CURRENT PRESS RELEASES ARCHIVE
View our Latest Press Releases. Subscribe to the TMAP email
list if you would like to be notified of new postings on the site.
2009-08-30 BACK
International Financial Reporting Standards
International Financial Reporting Standards What does it mean for Small and Medium Entities (SMEs)? This article originally appeared in the Texarkana Gazette on August 30, 2009 Dr. Joan Brumm, Professor of Accounting, Texas A&M-Texarkana College of Business The SEC is considering proposals that could lead to retiring U.S. Generally Accepted Accounting Principles (GAAP) and adopting International Financial Reporting Standards (IFRS) for publicly traded companies. The current timetable calls for a vote by the SEC in 2011 on whether or not to go ahead with IFRS adoption. Whatever the SEC decides, U.S. companies will be affected by global reporting over the next few years. Currently, there are 117 countries signed up to adopt IFRS, and International Accounting Standards Board chairman Sir David Tweedie expects there to be 150 by 2011. It is important therefore for US companies to understand IFRS and the implications it has for their business. What is IFRS for SMEs? On July 9, 2009 the International Accounting Standards Board (IASC) published the International Financial Reporting Standards (IFRS) for Small and Medium-sized Entities (SMEs). The IFRS for SMEs are the standards for the preparation and presentation of financial statements adopted by the International Accounting Standards Board for small and medium sized entities. It is less than 230 pages and much simpler than full IFRSs. IFRS for SMEs is geared toward private companies whose stock is not traded publicly. This represents about 95 of all companies. The IASC Foundation offers free online access to the document at http://www.iasb.org/IFRS+for+SMEs/IFRS+for+SMEs.htm. Unlike public companies, U. S. private companies are not required to prepare their financial statements using U. S. GAAP. They have a choice of using GAAP, cash-basis, tax-basis, full IFRS, IFRS for SMEs, and other methods. In an increasingly global environment, using a common global financial accounting and reporting standard may aid companies that do business outside of the United States. What are some of the key differences between U. S. GAAP and International Financial Reporting Standards for Small and Medium Entities (IFRS for SMEs)? 1) The last-in-first-out (LIFO) method of inventory valuation is prohibited. U.S. GAAP allows for the use of LIFO valuation of inventory even when the physical flow of the inventory is actually first-in-first-out. Affect on Reported Income – In periods of rising prices LIFO results in higher cost-of-goods-sold and lower profits and consequently lower income taxes. Affect on Taxable Income – The U.S. tax code requires the same inventory valuation method used for financial reporting be used for tax. The adoption of IFRS for SMEs would generally increase the tax liability for companies currently using LIFO. 2) Goodwill and indefinite life intangible assets, such as trademarks and trade names, are amortized over a period not exceeding ten years. U.S. GAAP does not allow for the amortization (expensing) of these assets over a specific time period. Under GAAP somewhat complex tests for impairment of the assets are made annually. Amortization of the asset only occurs if the asset is deemed to be impaired. Affect on Reported Income – Amortization of goodwill and indefinite-life intangible assets would decrease reported income for the amortization periods. Affect on Taxable Income – There would be no affect on taxable income. The IRS allows most intangible assets to be amortized proportionally over a period of 15 years. 3) Depreciation is based on a components approach. Under a component approach, each significant part (component) of an asset that has a different useful life is set up and accounted for separately. Each component is then depreciated based on its useful life and depreciation pattern. A component that is replaced is written off and the expenditure on the replacement is capitalized. For example, under the component approach an airplane's frame and engines would be depreciated separately if they have different useful lives. Similarly, building components such as heating units would be setup and depreciated separately. U.S. GAAP – Generally, the entire asset is depreciated at the same rate. Affect on Reported Income – The component approach would depreciate some parts of the assets over a shorter time period. The result would be greater depreciation expense in early years and less in later years in comparison with GAAP. Affect on Taxable Income – The component approach to depreciation would reduce federal income taxes. The depreciation of certain components may have shorter-life recovery periods. Depreciation is a non-cash tax deduction. Reducing the depreciation life for components increases annual depreciation, and effects reduction in federal income taxes. 4) Reversal of impairment charges, if certain criteria are met, is allowed. U.S. GAAP – Once an asset has been written down, U.S. GAAP does not allow for a subsequent write-up of the asset should economic conditions change. Affect on Taxable Income – There would be no affect on income taxes. The tax code does not allow for the write-down of impaired assets. A loss is shown only when the asset is sold. 5) Accounting for financial assets and liabilities makes greater use of cost rather than fair value. U.S. GAAP – The U.S. GAAP statement of fair value reporting of financial assets was finalized in 2006. It requires changes in the market or fair value of financial assets held by an entity to be reported. However, the U.S. Financial Accounting Standards Board (FASB) acknowledges that the volatility in earnings resulting from the fair value approach in periods of widespread market fluctuation is not always representative of the underlying business. U.S. GAAP is currently looking at changes in this area. Affect on Reported Income – Reported income would be less volatile under cost reporting. Affect on Taxable Income – Taxable income would not be impacted. The IRS does not allow for the reporting or gains or losses on assets held by a company. Gains and losses are only reported when the asset is sold. The Private Company Financial Reporting Committee (PCFRC), a joint venture of the U.S. Financial Accounting Standards Board (FASB) and the AICPA, met in August 2009 and examined the proposed financial standards for small business (IFRS for SMEs). The PCFRC determined that FASB should consider whether or not to adopt IFRS for smaller businesses in the future. While they noted that the proposal has both potential benefits and disadvantages a major sticking point seems to be the elimination of LIFO. Expect to hear more about this topic soon. Dr. Brumm is Professor of Accounting at Texas A&M University-Texarkana and can be reached at Joan.Brumm@tamut.edu.
TOP
International Financial Reporting Standards
International Financial Reporting Standards What does it mean for Small and Medium Entities (SMEs)? This article originally appeared in the Texarkana Gazette on August 30, 2009 Dr. Joan Brumm, Professor of Accounting, Texas A&M-Texarkana College of Business The SEC is considering proposals that could lead to retiring U.S. Generally Accepted Accounting Principles (GAAP) and adopting International Financial Reporting Standards (IFRS) for publicly traded companies. The current timetable calls for a vote by the SEC in 2011 on whether or not to go ahead with IFRS adoption. Whatever the SEC decides, U.S. companies will be affected by global reporting over the next few years. Currently, there are 117 countries signed up to adopt IFRS, and International Accounting Standards Board chairman Sir David Tweedie expects there to be 150 by 2011. It is important therefore for US companies to understand IFRS and the implications it has for their business. What is IFRS for SMEs? On July 9, 2009 the International Accounting Standards Board (IASC) published the International Financial Reporting Standards (IFRS) for Small and Medium-sized Entities (SMEs). The IFRS for SMEs are the standards for the preparation and presentation of financial statements adopted by the International Accounting Standards Board for small and medium sized entities. It is less than 230 pages and much simpler than full IFRSs. IFRS for SMEs is geared toward private companies whose stock is not traded publicly. This represents about 95 of all companies. The IASC Foundation offers free online access to the document at http://www.iasb.org/IFRS+for+SMEs/IFRS+for+SMEs.htm. Unlike public companies, U. S. private companies are not required to prepare their financial statements using U. S. GAAP. They have a choice of using GAAP, cash-basis, tax-basis, full IFRS, IFRS for SMEs, and other methods. In an increasingly global environment, using a common global financial accounting and reporting standard may aid companies that do business outside of the United States. What are some of the key differences between U. S. GAAP and International Financial Reporting Standards for Small and Medium Entities (IFRS for SMEs)? 1) The last-in-first-out (LIFO) method of inventory valuation is prohibited. U.S. GAAP allows for the use of LIFO valuation of inventory even when the physical flow of the inventory is actually first-in-first-out. Affect on Reported Income – In periods of rising prices LIFO results in higher cost-of-goods-sold and lower profits and consequently lower income taxes. Affect on Taxable Income – The U.S. tax code requires the same inventory valuation method used for financial reporting be used for tax. The adoption of IFRS for SMEs would generally increase the tax liability for companies currently using LIFO. 2) Goodwill and indefinite life intangible assets, such as trademarks and trade names, are amortized over a period not exceeding ten years. U.S. GAAP does not allow for the amortization (expensing) of these assets over a specific time period. Under GAAP somewhat complex tests for impairment of the assets are made annually. Amortization of the asset only occurs if the asset is deemed to be impaired. Affect on Reported Income – Amortization of goodwill and indefinite-life intangible assets would decrease reported income for the amortization periods. Affect on Taxable Income – There would be no affect on taxable income. The IRS allows most intangible assets to be amortized proportionally over a period of 15 years. 3) Depreciation is based on a components approach. Under a component approach, each significant part (component) of an asset that has a different useful life is set up and accounted for separately. Each component is then depreciated based on its useful life and depreciation pattern. A component that is replaced is written off and the expenditure on the replacement is capitalized. For example, under the component approach an airplane's frame and engines would be depreciated separately if they have different useful lives. Similarly, building components such as heating units would be setup and depreciated separately. U.S. GAAP – Generally, the entire asset is depreciated at the same rate. Affect on Reported Income – The component approach would depreciate some parts of the assets over a shorter time period. The result would be greater depreciation expense in early years and less in later years in comparison with GAAP. Affect on Taxable Income – The component approach to depreciation would reduce federal income taxes. The depreciation of certain components may have shorter-life recovery periods. Depreciation is a non-cash tax deduction. Reducing the depreciation life for components increases annual depreciation, and effects reduction in federal income taxes. 4) Reversal of impairment charges, if certain criteria are met, is allowed. U.S. GAAP – Once an asset has been written down, U.S. GAAP does not allow for a subsequent write-up of the asset should economic conditions change. Affect on Taxable Income – There would be no affect on income taxes. The tax code does not allow for the write-down of impaired assets. A loss is shown only when the asset is sold. 5) Accounting for financial assets and liabilities makes greater use of cost rather than fair value. U.S. GAAP – The U.S. GAAP statement of fair value reporting of financial assets was finalized in 2006. It requires changes in the market or fair value of financial assets held by an entity to be reported. However, the U.S. Financial Accounting Standards Board (FASB) acknowledges that the volatility in earnings resulting from the fair value approach in periods of widespread market fluctuation is not always representative of the underlying business. U.S. GAAP is currently looking at changes in this area. Affect on Reported Income – Reported income would be less volatile under cost reporting. Affect on Taxable Income – Taxable income would not be impacted. The IRS does not allow for the reporting or gains or losses on assets held by a company. Gains and losses are only reported when the asset is sold. The Private Company Financial Reporting Committee (PCFRC), a joint venture of the U.S. Financial Accounting Standards Board (FASB) and the AICPA, met in August 2009 and examined the proposed financial standards for small business (IFRS for SMEs). The PCFRC determined that FASB should consider whether or not to adopt IFRS for smaller businesses in the future. While they noted that the proposal has both potential benefits and disadvantages a major sticking point seems to be the elimination of LIFO. Expect to hear more about this topic soon. Dr. Brumm is Professor of Accounting at Texas A&M University-Texarkana and can be reached at Joan.Brumm@tamut.edu.
TOP