Financial reporting: A global transformation

For most of the 20^th century, the typical “Introduction to Accounting” book published in the United States (US) included the claim that “accounting is the language of business.” The claim was based upon a US perspective about three foci: a) accounting itself (the US version), b) language (English) and c) business (within the US). While the claim continues to be made today, its fundamental meaning is undergoing a significant change. This is due primarily to the relatively recent development of a body of International Financial Reporting Standards (IFRS) that have been adopted in over 100 countries (including most G20 members), are published in numerous languages and are intended to be sensitive to the global business environment and capital markets. Importantly, the US Security and Exchange Commission (SEC) is currently (April 2012) deliberating a transition to IFRS for all of its registrant reporting requirements. Since 2007, the SEC has accepted IFRS financial reports filed by foreign registrants; the previously required reconciliation to US generally accepted accounting principles (US-GAAP) was discontinued.

The fact that the SEC is even considering this transition is closely related to the fact that the US accounting and reporting standard-setter, the Financial Accounting Standards Board (FASB), has been working for several years with the International Accounting Standards Board (IASB) to effect “convergence” between US-GAAP and IFRS. While much progress has been made, a fair amount needs to be done. One very significant (in that it will alter the “public face” of company reporting) on-going convergence project involves the presentation format for the three financial statements that most companies (world-wide) provide to their stakeholders: 1) balance sheet, 2) profit and loss statement, and 3) statement of cash flows.

In this paper we discuss the evolution over the past 35 years of what are now known as IFRS and identify certain critical events that brought international standards to their current prominence. We then assess the unusual role of the US as an IASB collaborator and IFRS encourager of other countries even as it has been (at least to date) a non-adopter. Finally, we review in detail the IASB-FASB preliminary proposal to establish a financial reporting presentation format that, if enacted, will constitute a truly momentous change for companies and capital markets.