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Friday, September 12, 2008

IFRS tax increase

The SEC and other leading accounting and regulatory organizations are stampeding to switch US accounting rules from GAAP to IFRS. The question is not if, but when.

The nominal goal is to provide both comparability across nations, and also to simplify the accounting practices of MNCs that operate in multiple markets. (Of course, as with SOx, the shift will provide full employment for accounting firms like PWC and KPMG).

The reaction of engineering entrepreneurs to GAAP or IFRS would be MEGO. Of course, this is about the reaction an accountant would have to a discussion of the relative merits of Si or SiC as semiconductor substrates, or the platform requirements for building a service oriented architecture.

However, when I was a (non-MBA) entrepreneurial software engineer, the second class I could in night school was accounting: I needed to understand how financial performance was measured in my tiny startup and how to talk to my CPA. (The first class I took was strategy, which I thought was the most fun — an opinion I still hold more than 15 years later).

This brings me to a letter to the editor in Wednesday’s Wall Street Journal highlighted the accounting impact that IFRS will have on small businesses:
New Accounting Standard Offers Benefits, Problems
In "Closing the Information GAAP" (Information Age, Sept. 8). Gordon Crovitz has done a public service by informing the business community of the pending consequences of the adoption of the International Financial Reporting Standards. As a member of the Financial Accounting Standards Board's Small Business Advisory Committee, I can relate that IFRS has been a subject of discussion in our past two meetings.

What Mr. Crovitz does not state is the tax implications facing businesses adopting IFRS. Mr. Crovitz is correct in that IFRS does not accept the last-in, first-out method of inventory. IFRS only accepts the first-in, first-out method. Nor does IFRS accept mark-to-market accounting. Businesses changing from the LIFO method to the FIFO method will experience significant tax increases. Only congressional action protecting the entire business community can avert this unwelcome tax increase. According to my sources, the IRS is also currently working on the preparation of guidance materials for the anticipated adoption of IFRS.

The American Institute of Certified Public Accountants has developed a Web site to provide important information (www.ifrs.com). The implications of IFRS will be far and wide regardless of which party controls Congress in the next few years. The time to begin preparing is now. The time to contact our congressional representatives to protect businesses is now.

Leonard Steinberg, E.A.
West Windsor, N.J.
In an inflationary environment LIFO will increase taxes for manufacturing (or retailing) firms — because profits will be recorded against the lower basis of the older inventory rather than the newer basis of the more expensive inventory. (Of course, under GAAP, firms can elect FIFO if they expect the newer inventory to be cheaper).

My sense is that startup firms — particularly small startups run by engineers — are completely ignoring what will happen when GAAP is replaced by IFRS. But this stampede to help large multinationals be more efficient (generally an admirable goal) may crush the smaller, less well-funded small firms. And this doesn’t even count the switching cost of moving over to the new system.

1 comment:

Chris Lyons said...

Given the SEC roadmap for the integrations of IFRS, what are your thoughts on the looming tax implications of IFRS? I have been reading what I can at http://www.IFRStaximplications.com but I would like to know what you think.