IFRS: a turning point.

On January 1, nearly 9,000 publicly listed companies in the European Union (EU), Australia and South Africa changed their basis of financial reporting from their respective national accounting standards to International Financial Reporting Standards (IFRS), as developed by the International Accounting Standards Board (IASB). This changeover is part of a greater trend, and the latest survey from international accounting firm Deloitte estimates that 94 countries are requiring or permitting the use of IFRS beginning this year. For companies and investors, the use of IFRS throughout many of the major and emerging capital markets is a major transformation of the financial reporting landscape and could translate into significant economic benefits.

The January 2005 adoption of IFRS marks a turning point in IASB's work program. The focus of IASB--which has been operating since April 2001--had been preparing its inherited set of standards for use. It needed to address concerns regarding the quality of 14 standards that were raised by the International Organization of Securities Regulators (IOSCO). As a response, IASB completed its Improvements Project in December 2003. In the run-up to 2005 adoption, it also finalized standards that provided guidance on first-time application of IFRS, share-based payments and business combinations, which brought international practice largely in line with U.S. generally accepted accounting principles (GAAP). This process of fine-tuning existing standards provided a workable and comprehensive platform of standards for wide-scale adoption.

The priority now is the convergence of accounting practices between U.S. GAAP and IFRS. In 2002, the Financial Accounting Standards Board (FASB) and IASB reached an agreement, known as the "Norwalk Agreement," which committed the boards to eliminating existing differences in the standards and to working together on new standards to ensure new differences do not emerge. (A similar effort has just begun between IASB and its Japanese counterpart.)

Already, progress between FASB and IASB has been noteworthy: IASB has conformed international practice to U.S. GAAP on business combinations; noncurrent assets held for sale and discontinued operations; and accounting for costs associated with exit or disposal activities. FASB has finalized revised standards on share-based payment, the treatment of idle capacity and spoilage costs in the cost of inventory and asset exchanges. Two other FASB standards are pending.

In the coming months, IASB's aim will be to accelerate the pace of convergence with FASB and eliminate existing differences. FASB and the IASB will be meeting in London this April to discuss the immediate priorities going forward. The two boards will also consider the appropriate time frame for implementation of any new accounting requirements, with the understanding that companies have recently undergone a period of significant change.

While longer-term work will continue on important projects, IASB hopes that the success of its shorter-term convergence aims will provide both consistency between and improvement of U.S. GAAP and IFRS. The benefits of convergence should be apparent. As the differences between the two set of standards disappear, the barriers for non-U.S. companies to list in the U.S. and for U.S. investors to invest abroad should diminish.

--Contributed by Tom Seidenstein ([e-mail]), Director of Operations, IASC Foundation