Changing Paradigm of Accounting & Finance in Global Perspective
Introduction :: 1997 2002: 2006 2007 November — SEC votes unanimously to accept from foreign private issuers (PIs) financial statements prepared in accordance with IFRS without reconciliation to GAAP.
The IASB and US Financial Accounting Standards Board (FASB) have announced a modified convergence strategy in response to widespread concern that they were taking on too much. Under their revised plans, a phased approach to the publication of Exposure Drafts will be adopted and the completion of lower priority projects will be delayed. Despite this announcement, the IASB’s printing presses will remain in overdrive. Seven Exposure Drafts are due to be published in the second half of 2010, and up to eighteen new IFRSs could potentially be issued before the end of 2011. Many of these projects are driven by the desire to achieve global convergence in accounting standards. Grant Thornton International Ltd (Grant Thornton International), through its IFRS team, develops this newsletter to inform you about the upcoming proposals – the current direction, status and next steps. We think it’s critical that companies start to assess how these changes might affect them now. Companies can then seek to make their voices heard on the proposals that will affect them the most – and begin to plan for implementation.
Get Ready for IFRS
The growing acceptance of International Financial Reporting Standards (IFRS) as a basis for U.S. financial reporting represents a fundamental change for the U.S. accounting profession. Today nearly 100 countries require or allow the use of IFRS for the preparation of financial statements by publicly held companies. In the United States, the Securities and Exchange Commission (SEC) is considering taking steps to set a date to allow U.S. public companies to use IFRS, and perhaps make its adoption mandatory.
The international standard-setting process began several decades ago as an effort by industrialized nations to create standards that could be used by developing and smaller nations unable to establish their own accounting standards. But as the business world became more global, regulators, investors, large companies and auditing firms began to realize the importance of having common standards in all areas of the financial reporting chain.
Worldwide Momentum
The globalization of business and finance has led more than 12,000 companies in almost a hundred countries to adopt IFRS. In 2005, the European Union (EU) began requiring companies incorporated in its member states whose securities are listed on an EU-regulated stock exchange to prepare their consolidated financial statements in accordance with IFRS1. Australia, New Zealand and Israel have essentially adopted IFRS as their national standards. Canada, which previously planned convergence with U.S. Generally Accepted Accounting Principles(GAAP), now plans to require IFRS for publicly accountable entities in 2011. The Accounting Standards Board of Japan (ASBJ) and the International Accounting Standards Board (IASB) plan convergence by 2011.
In a survey conducted recently by the International Federation of Accountants (IFAC), a large majority of accounting leaders from around the world agreed that a single set of international standards is important for economic growth. AICPA Chairman Randy Fletchall, CPA, and AICPA President and CEO Barry Melancon, CPA, were among those surveyed.
Of the 143 leaders from 91 countries who responded, 90 percent reported that a single set of international financial reporting standards was “very important” or “important” for economic growth in their countries
With respect to the importance of convergence to International Financial Reporting Standards for economic growth in their countries: 55 percent of respondents said IFRS adoption was “very important” to economic growth, 35 percent said “important”, 9 percent “somewhat important”,1 percent “not important”
SEC Leadership In International Effort
The U.S. Securities and Exchange Commission has for many years been a strong leader in international efforts to develop a core set of accounting standards that could serve as a framework for financial reporting in cross-border offerings. It has repeatedly made the case that issuers wishing to raise capital in more than one country are faced with the increased compliance costs and inefficiencies of preparing multiple sets of financial statements to comply with different jurisdictional accounting requirements. In 2000, the International Organization of Securities Commissions (IOSCO), in which the SEC plays a leading role, recommended that its members allow multinational issuers to use 30 “core” standards issued by the IASB’s predecessor body in cross-border offerings and listings.
A few years later, the SEC announced its support of a memorandum of understanding — the Norwalk Agreement — between the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board. This agreement, concluded in Norwalk, Connecticut, established a joint commitment to develop compatible accounting standards that could be used for both domestic and cross-border financial reporting. In a subsequent memorandum of understanding, the FASB and the IASB agreed that a common set of high quality, global standards remained their long-term strategic priority and established a plan to align the financial reporting of U.S. issuers under U.S. GAAP with that of companies using IFRS.
Between 2005 and 2006, the number of foreign private issuers filing with the SEC using IFRS jumped from a handful to 110, and the SEC expects the number to continue to increase. In February 2006, SEC Chairman Christopher Cox reaffirmed the SEC’s commitment to achieving one set of high quality, globally accepted accounting standards and opened the possibility that U.S. financial statements could be prepared using IFRS or U.S. GAAP.
1988
Securities and Exchange Commission (SEC) begins
encouraging international
efforts to develop a core set of accounting standards.
SEC notes that for issuers wishing
to raise capital in more than one
country, preparing multiple sets
of financial statements to comply with different jurisdictional
accounting requirements increased compliance costs and
created inefficiencies.
SEC announces support of Norwalk Agreement between the Financial Accounting Standards Board (FASB) and the International Accounting
Standards Board (IASB).
Chairman Cox reaffirms commitment to the SEC
“roadmap.”
2008
SEC considers issuing a prop
December — SEC issues Concept Release seeking input on allowing U.S. public companies to use IFRS when preparing financial statements.
SEC Timeline
In 2007, the SEC unanimously voted to allow foreign private issuers to file financial statements prepared in accordance with IFRS as issued by the IASB without reconciliation to GAAP. Of even greater importance was the SEC’s Concept Release seeking input on allowing U.S. public companies to use IFRS when preparing financial statements. Most recently, Chairman Cox announced that in 2008 the SEC staff will formally propose to the Commission an updated “roadmap” that will include a schedule and appropriate milestones for continuing U.S. progress toward acceptance of IFRS.
Another recent development also points toward an accelerated convergence timeline. The FASB and the IASB say they will update the Norwalk Agreement to lay out a plan for one set of accounting standards from which all major capital markets would be able to operate by 2013. The boards will work to resolve differences believed to have impeded IFRS adoption in the U.S.
AICPA Participation
The AICPA was a charter member of the International Accounting Standards Committee (IASC), the IASB’s predecessor organization. In the three decades since, the AICPA has worked to advance international convergence of accounting standards. Through its Accounting Standards Executive Committee (AcSEC), the AICPA provides thought leadership to the IASB on financial reporting topics. The Institute has made clear its support for giving U.S. issuers the option to prepare financial statements in accordance with IFRS as published by the IASB for purposes of complying with the rules and regulations of the SEC.
Mindful of the importance of private companies and not-for-profit organizations, AICPA Council is working to update Rule 203 of the Code of Professional Conduct to recognize the IASB as an international accounting standard setter. By removing a potential barrier, private companies and not-for profit organizations will have a clear option to decide if following IFRS makes sense for their situations and financial reporting constituents.
The AICPA understands that it will need to fulfill a number of responsibilities to make the use of IFRS by public companies a success. Ongoing efforts include:
Two Sides Of The Story
Growing interest in the global acceptance of a single set of robust accounting standards comes from all participants in the capital markets. Many multinational companies and national regulators and users support it because they believe that the use of common standards in the preparation of public company financial statements will make it easier to compare the financial results of reporting entities from different countries. They believe it will help investors understand opportunities better. Large public companies with subsidiaries in multiple jurisdictions would be able to use one accounting language company-wide and present their financial statements in the same language as their competitors.
Another benefit some believe is that in a truly global economy, financial professionals including CPAs will be more mobile, and companies will more easily be able to respond to the human capital needs of their subsidiaries around the world.
Nevertheless, many people also believe that U.S. GAAP is the gold standard, and something will be lost with full acceptance of IFRS. What’s more, it is unlikely that all U.S. issuers will voluntarily elect to use IFRS. According to a survey conducted in 2007 by Deloitte & Touche of companies ranging in annual revenue size from $100 million to $10 billion, only about 20 percent of CFOs say they would adopt IFRS if given a choice. U.S. issuers without significant customers or operations outside the United States may not have a market incentive to prepare IFRS financial statements. Other U.S. issuers may use their financial statements as the basis for filings with other regulators and authorities that may require U.S. GAAP.
Another concern is that worldwide, many countries that claim to be converging to international standards may never get to 100 percent compliance. Most reserve the right to carve out selectively or modify standards they do not consider in their national interest, an action that could lead to incomparability — the very issue that IFRS seek to address.
GAAP And IFRS, Still Differences
Great strides have been made by the FASB and the IASB to converge the content of IFRS and U.S. GAAP. The goal is that by the time the SEC allows or mandates the use of IFRS for U.S. publicly traded companies, most or all of the key differences will have been resolved.
Because of these ongoing convergence projects, the extent of the specific differences between IFRS and U.S. GAAP is shrinking. Yet significant differences do remain. For example:
Perhaps the greatest difference between IFRS and U.S. GAAP is that IFRS provides much less overall detail. As an example, IFRS fit into one book, about two inches thick, while the three FASB paperbacks of pronouncements plus the paperback version of the FASB Emerging Issues Task Force consensuses measure about nine inches thick, and that doesn’t include all of the authoritative literature.
What CPAS Need To Know
The increasing acceptance of IFRS, both in the United States and around the world, means that now is the time to become knowledgeable about these changes. Most CPAs will somehow be affected. Once a critical mass of non-U.S. companies in a certain industry sector begin to report their financial results using IFRS, there will likely be pressure for U.S. issuers to do the same, to allow investors to better compare their financial results. But this issue will have an impact far beyond just financial reports. It will affect almost every aspect of a U.S. company’s operations, everything from its information technology systems, to its tax reporting requirements, to the way it tracks stock-based compensation.
For the CPA profession, the use of IFRS by U.S. publicly held companies will create the need for effective training and education. Companies will use IFRS only if they and their auditors have been thoroughly trained, and if their investors and other users of their financial statements — such as analysts and rating agencies — understand IFRS as well. At the moment, most accountants in the United States are trained in U.S. GAAP, not IFRS. Most specialists, such as actuaries and valuation experts, who are engaged by management to assist in measuring certain assets and liabilities also are not taught IFRS. Consequently, all parties will need to undertake comprehensive training. Professional associations and industry groups will need to integrate IFRS into their training materials, publications, testing and certification programs. Colleges and universities will need to include IFRS in their curricula. If IFRS is accepted — and many think this is inevitable — as GAAP in the United States, it will be included in the Uniform CPA Examination.
The bottom line is that CPAs need to begin to prepare for the day in the not-so-distant future when the SEC could designate a date for voluntary, or even mandatory, adoption of IFRS by all U.S. public companies.
IFRS Business Issues Corporate
Timeline for IFRS Acceptance in the United States
2001: The International Accounting Standards Board (IASB) is established as the successor organization to the International Accounting Standards Committee (IASC), formed in 1973. The IASB’s mandate is to develop International Financial Reporting Standards (IFRS).
2002: The IASB and the Financial Accounting Standards Board (FASB) issue the Norwalk Agreement, acknowledging their joint commitment to developing high quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. Also, the European Union (EU) announces that its member states will require IFRS in the preparation of consolidated financial statements of listed companies beginning in 2005.
2005: The chief accountant of the Securities and Exchange Commission (SEC) releases a roadmap allowing IFRS filings without GAAP reconciliation for foreign firms by 2009, or earlier.
2006: The IASB and the FASB agree to work on a number of major projects.
2007: The SEC announces that it will accept from foreign filers in the U.S. financial statements prepared in accordance with IFRS, as issued by the IASB, without reconciliation to U.S. GAAP. Also, the SEC issues a Concept Release asking if U.S. public companies should be given an option to follow IFRS instead of U.S. GAAP.
2008: The SEC is expected to vote on a proposal creating a timeline for moving U.S. public companies to IFRS. The AICPA’s governing Council considers amending rules 202 and 203 of the Code of Professional Conduct to recognize the IASB as an international accounting standard setter, thereby giving U.S. private companies and not-for-profit organizations a choice to follow IFRS. Also, the FASB and the IASB update the Norwalk Agreement with the goal of accelerating convergence.
2009: The IASB will end its moratorium, set in 2005, on the required application of new accounting standards and major amendments to existing standards. The board had frozen its rules while more countries adopted IFRS.
2011: Canadian and Indian companies are slated to begin using the global standards, and Japan is slated to have eliminated all major differences between Japanese GAAP and IFRS. In the United States, questions concerning IFRS are expected to be included in the Uniform CPA Exam.
2013: The earliest year projected by accounting firms for mandating that large U.S. public companies convert their financials to IFRS. Year that the updated Norwalk Agreement expects all major capital markets to operate from one set of accounting standards.
2001:
The International Accounting Standards Board (IASB) established.
2002:
The IASB and the Financial Accounting Standards Board (FASB) issue the Norwalk Agreement. The European Union (EU) announces member states must use IFRS beginning
2005 financial statements.
2005:
Securities and Exchange Commission (SEC) releases a roadmap for allowing IFRS filings without GAAP reconciliation for foreign firms by 2009, or earlier.
2006:
The IASB and the FASB agree to work on major projects jointly.
2007:
The SEC announces foreign filers in the U.S. can file IFRS without reconciliation to U.S. GAAP. SEC issues a Concept Release asking about U.S. public company option to follow IFRS instead of U.S. GAAP.
2008:
The SEC plans vote on a proposal creating timeline for moving U.S. public companies to IFRS. The AICPA’s governing Council considers amending Code of Professional Conduct to recognize IASB as an international accounting standard setter.
2009:
The IASB will end moratorium on required application of new accounting standards and major amendments to existing standards.
2011:
Canadian, Indian and Japanese companies are slated to begin using IFRS.
2013:
The earliest projection by accounting firms for mandating that large U.S. public companies convert financials to IFRS.
Organizations Involved
In April 2001, the International Accounting Standards Board (IASB), an independent accounting standardsetter based in London, assumed accounting standard-setting responsibilities from its predecessor body, the International Accounting Standards Committee. The IASB is responsible for International Financial Reporting Standards (IFRS).
The Securities and Exchange Commission (SEC), created in 1934 by an Act of Congress, is the U.S. government agency with primary responsibility for enforcing the federal securities laws and regulating the securities industry and the U.S. stock market. For the past three decades it has become increasingly vocal in its support of a single set of robust accounting standards that would be used worldwide.
The American Institute of Certified Public Accountants (AICPA), with approximately 340,000 members, is the national professional organization for certified public accountants in the United States. Well before IFRS began to gain traction in the U.S. business and regulatory communities, the AICPA was publicly supporting the goal of a single set of high quality, global accounting standards to be used in the financial reporting of public companies throughout the world.
The Financial Accounting Standards Board (FASB) is working with the IASB to converge their respective accounting standards into a robust set of rules that will meet the needs of preparers and users worldwide. The AICPA’s Accounting Standards Executive Committee (AcSEC) is the senior technical committee of the AICPA authorized to speak on accounting matters. It provides accounting guidance to help financial professionals discharge their duties and serve the public interest.
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Dodiya Dilip U.
Lecturer, Government Commerce College,
Sector 15, Gandhinagar.
Cell No:- 96387 14999
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