Ifrs in the Pharmaceutical Industry

IFRS in the Pharmaceutical Industry

It is time for accounting principles to become universalized throughout the globe. This goal will be accomplished by implementing IFRS, or International Financial Reporting Standards. Multiple nations in the world today have already adopted these standards, but one of the most advanced countries in the world has not: the United States. The United States currently uses GAAP, or Generally Accepted Accounting Principles, and plans to begin converting to IFRS in 2014. The United States has long been a leader in the global marketplace. Also, over half of the pharmaceutical companies on Earth are based in our country. But, the looming question among these companies is: How will the conversion from GAAP to IFRS in the United States affect the pharmaceutical industry?

The pharmaceutical industry has two major leaders: the United States and Western Europe. The two leaders of the industry are not just separated by the ocean, but also by their accounting methods. Most of the European countries have already converted their accounting methods to IFRS, and those who have not are already following suit. The United States, on the other hand, is left in the dust. It plans to only begin converting in 2014, which is nearly five years away.

To begin the process of converting to IFRS, the United States proposed to allow some companies to adopt this process as early as 2009. In order to be eligible for the early adoption of IRFS, the company must fulfill a major requirement. The company must be one of the top 20 largest in its industry. Company size will be measured by market capitalization. Multiple pharmaceutical companies within the United States will be eligible for early adoption because, as previously mentioned, the US is a leader in pharmaceuticals. A handful of US companies have already begun planning for IFRS, in hopes that the proposal is passed.

The pharmaceutical companies that plan to convert to IFRS early will reap the benefits of IFRS far longer then the ones that opt not to. IFRS can give many advantages in the pharmaceutical industry. Pharmaceutical companies can reduce their costs by using similar reporting techniques, channels, and also assimilating training and development. Capital also becomes more and more achievable from foreign markets and investments.

Money is not the only advantage that pharmaceutical companies will earn from converting to IFRS. Globalization is a huge advantage. Collaboration is a large part in staying ahead in the pharmaceutical industry. Using IFRS will allow companies in the United States to collaborate with European companies with a greater ease. It is almost impossible to compare GAAP information with IFRS information, so, if both companies use the same method benchmarking and other improvement methods can be applied. Globalization will also increase mobility internally, by allowing staff sharing in locations outside of the US.

With these advantages come disadvantages. One of the advantages above is also a disadvantage. While opening up communicative power between a US company using IFRS and a European company using IFRS is an advantage. It is also a disadvantage too, because it closes communicative power between that company and another in the US using GAAP. Another major disadvantage is that once converted to IFRS a company is left with unskilled employees. These employees ranging from management to financial officers need to be trained to handle IFRS. This process cost the company both time and money.

Converting to IFRS is exceptionally hard because it makes it almost impossible for a company to compare the past with present progress of the company. This is such a problem because the historic numbers are in GAAP and the present is in IFRS. This problem affects all companies converting to IFRS and not just pharmaceutical. One issue that hits home for the pharmaceutical companies is in recording their intangible assets. An intangible asset is one that can not be touched or physically measured. There are two types of intangibles: legal intangibles and competitive intangibles. The type related to pharmaceutical companies is competitive intangibles because they include knowledge, such as inventing a new pharmaceutical. In IFRS the company must recognize on the balance sheet intangible assets and relate them to in-progress research and development. GAAP, on the other hand, would just expense the intangible asset. The intangible is also such a large issue because some can have useful lives of around twenty years.

Converting from GAAP to IFRS is a large, but achievable hurtle for the United States. This conversion may be harder for some industries then others, but it is a necessary evil. Converting to IFRS will have many long term advantages, preceded by only a handful of disadvantages.