IFRS: Benefits to United States Corporations

With the convergence from Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS) quickly approaching for United States corporations, it is still up in the air as to whether or not such a major shift in standards would translate into large benefits for most companies or the entire U.S. economy.

It is obvious that the adoption of IFRS would, in fact, have a sizable cost factor.  Companies would have to make modifications to their accounting systems and processes.  They would also have to train their employees and investors in preparing financial statements using IFRS.  In today’s economy, many companies may be reluctant to incur upfront costs.  However, some long-run benefits include the fact that U.S. companies with subsidiaries around the world could possibly save a lot of money by avoiding the costs of having to translate their financial reports into other accounting languages.  Adopting IFRS would mean one universal global set of accounting standards.  If every country has a different set of financial standards, while multinational companies exist in different countries, it is difficult to compare how each company stands because there is no consistency.  Consistency is the key factor in comparing these financial statements.  New safeguards will be in place to, hopefully, prevent another national economic and financial meltdown. This would enable U.S. multinationals to maintain and track a single set of accounts.  Such companies could develop regional financial centers, relocate finance resources and centralize training and development efforts.  One must weigh the future benefits against the current costs.

In March 2009, Deloitte surveyed over 150 finance professionals, three fourth of respondents stated their support or strong support for the movement toward a single set of high quality standards such as IFRS.  However, with this support, 64% of respondents indicated that they have not allocated any budget for IFRS conversion activities (i.e. training employees, updated technology).  While some companies are waiting to hear the latest news from the SEC before taking any steps to prepare for the convergence to IFRS, some companies have already hit the ground running.  Twenty five percent of survey participants have budgeted funds for assessment and readiness of convergence.

The Securities and Exchange Commission’s goal and efforts, both domestically and internationally have been to have consistently pursue the achievement of fair, liquid and efficient capital markets, providing investors with information that is accurate, timely, reliable and most of all consistent.

Click to access us_assurance_IFRS_Survey_040609.pdf

http://www.kpmginstitutes.com/ifrs-institute/insights/2008/ifrs-in-the-us-benefits-challenges-of-the-coming-change.aspx

IFRS: Impact on Education

If you will recall in my blog titled “Why the Switch from GAAP to IFRS”, I mentioned the SEC’s published roadmap for the implementation of IFRS by US corporations.  Certain milestones must be reached before the United States would agree to the convergence.  One milestone is the need for training and education about IFRS, including changes to curricula by universities and colleges.  Accounting firms such as Ernst & Young and Deloitte have implemented programs to assist universities in IFRS curriculum development.  Pricewaterhouse-Coopers awarded $700,000 in grants to 26 universities to help universities in their implementation of IFRS.  A survey taken among the universities receiving grant monies said that the Intermediate Accounting course was the course most often integrated with IFRS.   In most schools the curriculum was taught in the lecture-style format.  Students taking this course thought it was useful and believed they were prepared professionally than their peers who did not take the course.

Being an accounting major, I am concerned about how International Financial Reporting Standards (IFRS) will affect my degree.    Will I now have to continue accounting classes to keep up to date on all the new rules should IFRS take place in 2015?  Are the courses I have completed already out of date and wasted.  Today’s students are the future of my profession.  The Uniform Certified Public Accountant (CPA) exam has already made changes to their exam starting in 2011 with a new structure, format and content, and is supported by enhanced technology.   For the first time it included testing on IFRS.  CPA exam candidates now have to identify and understand the differences between financial statements prepared under GAAP and IFRS.  They are also required to demonstrate the proficiency in the proposed adoption of IFRS.  The worst possible scenario would be the prolonging of the SEC’s decision to accept the IFRS as the new set of accounting standards.  Students would have to become proficient in both GAAP and IFRS.

This reality puts pressure on academic units providing accounting education.  The possible convergence hanging over the profession will bring about a complete overhaul of the accounting curriculum.  United States colleges and universities are not at the level they need to be to teach IFRS come 2015.  Today’s accounting students are the future of the accounting profession.  The world is becoming global and so must the teaching of accounting if we are to stay competitive.  The students who learn the global financial international language will be better prepared to succeed in the accounting profession.

Weiss, J. M. (2011). Implementing IFRS Curriculum into Accounting Programs. CPA Journal, 81(4), 62-63.

IFRS in the United States: Challenges

Globalization of financial reporting is becoming a reality with 2015 fast approaching.  Those involved in the process of this globalization believe that global financial reporting will improve the functioning of global capital markets by providing more accurate information to investors and other users of these reports.  The objective is to come up with one set of standards that will make interpretation of financial reports more uniform and easier to compare the information provided.  Many global firms that operate in many countries have a common complaint.  It is costly to prepare and audit financial statements using many sets of standards.

Many challenges, however, still remain.  No change is made without resistance including this convergence from Generally Accepted Accounting Principles to International Financial Reporting Standards.  This change is huge in the financial industry.  Outside the United States, there is concern that the U.S. will dominate the global market.  The International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) have been working together to come up with one set of accounting standards.  The two boards issued the “Norwalk Agreement” which, in part, stated that the two boards would work together to converge both set of standards into a highly qualified set of global standards.  Presently, most major agenda projects are a joint effort.  The goal is for the standards issued by the two boards to be identical so as to not leave any room for discrepancies in interpretation.  Is the convergence working?  Apparently so.  Critics at first were skeptical and said the project was doomed for failure for numerous reasons including the political and cultural differences between the FASB and IASB.  Both sides have succeeded at a surprisingly faster pace than anticipated.  The overall goal of the two organizations is for all major capital markets to be in position for the United States to adopt IFRS by 2015.

Another challenge facing the adoption of IFRS is the need for skilled personnel.  Training existing staff and management will be a time consuming process and there will also be a need for personnel with sufficient experience in the application of IFRS to ensure a satisfactory transition.

Information systems and technology raises a concern also.  Systems running multiple charts of accounts and consolidation methods will need to be brought in sync with each other.  This could be costly.   The SEC compiled the results of over 200 comment letters it received in response to the IFRS roadmap.  Thirty three percent of the people sighted lack of accounting technical guidance was the main concern along with seven percent concerned about insufficient technology.  Is the United States ready for this challenge?

Click to access Top-Acc-13-ebook-final.pdf

Click to access 28.pdf

Why the Switch from GAAP to IFRS?

Currently, there are two sets of accounting standards.  Generally Accepted Accounting Principles (GAAP) is rules-based with approximately 25,000 rules and used primarily in the United States.  International Financial Reporting Standards (IFRS) is a principle based set of standards with only 2,000 rules.  The entire codification of IFRS fits into one volume, whereas, there are multiple volumes of information in GAAP.  The difference between the two concepts (rules vs. principles) is comprehensive and will require a dramatic change in the way accounting procedures will be handled.  How do we globalize a single set of high quality accounting standards?

The SEC issued a “Roadmap” in November 2008, outlining seven so called milestones that had to be met in order for the United States to move forward with the acceptance of IFRS.  The seven milestones range from improvements in accounting standards, education and training related to IFRS and the accountability and funding of the International Accounting Standards Committee Foundation.  In 2011, these seven milestones were looked at by the SEC, and it was decided that the SEC needed more time to review and issue a final report of the adoption of the international standards.  Some key differences not yet worked out included accounting for Leases, Revenue Recognition, Financial Statement Presentation and Accounting for Financial Instruments.  These were high priorities that needed to be resolved.  Now it’s looking more toward 2015 when the convergence will take place.

Why bother switching to IFRS?  Leave well enough alone.  Not that easy anymore.  With main competitors in today’s global market already using the International Financial Reporting Standards, it is time for the United States to be competitive with the countries that have already accepted and are following the IFRS.  It’s time to make the switch to these standards also.  Consistency should be the number one reason why the United States should converge.  Multinational corporations, or a large corporation with operations and subsidiaries in several countries, exist in a majority of countries.  If every country has a different set of financial standards, how are we to really understand and compare numbers?  We need to compare apples to apples to get a true financial picture.  With one set of international standards being used, everyone will be on the same page.  It’s time for the United States to step up and become part of the global economy.

Lastly, the United States can actually profit from these countries by learning what they did wrong when they converged and avoiding these same mistakes when it’s our turn; possibly resulting in a substantial amount of money and time saved.

Click to access Top-Acc-13-ebook-final.pdf

http://dictionary.reference.com/browse/multinational?s=t

U.S. GAAP and IFRS: A Brief History

With the stock market crash in 1929 and the plunge of the economy into a Great Depression, it was necessary to set government regulations on businesses; especially financial institutions and the stock market.  The government established what is known as the Securities and Exchange Commission to help standardize financial information given to stockholders.  When the SEC was organized, there were no accounting standards.   Over the years, organizations were formed to develop accounting standards.  The SEC relied on the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA).  Today, the AICPA’s role in standard-setting has diminished.  The SEC relies on the FASB (primary US accounting rule maker since the 1970’s) to develop accounting standards.  The ultimate purpose of accounting standards is to establish a common set of rules and procedures in preparing financial statements so as to not mislead the users and preparers of these accounting statements.  Today, generally accepted accounting principles or (GAAP) are the accounting rules used to prepare the three basic financial statements called the balance sheet, income statement and statement of cash flows.

Without GAAP, companies would be able to report when and what they want on their financial statements.  Investors and creditors would have a difficult time in interpreting the true financial status of a company.  GAAP requires financial statements to be consistent, reliable and comparable.  The current set of standards used in the United States has over 25,000 rules.

The International Financial Reporting Standards (IFRS) is a standard set of accounting rules used basically by over 100 countries and consists of approximately 2,000 rules.  These rules are set by the International Accounting Standard Board (IASB) based in London.  It is made up of 14 members from nine countries.   Over 12,000 companies in over 100 countries are using the International Financial Reporting Standards.

On August 27, 2008, the Securities and Exchange Commission announced their plan to convert all listed companies in the United States from Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS).  They have been in favor of one set of standards since the 1990’s.  They have mapped out a timeline for this conversion which was supposed to have taken place in 2014 but has been delayed until 2015.  It is imperative, according to the SEC, that a global set of standards be used for financial reporting.  There needs to be consistency in reporting financial information to worldwide investors.

What does this conversion from Generally Accepted Accounting Principles to International Financial Reporting Standards mean for companies in the United States and will it help or hurt them?

http://www.legalzoom.com/business-management/running-your-business/general-accepted-accounting-principles-or