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Update on Adoption of International Financial Reporting Standards (IFRS)
for the U.S. Hospitality Industry

By Blair Vago, CPA

International Financial Reporting Standards (IFRS) are now required or permitted for financial reporting by over 100 countries worldwide.  They are increasingly becoming accepted as the global accounting language.  The European Union made IFRS mandatory for member countries in 2005.  The UK, Germany, Italy and France all require companies to publish financials in IFRS currently.  Brazil will be adopting IFRS in 2010 & Canada, India and Korea have made IFRS adoption mandatory in 2011.  Mexico will adopt in 2012.  China currently permits reporting in IFRS or Hong Kong FRS.  About half of Chinese companies currently report in IFRS.  Though Japan has not yet indicated a date of IFRS adoption, they are currently working to bring Japan GAAP to convergence with IFRS by 2011.

U.S. stock exchanges have historically provided the best valuation for public companies.  This was due in part to the regulatory oversight and rules provided by the SEC and Sarbanes Oxley.  However, the cost of compliance for companies (in the form of audits etc.) has been very high.  This is one of the reasons alternate international stock exchanges and IFRS are becoming increasingly accepted and utilized.  The U.S. is used to being in a position of strength in its insistence on U.S. GAAP.  Now it appears the global community is moving in a different direction.  The U.S. may be left behind in competing for access to global capital if it remains the lone hold-out against adoption of IFRS. Given the current wide-spread international adoption of IFRS a U.S. opt out would have wide spread negative consequences.

The reason for the worldwide acceptance of IFRS is that they are not as rules-based as U.S. generally accepted accounting principles and therefore not as cumbersome to use.  U.S. GAAP contains the equivalent of 25,000 pages of instructions versus 2,000 for IFRS.  Regulators and investors agree that the universal acceptance of one accounting language will facilitate cross border investment and the flow of capital.  The benefits of the switch to IFRS will largely accrue to sophisticated investors.

Hospitality REITs that are reviewing the financial statements of various worldwide hotel asset portfolios with an eye towards potential investment employ CPAs (and their international equivalents) to make recommendations.  A significant number of these professionals would prefer the switch to a less cumbersome set of rules than U.S. GAAP. 

U.S. hospitality companies with foreign subsidiaries that prepare financial statements in local country GAAPs which then have to be translated to U.S. GAAP will realize savings from a switch to IFRS.  The cost of maintaining staff that perform this accounting research and translation work can be reduced with the switch to one worldwide GAAP.  These savings can then be passed on to shareholders.

In 2008, the U.S. Securities and Exchange Commission (SEC) released a proposal that indicated interest in the adoption of IFRS for U.S. public companies.  The proposal listed certain improvements in IFRS and the IASB (the governing body of IFRS) that, if achieved, could lead to U.S. adoption of IFRS beginning in 2014.  A great deal of momentum behind the U.S. adoption of IFRS was created by the last U.S. administration’s SEC Chairman.

The Obama administration appointed Mary Schapiro as the new SEC Chairman earlier this year.  Ms. Schapiro’s first comments to the public about IFRS indicated that the pace of adoption of IFRS would be slowed.  She said she felt no requirement to continue with the U.S. adoption of IFRS as called for in previous SEC proposals.  As a result, many large U.S. corporations who had begun to prepare for the transition to IFRS put their plans on hold.  The new administration’s policy was met by criticism by the worldwide proponents of IFRS including Sir David Tweedie, the Chairman of the IASB who stated that unless the U.S. makes a commitment to adoption of IFRS, the convergence efforts underway to reduce the differences between US GAAP and IFRS would be difficult to continue.

In August 2009, Chairman Schapiro named James Kroeker the Chief Accountant of the SEC.  He had held the role on an interim basis since January.  In September 2009, Kroeker, in addressing the AICPA in Washington, stated that the financial crisis that erupted in 2008 highlighted the importance of global solutions to complex issues even on the accounting front.  SEC Chairman Schapiro anticipates that the agency will act on the decision to adopt IFRS this fall (Dow Jones Newswires 9/18/09). Kroeker told reporters after his speech to the AICPA that consideration of IFRS “will certainly be a staff priority”.  This indicates to some observers that the SEC is cautiously moving toward acceptance of IFRS.

It is clear that in the past GAAP served well in the creation and deployment of a standard set of rules governing the creation and deployment of all financial statements. It is also now very clear that the newer IFRS will simplify and create a world wide accepted standard which will greatly facilitate the flow of international capital and provide investors, practioners and regulators with a clearer picture of the financial condition of all publicly held companies.

Blair Vago is a member of Cayuga Hospitality Advisors and an experienced IFRS practitioner with 20+ years as a hospitality industry Controller/CFO.  He began his career with Hilton Hotels Corporation and Marriott and more recently has worked with start-up companies and entrepreneurs to assist them in preparing for initial public offerings and in facilitating mergers and acquisitions.  He holds a Master’s degree from Cornell University’s School of Hotel Administration, a Certificate in Investment Banking from UCLA and is a licensed CPA. Blair is the Group Leader for Cayuga’s CFO Assistance Group.

Reprinted with permission from Cayuga Hospitality Review.  All rights reserved.


Cayuga Hospitality Advisors

Also See: Do You Think Like a Leader or a Manager? / William P. Fisher. Ph.D. / October 2009

A Wake Up Call, The Shadow of 9/11: Terrorism and Premises Liability for Hotels / Carroll Dubuc / September 2009

You Need to Reset Your Exit Strategy / Jim Burr / September 2009

The Electronic Guestroom / Jules A. Sieburgh / September 2009

LEADERSHIP: The Basis for Management / William P. Fisher Ph.D. / September 2009

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