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Summary of this Episode

• Introduction to US GAAP and its importance for companies expanding into the US market
• Key differences between US GAAP, UK GAAP, and IFRS
• The process of converting from UK GAAP to US GAAP
• Compliance requirements and auditing considerations for US GAAP
• Preparing for fundraising rounds with US investors
• Challenges and common issues faced during the conversion process
• Strategies for effective knowledge transfer and ongoing US GAAP support

Topic Discussed

Introduction to US GAAP and its importance for companies expanding into the US market

The discussion began with an introduction to US GAAP (Generally Accepted Accounting Principles) and its significance for companies looking to expand into the US market. Katrina Nachi, a cross-border accounting advisor, highlighted that companies often face challenges when entering the US market due to differences in accounting standards and regulations. Understanding and complying with US GAAP is crucial for companies seeking US investors, acquiring US companies, or planning an IPO in the US.

Key differences between US GAAP, UK GAAP, and IFRS

Katrina explained the key differences between US GAAP, UK GAAP, and IFRS (International Financial Reporting Standards). While IFRS and US GAAP are becoming more aligned, there are still nuances, particularly in areas such as revenue recognition, capitalization of costs, and share-based compensation. UK GAAP, on the other hand, has more significant differences from US GAAP, especially in terms of what can be capitalized.

The process of converting from UK GAAP to US GAAP

Katrina outlined a three-phase process for converting from UK GAAP to US GAAP:

1. Qualitative assessment: Identifying differences in accounting policies and creating a matrix comparing current policies under UK GAAP with suggested US GAAP policies.

2. Quantitative assessment: Adjusting calculations and schedules to reflect US GAAP requirements and quantifying conversion adjustments.

3. Financial statement preparation: Preparing financial statements and footnote disclosures under US GAAP, incorporating conversion adjustments.

Compliance requirements and auditing considerations for US GAAP

The discussion covered the additional compliance requirements and auditing considerations when adopting US GAAP. Companies may need to undergo a US GAAP audit, which typically involves a lower materiality threshold and more thorough walkthroughs and control testing. The timing of audits and potential overlap with local audits were also discussed.

Preparing for fundraising rounds with US investors

Katrina emphasized the importance of being proactive in preparing for fundraising rounds with US investors. Presenting a qualitative assessment of US GAAP differences and potential conversion adjustments can demonstrate an understanding of the requirements and facilitate due diligence processes. This can potentially broaden the range of investors available to the company.

Challenges and common issues faced during the conversion process

Several challenges and common issues were discussed, including:

- Lack of documentation and messy calculations under current GAAP, making the conversion process more difficult.

- Determining the appropriate retrospective period for conversion, which may depend on the intended use of the financial statements.

- Ensuring knowledge transfer and ongoing support for the local finance team to maintain US GAAP reporting after the conversion.

Strategies for effective knowledge transfer and ongoing US GAAP support

Katrina highlighted the importance of effective knowledge transfer and ongoing support for the local finance team. She suggested exploring options such as working with a fractional Chief Accounting Officer or leveraging external advisors for specific transactions or new accounting standards. This approach can provide access to US GAAP expertise while enabling the local team to maintain day-to-day reporting.

Actions

For companies considering US expansion or fundraising with US investors:

• Document current accounting policies and procedures under local GAAP. Responsible: Finance Team, Ongoing
• Assess the qualitative differences between local GAAP and US GAAP. Responsible: Katrina Nachi or other US GAAP advisor, Prior to fundraising/expansion
• Engage with auditors to align on the conversion process and required documentation. Responsible: Finance Team, Prior to conversion

For companies undergoing a US GAAP conversion:

• Develop a detailed conversion plan, including quantitative assessments and financial statement preparation. Responsible: Katrina Nachi or other US GAAP advisor, Prior to conversion
• Ensure knowledge transfer and training for the local finance team on US GAAP reporting. Responsible: Katrina Nachi or other US GAAP advisor, During and after conversion
• Explore options for ongoing US GAAP support, such as a fractional Chief Accounting Officer. Responsible: Finance Team, After conversion

For companies operating in regulated industries (e.g., fintech):

• Consult with legal advisors to understand specific US GAAP requirements and regulations. Responsible: Finance Team and Legal Counsel, Prior to US expansion
• Assess the need for US GAAP reporting from day one of US operations. Responsible: Finance Team and Katrina Nachi or other US GAAP advisor, Prior to US expansion

Insights

Problem: Lack of understanding and documentation of current accounting policies under local GAAP, making the conversion process more challenging.

Solution: Proactively document and maintain clear accounting policies and procedures under local GAAP. This will facilitate the conversion process and enable effective knowledge transfer to the US GAAP advisor.

Problem: Limited budgets for engaging large accounting firms to handle the US GAAP conversion, leading to potential knowledge gaps within the local finance team.

Solution: Explore alternative engagement models with US GAAP advisors, such as working collaboratively on specific phases of the conversion process or leveraging fractional Chief Accounting Officer services. This can provide access to expertise while enabling knowledge transfer and cost savings.

Problem: Difficulty finding local finance professionals with strong US GAAP expertise, particularly in Europe.

Solution: Maintain a strong local finance team with expertise in local GAAP and leverage external US GAAP advisors for specific transactions, new accounting standards, or ongoing support. This hybrid approach combines local knowledge with specialized US GAAP expertise.

Problem: Potential overlap or conflicts between local audits and US GAAP audits, leading to inefficiencies and duplication of efforts.

Solution: Engage with auditors early to align timelines and coordinate the local and US GAAP audit processes. Explore opportunities for auditors to leverage work already performed during the local audit to streamline the US GAAP audit process.

Resources

• Find Katrina’s US Accounting & Reporting Guide

​built for European finance teams: https://www.theinternationalaccountant.com/