SEC decision means investors will be able to craft decisions based on a single set of principles rather than a maze of interpretations The United States Securities and Exchange Commission (SEC) is working on a timetable that will permit US domestic companies to prepare financial statements according to International Financial Reporting Standards (IFRS) rather than US Generally Accepted Accounting Principles (US GAAP) from 2014. Apart from the fact that IFRS adoption will bring US accounting standards into line with more than 100 countries in Europe, South America and the Asia-Pacific region, including Hong Kong and the mainland, the impact of Americans embracing the IFRS will also be significant for the global business community. US public companies now follow US GAAP but foreign issuers and companies, listed in the US but with an overseas parent company, have the option to file financial statements according to either standard. The SEC decision to switch to IFRS should enable prospective investors to make investment decisions based on a single set of accounting principles rather than sifting through a range of interpretations. 'In the long run it's only going to be a good thing for the investing public and the global capital markets, because right now investors do not get any benefit whatsoever from having to reconcile multiple sets of accounting standards,' said Daniel Lin, assurance partner at Grant Thornton. Until last year, those foreign issuers that reported under IFRS also had to reconcile the published information, including the balance sheet and income statement, to US GAAP, a requirement that was abolished in November last year. Rather than reconcile, many such companies chose to prepare financial statements under US GAAP, partly because their local US competitors did so and also because US investors are more comfortable with US GAAP. Now the SEC had moved one step further, said Richard Ho, president of CPA Australia's Hong Kong, China Division. 'It's not yet final, but we expect some of the larger domestic companies in the US will have the option to file IFRS financial statements in 2010,' he said. Mr Ho also cautioned those who might expect the changes to be one-sided. 'Both the IFRS and the US GAAP financial statements will change in order to merge the two sets of accounting standards into one viable set,' he said. What this means for Hong Kong accountants, who began working with IFRS in 2005, is that there might be further changes to the standards in the next couple of years in order to prepare for the final integration with US GAAP. There are many subtle and not-so-subtle differences between the two accounting standards. One of the most obvious examples for accountants practising in Hong Kong is inventory costing. Under IFRS, inventories are valued using 'first-in-first-out' or FIFO methodology. LIFO, or 'last-in-first-out' is not permitted under IFRS, but it is permitted under US GAAP. For example, an item purchased a year ago for US$10 now costs US$12, assuming inflation. Using 'last-in-first-out' an accountant would use the latest purchase cost - US$12 - as the cost of inventory. But IFRS does not permit LIFO, so the cost of inventory would be measured at US$10. 'With US GAAP, this means that on the balance sheet you would have a lower inventory cost but a higher cost of sales and lower profits for the year,' Mr Ho said. 'Perhaps companies might have to consider how they structure their transactions to minimise tax, because using different valuation costing methods for inventory will affect their bottom line.' A second key difference between the two accounting standards is with investment property valuation. Under IFRS, a company is allowed to use either cost minus depreciation or market value to value its investment property. With US GAAP, the property must be valued at cost minus depreciation. 'If there is an impairment of the property value, then you have to write it down. But in an increasing market-price scenario, you cannot then write up your property value,' Mr Ho said. Mr Lin said trying to compare the standards was like trying to compare Chinese food to western food. 'Some accountants argue that US GAAP is more rules-based while IFRS is more principles-based, but it is difficult to argue which is the better of the two.' However the SEC has taken the view that the global trend, with more than 100 countries adopting IFRS in the past few years, is something the US needs to follow in order to converge with international standards. For practising accountants in Hong Kong, convergence between IFRS and US GAAP is beneficial because it will relieve some of the time pressures of having to complete different sets of financial statements using different accounting standards for clients who are listed in Hong Kong, China and the US. Convergence should also have particular benefits for Hong Kong accountants, who have a comparative advantage because they had been working with IFRS since 2005, Mr Ho said. 'Frankly speaking, it is not easy to change from one set of accounting standards to another, but in Hong Kong we already have the knowledge and the advantages because we have gone through those difficulties,' he said. 'I anticipate that with the final integration of IFRS and GAAP still a couple of years away, there will be some changes to IFRS. 'Some US GAAP requirements will be implemented into IFRS, and us Hong Kong accountants will have to keep on updating our knowledge. Accounting standards keep changing and we have to prepare for the changes otherwise we cannot maintain our competitive advantage.'