More than 120 countries around the world have adopted IFRS, making IFRS a must-know for US companies that intend to attract foreign investors, are contemplating raising capital outside the United States, or that are engaged in cross-border M&A transactions.
The SEC recently reiterated1 that IFRS has become “very significant for both US investors and companies.” We estimate that, as of today, the use of IFRS and US GAAP as an accounting framework to support capital formation is about equal around the globe, when looking at relative market capitalization of shares publicly traded.2
More than 120 countries around the world have adopted IFRS, making IFRS a must-know for US companies that intend to attract foreign investors, are contemplating raising capital outside the United States, or that are engaged in cross-border M&A transactions. The SEC also confirmed1 that 525 Foreign Private Issuers with a combined worldwide market capitalization of more than $7 trillion currently apply IFRS for their US listing. In addition, nearly 90% of initial offerings of foreign equity in the United States were conducted through exempt offerings for which IFRS financial information is usually used.
At the same time, it has become clear that we will not see use of IFRS by domestic SEC registrants in lieu of US GAAP in the foreseeable future.
The IASB and the FASB have acknowledged that convergence, as a standard-setting strategy, is no longer a priority for either board. Since the formation of the IASB in 2001, the FASB and the IASB have worked on approximately 35 projects to achieve convergence of IFRS and US GAAP at various levels. There are notable successes, including revenue recognition, business combinations and fair value measurement. However, the IASB and the FASB have recently followed dissimilar paths for their projects on financial instruments and insurance.
As a result, a two-GAAP world has emerged. Preparers with a global footprint will continue to deal with US GAAP/IFRS differences. Indeed, this creates additional challenges for cross-border transactions: a higher cost of capital than would be the case with one GAAP, additional systems and/or processes to track both GAAPs, etc. But the fact that only 10 to 15 years ago more than 70 different accounting frameworks existed globally, having evolved into a two-GAAP world with the two GAAPs being broadly comparable is still a tremendous accomplishment.
Future issues of this newsletter will address some of the specific issues companies face working in this two-GAAP world. We hope you’ll find our newsletter a trusted source of insight as you work with these challenges.