Wednesday, August 20, 2008

Bean counters and the new methodology for counting beans

As International Financial Reporting Standards (IFRS) replace Generally Accepted Accounting Practices (GAAP), management decisions could be affected. The biggest difference is in the treatment of R&D which is expensed under GAAP whereas"D" is capitalized under IFRS. So, for example, only $10 of a $100 dollar R&D expenditure, amortized over ten years, would show up on an IFRS income statement.

If a firm's R&D budget is mechanically tied to last year's accounting expenditures, which is often the case for cost centers, then budgets could be automatically reduced when a firm switches from GAAP to IFRS. I just heard that a big Fortune company, whose competitive advantage is linked to R&D, inadvertently cut its R&D budget when they switched to IFRS.

I would be interested to hear about other management problems created by the change from GAAP to IFRS.

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