It may be quite a few years before US companies need to make the switch to adopt International Financial Reporting Standards (IFRS) to replace US Generally Accepted Accounting Principles (GAAP). Much progress has been made in moving the US to the international standard but some significant hurdles remain, including vastly different approaches to revenue recognition. When the switch to IFRS takes place, US companies will face a transition phase where they will have to show their results using both US-GAAP and IFRS. If they’re smart, they will carefully explain to investors their new accounting policies and where the use of IFRS will result in ongoing meaningful differences. All this in quantitative terms so that investors can assess the specific impacts and compare these across similar companies.
I think SAP has provided public companies with a great example of how to provide this kind of information to investors. After a longer-than-required four-year transition period, the company will only report results according to IFRS starting this year. The company has posted a FAQ page on its web site as well as a comprehensive “Virtual Classroom Session” presented by the Chief Accounting Officer, Dr. Chrisoph Hütten that covers more of the details. I think anyone with a basic knowledge of accounting will be able to fully and quickly understand the impact of the change.
For investors in many companies, the transition from US-GAAP to IFRS will not be a big deal because the inherent differences in results reported under the two systems will be immaterial. For others, though, the differences need to be explained carefully. If companies fail to present the impact of the change clearly, or if they only present the bare minimum information required, they may find they are unnecessarily creating suspicious analysts and former investors who are afraid they may be victims of that old accounting game, “hide the ball”.
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Robert D. Kugel - SVP Research