US GAAP to IFRS Accounting Transition Overview

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Most public companies in the U.S. are welcoming – or at least accepting – the prospect of transitioning from U.S. Generally Accepted Accounting Principles (U.S. GAAP) to International Financial Reporting Standards (IFRS) in the near future. Well over 100 countries now require or permit the use of IFRS, and several others are committed to implementing IFRS in the near future.

This global movement towards a single set of high quality financial reporting standards will lead to greater comprehensibility and transparency in financial reports and a consequent increase in cross-border capital flows.

Dr. Barry Jay Epstein, CPA, an international accounting expert on U.S. GAAP and IFRS with the Chicago accounting firm of Russell Novak & Company, LLP (www.rnco.com), recently participated in an IFRS Roundtable published in the February 2011 issue of Financier Worldwide Magazine (www.financierworldwide.com). Excerpts from this article appear below.

The challenges faced by countries that are currently rolling out IFRS include the need to modify certain contracts – for instance loan covenants based on existing GAAP measures, such as debt to equity – to incorporate IFRS-based criteria; the risk of misapplication of IFRS during the early "learning curve" years, resulting in erroneous financial reporting; and the risk of litigation arising from confusion on the part of financial statement users – investors, for instance – as well as to innocent misreporting by issuers.

The impact of IFRS versus US GAAP or UK GAAP has probably been overstated; the differences are modest in number and can readily be identified and explained. Bonuses and other payments driven by reported earnings can either be adjusted by formula so that the new base can be substituted, or else "frozen GAAP" can be applied until existing agreements run out, although this requires keeping "two sets of books".

Tax law is typically already not fully congruent with GAAP, so moving to IFRS doesn’t add a new problem, with a few exceptions, the US "LIFO conformity rule" being the most significant. Once universal application of IFRS is achieved, M&A and other transactional matters will be simplified.

Read the full article below. Contact Dr. Epstein at 312-464-3520.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Barry Epstein, Epstein + Nach LLC | Attorney Advertising

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