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Trends toward globalization and open markets have expanded the playing field for U.S. commerce. And one of the trade offs may be a fast-growing international movement to unify basic principles of financial reporting.

"The big thing American companies of all sizes need to understand is that U.S. GAAP [generally accepted accounting principles] is changing," says D.J. Gannon, chairman of the international practices task force for the American Institute of Certified Public Accountants. "Even if companies currently don’t have financial reporting requirements in another country, they need to understand that our accepted practices are now moving toward a global standard."

Since 2000, the International Accounting Standards Board, whose members represent many countries, has been issuing accounting standards and interpretations and developing a new international accounting framework that can work as well in Shanghai as it does in San Francisco. The result is the International Financial Reporting Standards (IFRS), which now serves as the mandatory financial reporting tool for publicly held companies within the European Union(EU). Australia, Eastern Europe, Russia, China and a growing number of other nations are either moving toward IFRS or adopting standards substantially consistent with IFRS, while retaining some local identity.

While IFRS continues to evolve, Gannon says the EU’s adoption of the standard was the biggest change in global financial reporting in recent memory.

Conceding or converging?

Viewed from a distance, the notion of unified international standards for financial reporting makes good sense. Many emerging markets, for example, have little structure and few regulatory mechanisms in place to monitor financial activity. All developed markets, on the other hand, have historically applied their own versions of GAAP. However,"local GAAP" guidelines were fraught with localized exceptions, makingit difficult to maintain consistent financial reporting tools across nations.

When it chose to embrace IFRS in 2005, the EU effectively conceded that the benefits of a unified reporting system outweighed the need for local exceptions. That move immediately affected more than 300 public companies registered with the U.S.Securities and Exchange Commission, according to research by Bert Zarb,a business professor at Embry-Riddle University in Florida. These businesses needed to file financial statements to meet both IFRS and U.S. GAAP reporting standards.

"The emergence of the International Accounting Standards Board as the world’s sole international accounting standards setter, together with the acceptance of IFRS by regional organizations such as the European Union, ensure that international accounting standards will continue to play a role in financial reporting," Zarb wrote in a 2006 article for The CPA Journal.

Countries that move forward with adopting IFRS or substantially similar standards likely recognize the benefits of transparent accounting standards, a common accounting language and the need to help developing countries establish credible local capital markets to attract investors and capital flows.

Nevertheless, not all countries are ready to abandon their time-proven national standards and adopt IFRS. The U.S. GAAP will likely remain in force for the foreseeable future, according to Gannon. However, he adds that the long-term distinction may be in name only.

"The standard-setting bodies working on convergence [between IFRS and U.S. GAAP] are following a very specific work program to narrow the differences," Gannon says. "In five to 10 years, the goal is to have systems that are so similar, it really won’t matter which one is used."

Has your company analyzed its current or potential exposure to the new IFRS requirements? If not, here are some tips to help you prepare.

Foreign operations. Companies with operations in countries where IFRS is the accepted standard may need to file financial reports that meet both local GAAP and IFRS standards.They may also need to reconcile to U.S. GAAP to meet reporting requirements of the U.S. parent company. Similarly, a U.S. company that’s a subsidiary of a publicly traded international firm headquartered in an IFRS reporting country must prepare IFRS financial statements. Or it must be able to reconcile its U.S. GAAP statement to IFRS for inclusion in the parent company’s consolidated financial statements.

Joint ventures. If a U.S.-based company participates in a joint venture where IFRS is the standard, both partners need to use the international reporting standard. In addition, if a publicly traded company headquartered in an IFRS reporting nation holds a 20 percent to 50 percent interest in a U.S. company, the U.S.firm will need to prepare IFRS reports to satisfy the partner’s equity accounting requirement.

Seeking new markets. Experts say that companies with overseas expansion or market development goals would be well-advised to acquaint themselves with IFRS requirements. In many locations, a U.S.-based firm using IFRS may have an easier time building relationships with prospective customers, vendors or lessors.Strong knowledge of the international standard may also help cut red tape in securing local permits and licenses.

While Gannon acknowledges that many midsized companies won’t need to worry about IFRS in the short term, he adds that it’s smart business to stay abreast of shifts in the global regulatory landscape.

Many experts do advise companies and their auditors to become well-acquainted with IFRS — anticipating it will become the "common language" for international accounting. This means all U.S. companies with global interests should prepare themselves to reconcile local GAAP or U.S. GAAP statements to and from IFRS.

"Financial reportingis changing across the globe, both in standard-setting and inregulations," says Gannon. "The long-term goal isn’t to write a set of rules to cover every country in the world. Instead, this is about developing some broad-based principles that can be tailored and applied in a global context."