which express the need for a longer implementation period. The commenters give positive critique towards a single-set high-qualitative global accounting system, where the benefits recognized of this were to a large extent similar to the ones dis-cussed by the SEC before the Roadmap was published. The negative aspects in the com-ments are how the adoption process to IFRS is supposed to be conducted (Securities and Exchange Commission, 2010-03-29b).
Another subject raised in the second statement implies that a shift to IFRS will generate a need for a modification of the federal codes as well as tax codes, which regulate the finan-cial methods for inventory valuation. A continuance of these codes after an adoption of IFRS would cause that LIFO is maintained for tax purposes. Switching from LIFO to FIFO would be the other option, from which a higher income tax provision and revenue will occur for the companies using LIFO today. They would thereby suffer in two areas at the same time; costs for implementing the new standards and costs in form of increased income tax provisions (Securities and Exchange Commission, 2010-03-29b). A continued use of LIFO is not an option since the SEC issues the importance of adopting IFRS com-pletely. The SEC declares that the decision of a full implementation of IFRS is dependent on whether countries use IFRS fully or if local variants are applied. Local variants of IFRS eliminate the long-term goal of comparability between countries and jurisdictions (Securi-ties and Exchange Commission, 2010-03-29b).
Even though the SEC Roadmap is recently published, the inventory valuation methods LIFO and FIFO and their effects on companies accounting has been researched for dec-ades. Some of these studies are provided in the following section, 3.2 – Historical aspects and usage of LIFO by US companies. The subject has become more intense since the pro-posal from the SEC to adopt IFRS as the accounting system in the United States instead of US GAAP, and is presented in section 3.3 – Research regarding LIFO consequences of a US adoption to IFRS.

Historical aspects and usage of LIFO by US companies

Dopuch and Ronen (1973) conduct an experimental study of how US companies choose methods for inventory valuation and what affect this have on their resource allocation. They concentrate their research on two companies where clear inventory information is provided, to be able to translate valuation method in use from either LIFO to FIFO or FIFO to LIFO. The decision of investing capital in these companies is tested in relation-ship to each other, using LIFO or FIFO with the respect to the other company’s use of valuation method. The results Dopuch and Ronen (1973) receive from the responses in their study are that there are small FIFO-effects and LIFO-effects when focusing on dif-ferent key ratios. In almost all of the cases there were no effect when using either of the valuation methods. The conclusion is that the numbers of valuating inventory deceives in-vestors differently.
Cohen and Pekelman (1979) study differences in the benefits between LIFO and FIFO and companies that switch from FIFO to LIFO, when valuating inventory. They find that by choosing LIFO before FIFO the inventory is used more effectively as well as the benefits, such as lower income tax provisions, increase in the short- and long-run. However, the benefits of using the LIFO method are complicated to calculate which creates unwilling-ness among managers to implement this method. This is a reason why companies have not applied this method for valuating inventories.

1 Introduction
1.1 Background
1.2 Methodology
1.3 Thesis outline
2 Accounting standards systems and inventory valuation
2.1 IFRS and US GAAP standards systems
2.2 Valuation methods of inventory according to IFRS and US GAAP
2.2.1 First-In, First-Out (FIFO) inventory valuation method
2.2.2 Last-In, First-Out (LIFO) inventory valuation method
2.2.3 Differences between FIFO and LIFO
3 The US adoption towards IFRS
3.1 SEC’s Roadmap
3.2 Historical aspects and usage of LIFO by US companies
3.3 Research regarding LIFO consequences of a US adoption to IFRS
3.4 Effects of a LIFO removal if IFRS is implemented in the US
3.5 Consequences of LIFO with a non-adoption of IFRS in the US
4 Conclusion
Reference list
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