Companies in the United States have, for many years, relied on GAAP, or Generally Accepted Accounting Principles, when they officially account for their revenues. Established by policy boards, GAAP provides a very, detailed set of accounting standards which American companies must follow when preparing its financial statements and tax returns.
On the other side of the big pond, European companies have sought guidance, by contrast, from the International Financial Reporting Standards (IFRS) which provide broad guidelines as to the application of accounting standards but lack the detailed specificity of GAAP. According to a new article in The Economist, the disparity between these two systems has contributed to problematic controversies particularly amidst mergers of companies from the two continents. The article cites the controversy which faced Hewlett-Packard (HP) when it acquired the British firm, Autonomy in 2011. HP declared a substantial write-down from what it referred to were inflated revenues resulting from Autonomy’s decision to count prospective subscription fees as current sales.
Of course, many American and European companies have many reasons to either inflate revenues to impress potential investors viewing quarterly earnings reports or understate them so as to reduce tax liabilities. But, after twelve years of negotiation between the boards governing these two systems, an agreement has been reached on a joint standard which will become effective in 2017. The new standard will ensure that companies must play by the same rules on both sides of the Atlantic. The general effect will be to make sure that merging business entities cannot seek to take advantage of one of the two current sets of standards as a means to fudge revenue amounts to the detriment of investors or taxing authorities. Specifically, the new rules will provide uniformity concerning the handling of fees from bundled services where there had been ambiguity how to allocate fees generated from such sales.
Companies now will have a few years to become familiar with the new standards before implementing them in 2017.
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