Update on International Accounting Standards

How is the U.S. measuring up to global expectations when it comes to transparency, disclosure and wiggle room?

July 7, 2008
by Hank Berkowitz

For accountant, Richard Fuchs, it’s pretty simple. He and his clients work in a global economy and that means they need universally accepted ways of treating and reconciling the transactions that global businesses conduct, regardless of where those transactions occur.

“From an accounting standpoint, the U.S. thinks there’s only one way to do things and that drives the rest of the world nuts,” quipped Fuchs, a partner in the PricewaterhouseCoopers (PwC) Global Capital Markets Group, at the recent International Accounting Standards Board/Pace University forum on integration of global accounting standards in New York City. “We’re really going to have to grapple with this.”

Regardless of where you stand on the issue of U.S. versus global accounting regulations, the prevailing sentiment at the IASB/Pace University forum was that it’s a fascinating, albeit stressful, time to be talking about accounting and there will be plenty of “IF(rs)” and “knowledge GAAPs” to contend with.

“We start with principles,” said D.J. Gannon, Partner and Leader, IFRS Centre of Excellence — Americas, Deloitte & Touche. “A lot of U.S. Generally Accepted Accounting Principles (GAAP) has been driven by uniformity. With IFRS there is less uniformity and more transparency of financial statements. From a big picture perspective, we’re seeing a fundamental shift.”

Fundamentally speaking, International Financial Reporting Standards (IFRS) “are more principles based and U.S. GAAP is more rules based,” agreed PwC’s Fuchs.

“Every industry seems to have different standards (in the U.S.) broadcast, motion picture, manufacturing for example. It’s crazy when you think about it,” said Paul Munter, Partner, Professional Practice — Audit & Advisory, KPMG.

“Will IFRS reduce the gamesmanship or just shift the rules of the game?” asked Neil Weinberg, a Forbes magazine editor, who was moderating a panel discussion at the recent IASB/Pace University Forum.

Its not game playing, countered Gannon. Its about trying to get a good, accurate accounting result.

“The one-size-fits-all mentality is what drove people away from U.S. GAAP,” added PwC’s Fuchs. “What I like about IFRS is there’s a lot of disclosure. It makes it a lot easier for an intelligent reader to compare (financial statements) and judge for themselves.”

Fuchs said countries such as Australia, New Zealand and the U.K. are most similar to the U.S. from an accounting perspective since they have substance-based, rather than tax-based, systems. “It takes us back to the notion of reasonable professionals making reasonable judgments with lots of footnotes, disclosure. It’s very clear and transparent. The U.S. will have to think hard about how much disclosure is appropriate and necessary.”

But several experts felt that no accounting system will ever be so cut-and-dry that it eliminates human interpretation. “Even reasonable people who find financial results crystal clear can still come up with different results,” said KPMG’s Munter.

The Need to Simplify and Start Fresh

Deloitte’s Gannon said U.S. GAAP is 2,500 pages of guidance. It’s a big research exercise just to comply with it. Finding that one single page that contains the answer you’re looking for takes up most of your time and energy. For instance, there are over 200 different revenue standards in U.S. GAAP. Gannon said a new skill-set is required for today’s CPAs. “I’d like to see more energy not on finding the answer, but on thinking about what that answer really means.”

This is a once-in-a-lifetime opportunity to start fresh,” said Ernst & Young’s Ostling. “Just get on with it. It’s a clean-sheet-of-paper approach.”

PwC’s Fuchs said questions are coming up in this year’s reporting season. “If a company is doing things differently — not taking the easy route — how will investors, stakeholders and the markets react to this different accounting?” IFRS implementation has not had significant impact, he said.

IFRS Backdrop

More than 100 countries require or allow companies to use the IASB’s International Financial Reporting Standards (IFRS) today and the IASB expects that figure to reach 150 countries within five years.

The U.S. Securities and Exchange Commission (SEC) last year issued a concept release to gauge public interest in allowing U.S. companies to use IFRS when getting their financial statements ready for SEC filing. However, many cultural and compliance cost hurdles will have to be cleared, not to mention philosophical differences on transparency and principles-based international standards versus rules-based U.S. accounting standards.

“Recognizing the accelerating pace of global acceptance of IFRS, we at the AICPA are working to provide the U.S. accounting profession with the tools CPAs need to learn about, understand and apply IFRS,” said Barry C. Melancon, president and chief executive officer of the American Institute of Certified Public Accountants, in a news release earlier this year.

While a 55 percent majority of CPAs said in a May survey by the AICPA that they expect U.S. introduction of IFRS will have a direct impact on their firms and their work, 59 percent said they have not yet begun to prepare for IFRS adoption. Just 17 percent of the 1,240 survey respondents said they were actively preparing and 24 percent said they were having preliminary discussions about how to get ready for IFRS.

Julie A. Erhardt, SEC Deputy Chief Accountant, said the Commission is developing a timetable to move U.S. companies to IFRS, but speaking on behalf of the SEC, couldn’t commit to a firm start date.

Late last year, the SEC gave foreign private issuers the option of filing their financial results using international standards instead of using U.S. GAAP to square up their financial statements. Erhardt said 37 companies have opted to report their results via IFRS so far, and of those, 35 provided investors with the IASB version of IFRS. Of the 35 who provided results using the IASB version, 29 also presented their results in their local IFRS. Erhardt expects about 70 companies to submit their results using IFRS by the June 30 filing deadline.

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Hank Berkowitz is the Publisher of AICPA’s Insider™ electronic newsletter group in New York City.