The recent announcement of a merger between Deutsche Boerse
AG and the New York Stock Exchange (NYSE) leads many to believe that an
acceleration of the conversion from the Generally Accepted Accounting
Principles in the United States (U.S. GAAP) to the International Financial
Reporting Standards (IFRS) for public companies may occur.
The parent company of the NYSE and Germany’s Deutsche Boerse
AG, the company that operates the stock market in Europe’s largest economy, agreed
to merge in a deal that will create the world’s largest exchange for stocks and
derivatives, with 60 percent of the combined company owned by Deutsche Boerse
shareholders. Upon close examination, however, it becomes clear that the
question is not will there be a full adoption of IFRS, but rather when will it
In fact, the actual process of converting to IFRS has
already begun in the U.S.
The cornerstone to successful financial reporting is that a singular
set of standards must be followed to properly gauge businesses located across
the globe. Many public companies in the U.S. have indicated a willingness to
adopt IFRS for this reason. Several of these U.S. companies have, or are
looking, for overseas investors, lenders and potential merger and/or
acquisition candidates. If potential business partners are not able to adequately
assess and compare companies’ financial conditions to similar companies in
similar industries, both parties are at a disadvantage, and business deals may
In addition, many public companies and U.S. subsidiaries of foreign
parent companies currently maintain their financial statements on both U.S.
GAAP and IFRS. This may also be the case for companies already using IFRS for
statutory reporting outside the U.S. The accounting under two separate sets of
accounting standards is costly, and as additional companies begin to do so,
there will be an increase in the desire to fully adopt IFRS early.
IFRS has already begun to make its way into U.S. standards. As
a matter of fact, the financial community currently awaits a decision by the
Securities and Exchange Commission (SEC) as to whether or not IFRS will
supersede U.S. GAAP for public companies. The potential currently exists for a
full adoption to take place no sooner than 2015; however, the convergence of U.S.
GAAP towards IFRS continues to take place on an ongoing basis. While the
investment community, accountants, politicians and other regulators consider
whether or not to move to IFRS, the Financial Accounting Standards Board (FASB)
in the U.S. continues to issue proposals and standards that modify existing U.S.
GAAP to more closely resemble IFRS.
Current major proposals by FASB to gradually transition to
IFRS include revenue recognition, leases and financial statement presentation. Simultaneously,
modifications to IFRS are also being proposed and made to incorporate certain U.S.
GAAP principles. These modifications and smooth approaches to IFRS adoption are
logical and efficient means of making the most significant changes in financial
reporting ever seen in the United States.
Whether or not the acquisition of the NYSE is approved by
regulators, U.S. public companies should be evaluating their state of readiness
for the major converging changes that will be taking place over the next few
years. Companies must realize the benefits of providing IFRS statements to the
users of their financial statements sooner and must evaluate if there are
changes in existing policies and methods that could be made now to benefit the
company later. It is apparent that full adoption of IFRS is coming to the U.S.;
the only question is how soon.
Ed O'Connell is a
partner with partner with WithumSmith+Brown,PC.
Excerpted from the
June issue of Exchange.