IFRS versus USGAAP: a bit of history

Lucio Ferreira Barbosa – Big4 guest blogger

Why the IFRS? Its origins and strategies to become the chosen one

Chess mode on!

The IFRS (International Financial Reporting Standards) arose to feed the increasingly global investors needs and the capital markets globalization.

The capital markets world was sharing concerns about which standard it would adopt – there was a trend for the adoption of the USGAAP (United States Generally Accepted Accounting Principles) once the United States holds the biggest capital markets and investors in the world. As US has most of the investors it was natural to think about adopting the USGAAP.

However, by the time the capital markets were becoming really globalized and the investors were strongly starting to use the internet the United States standards were hugely hit by the biggest corporate scandals we have ever seen since 1929 – from the late 1990’s through 2000’s we have noticed some of the biggest scandals on capital markets in the world. Some known examples are: Enron, WorldCom, Arthur Andersen and others.

The US capital markets, authorities and Accounting Principles were fragile at that time.

Coincidence or not, in April 2001 the IASC (International Accounting Standards Committee) was replaced by IASB (International Accounting Standards Board) and the principles so far written as IAS (International Accounting Standards) were replaced by the IFRS (International Financial Reporting Standards). And this was a strategic movement towards the international standardization of the accounting principles.

This movement was mainly a marketing strategy (more than any deep change) and it has brought to focus some concepts of a market facing its biggest turbulence since 1929. The USGAAP was being hit by the world at that very moment with its weaknesses being well-known.

While the USGAAP were based on rules and it was applicable for the Accounting books, the IFRS were based on principles and it was applicable only on the Financial Statements. This being said, the IFRS was tremendously easier to be applied when compared with the USGAAP, already suffering with the corporate scandals and now suffering with the parallel movement of the Europe, led by the United Kingdom, to adopt the IFRS. The English principles were the FRS (Financial Reporting Standards) and with a kind of makeup the UK led the IFRS principles. For example, for some rules in USGAAP that we have about 4 or more pronouncements / interpretations, you can get only one pronouncement for IFRS. It is simple and the companies did not have to change its accounting books – only the Financial Statements pack.

The US corporate scandals allied to the complexity of the USGAAP rules, made most of the countries to choose the simpler and cheaper way to adopt an international standard – the IFRS.

It was the same basis the tech world used to choose for the VHS, to choose for the PC etc. The cheaper – the best;

Chess mode off!

Success! Today, more than 120 countries adopt and accept the IFRS as its standards for the Financial Statements – and some of them has adopted it as its accounting principles (in Brazil, for example).

The IASB was concerned on presenting the benefits and studying the markets to allow more and more countries to adopt the IFRS. But it didn’t supervised nor created an International Agency to do it around the world.

With no supervision the countries has adopted the principles as they understood.

Proof of this: on November 16th, 2011 the Securities Exchange Commission has issued a study (http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-paper-111611-practice.pdf) with some points and comparisons between the companies around the world. They have chosen 183 companies around the world and in a variety of markets, indicating some strange points.

Most of the companies analyzed, and within the same market sector, have stated different treatments of the same thing.

It was easier to compare a Telecom Company from the UK with a Mining Company in Brazil, than comparing Telecom with Telecom companies in both countries.

When you decide to adopt principles, you need to make sure the countries has the same understanding of these principles, otherwise it could be easier to implement detailed rules. When we talk about principles we have to consider some deviation of understanding and of environment. When we talk about detailed rules, it is specifically for some situations, independently of its environment.

Are the IFRS’s permanent?

What do you think?

Lucio Barbosa works as a Finance Manager at GE Energy; IFRS specialist being member of the IFRS Advisory Group in Brazil from 2009 through 2011; and blogs for some Brazilian websites for business administration and accounting.

LinkedIn: http://www.linkedin.com/pub/lucio-barbosa/9/673/82a