 |
|
|
By Melissa Hoffmann Lajara
Posted on 11/06/08
NEW YORK -- Whether or not you like it -- or are ready for it -- come 2015, you will most likely be preparing financial statements using International Financial Reporting Standards (IFRS).
That harsh reality brought more than 200 CPAs and other financial professionals to FAE's IFRS Conference at the Marriot Marquis in Times Square last week, where a series of experts hashed out the differences between IFRS and U.S. Generally Accepted Accounting Principles (GAAP) and explained the Securities and Exchange Commission's (SEC) anticipated convergence plans.
"It really is a pretty daunting challenge, even though there is time," said speaker Tom Omberg, a partner in Deloitte & Touche's Regulatory & Capital Markets consulting practice in New York City. "There are some convergence efforts that still need to happen."
IFRS, used today in more than 100 countries and mandated for companies in the European Union, Brazil, Canada and India, is "generally more focused on objectives and principles and less reliant on detailed rules and interpretations than U.S. GAAP," Omberg said.
But that's just the beginning. Over the course of the day, conference attendees got a close look at the many areas where IFRS and GAAP diverge.
Major Differences
Sharif Sakr, a senior manager in the complex accounting and valuation
group of Deloitte & Touche's Regulatory & Capital Markets consulting
practice, detailed nine areas in which IFRS differs substantially from
U.S. GAAP:
-
Consolidation: GAAP uses a bipolar consolidation model, which distinguishes between a variable interest model and a voting interest model. Under IFRS, consolidation is based on control, which is assumed to exist when a parent company owns more than half of an entity's voting power, or has legal rights.
-
Securitizations using Qualifying Special Purpose Entity (QSPE): Under GAAP, the derecognition test focuses on the transfer of control and legal isolation. Under IFRS, there is no QSPE concept, and the derecognition test focuses primarily on risks and rewards.
-
Derivatives: In order to meet the definition of a derivative under GAAP, a contract would require net settlement. There is no net settlement requirement under IFRS.
-
Equity Instruments: Under GAAP, investments in unlisted equity instruments are measured at cost, minus any "other than temporary impairment," unless the fair value option is being used. IFRS requires equity instruments be measured at fair value, if reliably measurable. Otherwise they would be measured at cost.
-
Debt Instruments: Even if not quoted, debt securities must be classified as trading, available-for-sale or held-to-maturity under GAAP. Under IFRS, certain debt securities not quoted in an active market can be classified as "loans and receivables." This category is not measured at fair value and does not require the intent to hold the loan to maturity.
-
Fair Value Measurements: Under GAAP, fair value is the exit price, and Financial Accounting Standards Board Statement No. 157 establishes the framework for mark-to-market accounting. Under IFRS, fair value is entry price, unless there are observable market prices.
-
Inventory Valuation: The cost of inventory cannot be measured using the last-in, first-out method in IFRS, but it is permitted under GAAP.
-
Inventory Write-downs: Under GAAP, reversal of any write-down is prohibited. IFRS requires any write-downs which have been recognized in previous years to be reversed through the income statement in the period in which the reversal occurs.
-
Revenue Recognition: Generally, under GAAP, delivery is required to have occurred to provide sufficient evidence that risks and rewards of ownership have passed. IFRS accepts that delivery is not always necessary for revenue to be recognized, because the risks and rewards of ownership may be transferred to the buyer even though the good have not yet been delivered.
The Road to Convergence
By 2011, Omberg said, it is anticipated that "all major countries will have adopted IFRS to some extent, with China and Japan 'substantially converged.'"
In the United States, it will take until 2014 or 2015 to implement, he said.
"Hopefully, in the next three to six months," the SEC will finalize the roadmap, Omberg said. The SEC is expected to decide before the end of 2008 whether to issue the proposed plans and final rules.
It's a gradual transition, but one several years in the making. It was set in motion by the Norwalk Agreement of 2002, a deal between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to formally undertake efforts to converge the two sets of reporting standards.
Three years after that accord, SEC Chief Accountant Donald T. Nicolaisen developed the IFRS roadmap. Since then, the SEC has eliminated the requirement for foreign private IFRS issuers to reconcile to GAAP and has proposed allowing U.S. issuers a choice between the two methods.
The proposed roadmap sets seven milestones that, if achieved, could lead to an SEC decision for mandatory use of IFRS for fiscal years ending on or after Dec. 15, 2014. In 2011, Omberg said, it will be evident whether "IFRS is ready for prime time."
Milestones one through four focus on issues that need to be addressed prior to mandatory IFRS implementation, including necessary improvements in current accounting standards, funding for the International Accounting Standards Committee Foundation, improvement in the ability to use interactive data and proper education and training on IFRS in the United States.
EXtensible Business Reporting Language (XBRL), intended to create interactive data for use in financial statements, has stalled somewhat, Omberg said, but "maybe IFRS can be the stick to move that along."
He said the CPA exam needs to move to "IFRS mode" and accounting courses should be updated to prepare American accountants for the transition. He noted that a need for training will be extensive, as firms will have to "turn [their] GAAP experts into IFRS experts."
Milestones five through seven discuss the transition plan for mandatory IFRS usage. Those goals include giving certain U.S. issues the option of using IFRS for fiscal years ending on or after Dec. 15, 2009, addressing the anticipated timing of future rule-making by the SEC and finally, potential implementation and mandatory use.
Silver Linings
Much of the interest in IFRS, Omberg said, is driven by its possibilities, especially "as you start to think about the competitive landscape." As a centralized and standardized set of processes, it would streamline and provide greater consistency in financial reporting. It is also expected to reduce costs through greater efficiency and provide better information.
"With one single accounting platform," Omberg said, "the efficiencies and synergies you can get … would be huge."
Sharif agreed. Negative aspects of the transition are balanced by benefits that IFRS will bring to American companies, he said.
"I think everyone sitting in the room here knows more about IFRS than you think you do," he said.
Although substantive differences will require some adjustment, he said some aspects of IFRS -- such as concepts and principles -- are very similar to GAAP, as is the conceptual framework. And like GAAP, IFRS is investor-oriented.
Other Conference Highlights
The conference, held on Oct. 29, offered a look at IFRS that included the basics as well as a more granular look at the standards and transition. William M. Stocker III, a member of the NYSSCPA's International Accounting and Auditing Committee, led the day's events with a detailed introduction to IFRS and the various committees responsible for setting the rules and facilitating the transition.
Financial instruments recognition and measurement, as well as derivatives and hedging, were covered by KPMG partner Michael H. Hall, while financial asset derecognition was explained by Naveed Rafique, an IFRS specialist at PricewaterhouseCoopers. Chad C. Soares, a partner at PricewaterhouseCoopers, discussed consolidation under IFRS, and Deloitte & Touche partner Kathie Bugg covered income tax considerations. Margaret Ann Wood, a vice president of the NYSSCPA's Board of Directors, detailed the major differences between IFRS and GAAP for equity method accounting and joint ventures.
