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Report from PwC Highlights Continuing Differences Between US GAAP and IFRS

by Wayne Bartlett

A recent report from PwC emphasised that some significant divergences between US GAAP and IFRS still remain. Read here.

Whilst it is important of course for accountants and preparers of financial statements to understand and deal with the differences when there are cross-jurisdictional issues to take into account, to some it no doubt remains unfortunate that we still have to be, as the PwC report remarks, 'bilingual' if we have to look at financial statements that cross the borders between the US and other countries that are moving towards full adoption of IFRS.

In an increasingly globalised economy the use of two alternative approaches to standardisation is, some might conclude, a complication that most of us would rather avoid. Learning two languages as a matter of necessity is not always something to be embraced, especially when the linguistics involved are of a technical nature and both need to be understood in-depth by accountants, investors and analysts to do their jobs properly. In such cases the individual has to be fluent in both languages.

The ongoing struggle to get definitive agreement on all aspects of the 'reporting language' of financial statements was never going to be easy. As well as the impact of the political complications arising from issues of sovereignty there are genuine concerns to be dealt with arising from real differences in approach in some areas. Some of the details might be quite technical. For example US GAAP does not allow recognition of revenue whilst some contingencies remain about it, whereas IFRS permits recognition when it is 'probable'. The IFRS approach in this case appears to be less prudent.

For issues such as this there are sometimes no black and white answers. What is different are the underlying principles being applied and in some cases these can have major repercussions. In some cases the different treatment applied to revenue recognition could have a hugely material effect on the financial statements. This could have a significant view on the interpretation drawn by users of financial statements.

It will be interesting to see how this drama concludes. The famous American soap opera Dallas ran for 13 years. Attempts to converge US GAAP and IFRS have taken the same amount of time so far and some major differences remain. The 'mood music' in the PwC guide is not encouraging in this respect. The major conclusions drawn include one that any further moves towards full adoption of international standards are currently off the table. In addition, it hopes that any steps towards increasing divergence will be resisted. This is rather different than hoping that the two 'sides' will be moving closer together.

Yet the global take-up of IFRS continues apace. More major economies are edging towards a definitive take-up of international standards. There are signs for example that take-up of IFRS by Japanese companies is on the increase, something that will be referred to further in an upcoming blog. China has stated its intention to eventually move to full IFRS adoption and in India target dates of 2016-2017 have been publicly referred to.

So the world moves slowly but it would seem surely towards wide adoption of IFRS with fewer countries it would seem holding out. In the final analysis the key question is does it matter if we continue to see the US holding out for its own brand of reporting framework? The answer must be yes. Despite the presence of significant new international players in the global economy, the US remains top of the economic tables, for now at least. If it continues to resist the wide adoption of IFRS then that will impact negatively.

Because of this it is to be hoped that some kind of consensus can be reached on the outstanding differences that remain. In any negotiation there will be have to be some give and take on both sides. However those who are of a regulatory disposition are not renowned for their ability to compromise. This means that it will be a while yet before the issue is disposed of once and for all. Expect a few twists and turns in the journey before we reach the final destination.


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