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1、International Financial Reporting Standards: The Road AheadBy Langmead, Joseph M,Soroosh, JalalPublication: The CPA Journal Date: Sunday, March 1 2009 In December 2007, the SEC eliminated the requirement to provide U.S. GAAP information for many foreign company filers that use International Financia
2、l Reporting Standards (IFRS). The SEC has also published a proposed rule for U.S. companies to start preparing their financial statements using IFRS. IFRS is effectively in the process of replacing U.S. GAAP in the U.S. capital markets - it has already replaced GAAP for non-U.S. companies listed in
3、domestic markets, and will soon replace GAAP for U.S. public companies. These rapid developments will require CPAs to retool and learn more about IFRS quickly. Doing so requires an appreciation of why IFRS is of such immediate interest to U.S. businesses and practitioners, a familiarity with the his
4、tory and background of IFRS. and an understanding of the key similarities and differences between IFRS and U.S. GAAP. This primer on IFRS concludes with some practical considerations for a company converting U.S. GAAP to IFRS.BackgroundWhy is IFRS back in the news? The FASB and the International Acc
5、ounting Standards Board (IASB) have committed repeatedly - beginning with the Norwalk Agreement of 2002 - to the convergence of the two bodies of standards on an aggressive timetable. U.S. accountants might have expected that all they needed to do was keep up with the changes to U.S. standards, whic
6、h, in good time, would be the same as IFRS. If one wanted to keep up with the progress of the convergence effort, one could easily access SEC filings for some non-U.S. registrants using IFRS and review the required reconciliations to U.S. GAAP as convergence matured and the differences gradually dis
7、appeared.A passive approach may no longer be realistic. According to a December 2007 rule change by the SEC, many non-U.S. filers who use IFRS are no longer required to prepare reconciliations of their key financial statement amounts to U.S. GAAP. The last reconciliations for many IFRS companies wer
8、e filed with the SEC for 2006, meaning that the only recent financial information on record is IFRS information. The visibility of those differences is lost. Furthermore, implicit in the new rule, the SEC has effectively acknowledged IFRS as an alternative accounting model for non-U.S. companies who
9、se securities trade in U.S. markets. As long as IFRS and U.S. GAAP contain differences - as they certainly do today there are effectively two sets of acceptable standards in the United States.One might have taken some comfort in the fact that U.S. companies would continue to use U.S. GAAP. But that
10、assumption is in the process of being dismantled. In 2007, the SEC issued a concept release as a companion piece to the aforementioned new rule. The release examined issues and questions - and invited comments - surrounding the striking scenario in which U.S. public companies, or at least some of th
11、em, would begin to use IFRS as their new accounting and reporting model. This release was much discussed and, after a vote by the SEC,a rale proposal was issued on November 14, 2008 (www.sec.gov/rules/proposed/2008/33-8982.pdf), providing a road map for the full replacement of U.S. GAAP with IFRS fo
12、r all U.S. public companies in a series of stages by 2016.These SEC initiatives put two parts of a widely accepted agenda at odds with each other: 1) a drive for a single, high-quality set of accounting and reporting standards appropriate for use around the world as soon as possible, and 2) continue
13、d pursuit of the more complicated and time-consuming process of convergence of U.S. GAAP and IFRS. The fast-tracking of the former is plainly a priority at the SEC, even while the latter remains an active, albeit more gradual, agenda item. Unfortunately, the effect of too strong an emphasis on unive
14、rsality might be to decouple the two dimensions and, inadvertently perhaps, weaken the convergence effort or render it irrelevant.The SECs 2003 study report, undertaken pursuant to section 108 (d) of the Sarbanes-Oxley Act (SOX), concluded that convergence should be a priority, but this conclusion w
15、as accompanied by a related overarching point already embedded in the language of SOX itself: The U.S. GAAP model was flawed - too rules-based and a more principles-based model should be sought as a replacement SOX section 108 (d)(B). The study report cited several U.S. standards that rely on strict
16、 rales of application, thereby rendering them subject to circumvention. U.S. GAAP was thus deemed part of the problematic landscape that helped give rise to the debacles of Enron and WorldCom. IFRS was also flawed but, on balance, both SOX and the resulting study report made it clear that convergenc
17、e should mean a movement away from the rules mentality of U.S. GAAP and toward the principles mentality more characteristic of IFRS. An optimal blend of the two extremes was labeled objectives-oriented, and convergence was retargeted toward such a blended ideal. Nevertheless, despite the acknowledgm
18、ent of the limitations of IFRS, the damage to the stature of U.S. GAAP was, it now seems, fatal. In this context, it is less surprising that IFRS, even in a notyet-converged state, should find acceptance at the SEC and come to represent the only real candidate to fill the need for a single global ac
19、counting model.The SEC is now moving to the point that, in retrospect, might have been inevitable since 2002-2003: active consideration of near-term adoption of IFRS by at least some U.S. public companies before convergence has matured. Even CPAs who otherwise have no direct responsibilities for pub
20、lic companies are nevertheless expected to know how to read their financial statements. Because we now face the likelihood that IFRS will become the primary accounting model for many U.S. companies even before convergence, CPAs need to know at least the basics about IFRS.The International Accounting
21、 Standards BoardThe IASB, based in London, U.K., is the standards-setting body which establishes IFRS and issues related standards and interpretations. It was created in 2001 by its parent, the International Accounting Standards Committee Foundation (IASCF), and assumed the work product of a predece
22、ssor body, the International Accounting Standards Committee (which began around the same time as the FASB in 1973). A number of the predecessor standards - International Accounting Standards (IAS) - and interpretations of the Standing Interpretations Committee (SIC) remain in effect today along with
23、 the newer standards - IFRS - and interpretations developed by the International Financial Reporting Interpretations Committee (TFRIC). The IASB website contains much useful information about the board and includes summaries of each standard currently in effect (www.iasb.org/IFRS+Summaries/IFRS+and+
24、IAS+Summaries+English+2008/IFRS+and+IAS+Summaries+English.htm).The character and funding of the IASCF are matters of interest to regulatory bodies, such as the SEC, who evaluate the professionalism and independence of the standards-setting body. Likewise, the caliber and effectiveness of the related
25、 interpretive body (IFRIC) is of continuing interest to such regulators who recognize that a robust and authoritative interpretive capacity is required for a global body of standards to be implemented in a uniform and consistent manner across many jurisdictions. Any advisory bodies that might influe
26、nce the agenda of the standards-setting body (a Standards Advisory Council plays such a role with the IASB) can become a concern if advisors are seen to have undue influence or to represent particular interests. The SEC and its fellow national/regional regulators around the world have influenced and
27、 will continue to monitor and influence the maintenance of quality at the IASB. On January 29, 2009, the IASCF announced the creation of a monitoring board made up of regulators from around the world-including the SEC, the International Organization of Securities Commissions (IOSCO), the European Co
28、mmission, and the Japan Financial Services Agency - to oversee the work of its trustees.IFRS has gained acceptance in more than 100 countries. In many, it is either already the prescribed model for public (listed) companies or is on an agreed timetable to become so. The most noteworthy of these adop
29、tions was that of the European Union, which chose IFRS (with the notable exception of a carve out of IAS 39, Financial Instruments: Recognition and Measurement) for the more than 7,000 listed companies in the EU, effective in 2005. The majority of economies in the developed world are now in the IFRS
30、 camp, with the United States poised to join them. IFRS has already effectively become the world standard.Conceptual Similarities and DifferencesIFRS is conceptually similar to U.S. GAAP in many ways, but there are a few noteworthy differences between the two models. Like U.S. GAAP, IFRS is anchored
31、 in the accrual basis of accounting within a going-concern framework and requires financial statements of a type similar to those required by U.S. GAAP, with a balance-sheet focus. Terminology (and also taxonomy, for purposes of XBRL applications) can be different, but not overly obscure to English
32、speakers familiar with U.S. GAAP. IFRS is a mixed-attribute accounting model, with historical cost elements, fair value elements, and other elements similar to recoverability and realizability, as in U.S. GAAP. Its basic orientation toward accountability to shareholders and other stakeholders is sim
33、ilar to U.S. GAAP. Standards are developed within a framework that can be fairly characterized as balance-sheet or asset-liability oriented, similar to U.S. GAAP.Generally, IFRS has been developed with a cross-industry orientation. A standard for a given type of transaction is developed for applicat
34、ion to all industries in which such a transaction might occur. U.S. GAAP, on the other hand, has developed many industry specific rales which permit the same kind of transaction to be treated differently, depending on the industry.Related to the cross-industry orientation of IFRS is its tendency to
35、concentrate on the articulation of principles and to stay away from specific implementation prescriptions. It emphasizes substance over form and tends to avoid specific, brightline guidance. This is one reason why the total size of the IFRS literature is a fraction of the size of U.S. GAAP literatur
36、e.IFRS developed with a tolerance for alternative accounting treatments within the same topical category or transaction type. While U.S. GAAP also includes some alternatives, IFRS has historically been more willing to tolerate alternative treatments in its standards, in the interests of incorporatin
37、g as many legitimate views as possible and facilitating acceptance across borders as well as within countries with alternative precedents. Some older alternative treatments in IFRS have been gradually removed in recent years as the regulatory bodies of various countries, including the SEC, have gene
38、rally regarded such alternatives as weaknesses.At the conceptual level, another difference is worth noting. U.S. GAAP contains no embedded permissions to override its standards in the interests of a fairer or more accurate result. The U.S. auditing literature (Rule 203 of the AICPA Code of Professio
39、nal Conduct) allows for this possibility and, while it has been applied to private companies, it has never been invoked for a public company. IFRS contains within itself (IAS 1, Presentation of Financial Statements) the possibility that management may exercise a true and fair override of IFRS standa
40、rds when it is deemed necessary for an appropriate financial presentation.A good example of such a practice took place last year when a major European banking organization announced that a rogue trader had entered into financial transactions on behalf of the company which resulted in large, unauthor
41、ized positions. Adverse market conditions early in the year created losses in the positions, which became realized as the positions were unwound by management after being discovered. Some time later, the bank announced that it had completed its 2007 annual financial statements and that the huge trad
42、ing losses incurred in 2008 were to be reflected in its 2007 accounts. The bank did not justify its position based on the particular IFRS standards applicable for such losses (LAS 10, Events After the Balance Sheet Date, and IAS 37, Provisions, Contingent Liabilities and Contingent Assets), but on t
43、he true and fair override provisions of IAS 1. As the FASB prepared the aforementioned new GAAP hierarchy standard for issuance last year (SFAS 162, The Hierarchy of Generally Accepted Accounting Principles), it explicitly considered and rejected the notion of such an override.Thus, there are strong
44、 conceptual similarities as well as some important differences between the two accounting models (summarized in the Exhibit). These differences can be viewed as conceptual strengths or weaknesses, depending on what one looks for in an ideal body of standards. As noted above, the 2003 SEC study repor
45、t criticized both sets of standards, but on balance found more to like in IFRS.Critics of TFRS sometimes note that the standards are still rather young and untested over a sustained period, as different economic cultures around the world apply their respective takes to its sometimes rather generic p
46、rinciples. U.S. GAAP is comparatively mature, has developed robustly in the face of repeated challenges, and has adapted to specific applications. A truly high-quality global accounting model should result in consistent application around the world, and IFRS is still a relatively new and unproven ex
47、periment in that regard.Implementation ConsiderationsAs detailed above, the FASB and the IASB s convergence efforts are unfinished; if convergence remains a priority, substantial changes to both sets of standards can be expected for years to come. Thus, a U.S. company should view the challenge of ad
48、opting IFRS from a number of perspectives. First, since full convergence is still a distant reality, any changeover in the near future must confront all the differences which still exist vis-vis U.S. GAAP. Appropriately trained controllers and their advisors can usually undertake this exercise with
49、limited impact on the organization. Once the differences are identified, a deeper analysis of related implications can proceed. What are the effects of a new financial reporting model on the many other legal relationships in which the organization is involved? What will be the impact on debt agreements and other financing arrangements that include financial statement measures and covenants based on them? What about profit sharing and other compensation plans and their relationship to financial measures? Financial
