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As the SEC presses for accelerated acceptance of IFRS as a GAAP alternative, many financial executives fear a hasty move could be as problematic as the rush to adopt SOX . But not United Technologies
When the U.S. finally converts its corporate accounting to the more globally utilized International Financial Reporting Standards (IFRS) from Generally Accepted Accounting Principles (GAAP), companies like United Technologies Corp. (UTC) are likely to take a huge hit because of differences in how such items as inventory are handled. No matter.
Margaret Smith, UTC’s controller, is one of the biggest proponents for making the switch—and as soon as possible. “With 62% of our revenues coming from international locations, and with more than 180 offices abroad, we’re watching this process carefully,” says Smith, a vice president at the $55 billion conglomerate. “While initially it would cost us more, there would be big savings in being able to move all our accounting operations into one service center that could do it all.”
This must be music to the ears of Christopher Cox, the chairman of the Securities and Exchange Commission (SEC), who has been pushing for a rule to allow U.S. filers to jump voluntarily to IFRS as early as next year. Cox has been insisting since he first took over the SEC about the need for convergence in accounting, financial standards and regulation to accommodate increasingly global markets and economies, and a global switch to IFRS would allow investors to compare financials from around the world. As Cox told a meeting of the American Institute of CPAs in January, “There is a risk that the rapid increase in global trading and investment is getting ahead of the ability of accounting standards and financial analysis to provide investors with comparable information in a form they can readily use and understand. That’s why it’s important…that we do everything within our power to ensure that financial reporting information from different countries is comparable and reliable.”
Unfortunately, many U.S. senior financial executives and experts are singing a different tune—one that reflects fears that companies and the accounting profession itself may simply not be ready to make too hasty a conversion. If regulators move too quickly, before the discrepancies between IFRS and GAAP are resolved, they argue that the move to IFRS could turn out to be worse than the Sarbanes-Oxley Act in terms of expense and distraction from business. “The SEC is not ready to look at corporate filings in IFRS,” says Christine Fabio, Financial Executives International’s vice president for technical activities. “There are practical issues between GAAP and IFRS that need to be reconciled. Any IFRS filing mandate should be phased in over five to 10 years.”
UTC’s inventory accounting issue provides a good case in point. Many U.S. firms use what is called ‘last in, first out’ (LIFO) methodology to account for inventory. When they do this, under U.S. tax law, they are also required to use LIFO for inventory in their tax filings, too. IFRS doesn’t accept LIFO, and even proponents like Smith concede that until companies know whether the IRS will continue to accept LIFO they would be forced to wait. “Making that change, if the IRS forces us to change too, would cost us a one-time $50 million,” notes UTC’s Smith, who sits on the executive committee on corporate reporting of Financial Executives International (FEI). “So even if we did get an option to switch over to IFRS, we’d probably wait to see what the IRS does about that.”
Inventory is not the only potential minefield. Other significant issues to be resolved include:
• The need to rewrite and re-sign existing debt covenants and other contracts, most if not all of which have been based on GAAP treatments rather than IFRS;
• The handling of research and development, which is an expense charged to operations under GAAP, but which under IFRS has research charged to operations and development depreciated;
• The differences in business combination accounting, with GAAP permitting no contingent liabilities after a merger while IFRS allows contingent liabilities; and
• The treatment of minority non-controlling interests, which are calculated at fair market value under GAAP, but can be calculated at fair market value or book value under IFRS.