Preparing for the Future: What IFRS Could Mean for Accounting Practitioners Across the Globe
The leaders at AuditWatch provide guidance on IFRS changes ahead.
August 6, 2009
Sponsored by AuditWatch
All businesses need a base — a set of standards from which transactions are measured — regardless of location, subsidiaries and partnerships. And because business is global, this question has come to the forefront of commerce: Would it be more proficient, efficient and convenient to have one single set of accounting standards that would apply to any business, in any location, at any point?
This is the thesis of the International Financial Reporting Standards (IFRS), an accounting protocol that could become the United States’ standard for the preparation of financial statements for public entities. Currently, American businesses follow the United States Generally Accepted Accounting Principals (GAAP) as the basis for processing, preparing and reporting financial information to the public. But with the Securities and Exchange Commission (SEC), the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) blazing the way, IFRS could become the new kid in town.
Should We Stay or Should We Go?
IFRS differs from GAAP in that the IFRS allows for more choices, elections and alternatives. IFRS also requires greater exercise of judgment than GAAP. This does not mean, however, that GAAP is outmoded or antiquated. In fact, many practitioners believe that GAAP is king and shouldn’t be altered.
And for companies that don’t have a global presence, there may be little incentive to transition to IFRS.
For those late to the game, there will be consequences, and until IFRS has had time to build history, there will be a limited number of experts qualified to train others, such as statement preparers, investors, investment managers, pension plan trustees, actuaries, attorneys, financial analysts, CPE instructors and developers and sureties.
“IFRS is a principles-based system, as opposed to the U.S. GAAP rules-based system. Accountants and auditors in the United States are accustomed to having accounting rules spelled out in detail with ‘bright lines’ that often make application of accounting rules a quantitative exercise,” explains Wayne Kerr, senior consultant with Thomson Reuters. “While there is still a lot of room for interpretation and judgment in U.S. GAAP, IFRS usually requires much more judgment because there are fewer bright lines and the rules are more objectives based.”
He says this is a change in the way accountants and auditors approach accounting rules.
“It raises issues about how accountants and auditors work together, how accountants develop and document the rationale for certain positions, how accountants and auditors defend themselves against lawsuits, etc.,” he says.
On the other hand, there are reasons why a switch could be beneficial. First, a core set of accounting practices across the globe would serve as a basis for cross-border activity. Second, under IFRS, financial statements can be presented on the same basis as foreign competitors, allowing for easier comparisons. Third, companies with subsidiaries in various countries would have one standard from which to operate, regardless of geographic location.
Adopting IFRS standards has the potential to rev up global competition for U.S. companies, allow for greater efficiencies, and it may help with raising capital abroad. For all U.S. companies, the adoption of IFRS would affect subsidiaries of public companies, foreign companies, potential acquisition targets and any company considering an initial public offering.
Who’s On Board Today
Across the globe, more than 12,000 companies in 113 nations follow IFRS. IFRS was originally developed by the IASB, which is an independent group based in London. By 2011, India and Canada are expected to utilize IFRS standards. The following year, the same is expected of Mexico. The United States — specifically the SEC (U.S. Securities and Exchange Commission) — is evaluating whether the adoption of IFRS should occur, and, if it does, the organization is assessing the implications for American businesses.
The SEC has suggested a roadmap for adoption of IFRS by U.S. public companies. The milestones are arduous and specific, but if the guidelines for IFRS can be outlined in a pragmatic manner, specified issuers could be required to use IFRS in the near future. The original roadmap would require adoption of IFRS by large accelerated filers by 2014, and other accelerated filers by 2015. Remaining would be required to use IFRS by 2016. According to Kerr, “the timeline in the SEC roadmap will almost certainly change — allowing more time for the convergence of U.S. GAAP and IFRS and more time for companies to prepare. But I still believe IFRS adoption is a matter of ‘when’ and not ‘if.’ ”
But until the SEC enacts the rule to transition to IFRS, all U.S. public companies will continue to work under U.S. GAAP when preparing their financial statements.
“Our mission is not to advocate adoption of IFRS,” Kerr says, but to help our customers get ready for what’s coming. “The benefit to U.S. companies is staying informed about developments with IFRS, including the possible requirement of SEC registrants (i.e. public companies) to adopt IFRS in the future.”
In other words, have a plan, which includes having the ability to assess the impact of IFRS adoption on systems, financial reports and personnel, Kerr says. Further, he explains that CPA firms that stay on top of the potential changes will be in a good position to advise clients and provide the expertise needed to thrive under the new standards.
To help practitioners prepare for the potential of IFRS, Thomson Reuters offers several training solutions geared toward understanding IFRS, including the following courses:
IFRS may become the new standard for accounting practitioners, but until all of the facts are in, it’s business as usual … with an eye on the future. Whichever path accounting standards take, the most important tool professionals can have is education, and the most important skill is preparation.
“Stay tuned and don’t panic,” Kerr says. “Things are changing quickly and you need to know what’s going on, but we still don’t have a clear picture of where this is all going to end up.”