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"Jumping the GAAP into IFRS "

(Guest)

When the United States Olympic basketball team, made up mostly of NBA stars, plays Spain in an international tournament, they play by international rules, which in some ways are quite different from NBA rules. For instance, there are variances in at least 15 major rules categories, including the shape and size of the lane, playing time, goaltending, traveling and fouls. When NBA players and coaches prepare for international events such as the Olympics, a portion of their training involves learning the new rules and how to play effectively by them.

Imagine the following scenarios:

The U.S. and Spanish teams play by different rules within the same game. For instance, the U.S. has to shoot three-pointers from its familiar 23 feet 9 inches, while Spain can shoot from 20 feet 6.25 inches, but then Spain has to turn around and make the
same shot from the American distance.
The game is played under NBA rules. After that game, another one is played under international rules

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(Guest)

Although this zaniness would be absurd in sports, something similar besets the accounting world. The U.S. has its own set of accounting rules — the United States Generally Accepted Accounting Principles (U.S. GAAP, or just GAAP) — while other countries have their own rules, such as UK GAAP and GAAP of Canada. Such a system has created havoc in an increasingly global monetary world, one in which companies with multinational operations often have to do fiscal reports in compliance with more than one set of accounting rules.

According to www.icaew.com, the site for the Institute of Chartered Accountants in England and Wales, CPA organizations from Britain, Canada and the U.S. began in 1966 exploring ways to converge international accounting standards. The following year, the Accountants International Study Group (AISG) was formed, providing information regarding the issues and practices of international accounting. In June 1973, the International Accounting Standards Committee (IASC) was born. Its mission was the “rapid acceptance and implementation world-wide” of an international accounting standard. From 1983 to 2000, they published 41 standards of international accounting. In 2001, the group was restructured to be the current International Accounting Standards Board (IASB).

In 2000, the Securities and Exchange Commission (SEC) began exploring the ideas fostered by the IASC. Within a few years, a growing movement supported International Financial Reporting Standards (IFRS). By 2005, all countries of the European Union were required to use IFRS. Now, more than 115 countries use it in varying degrees, including Arab states, Australia, Malaysia, New Zealand, Pakistan, Russia, South Africa, Singapore and Turkey.

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(Guest)

Playing politics

The movement to replace GAAP has been spearheaded by the SEC. Former SEC Chair Christopher Cox, a Bush appointee, was “full speed ahead on this,” in the words of Gary Illiano, national partner-in-charge of international and domestic accounting for Grant Thornton.

However, Illiano indicates that Mary Schapiro, the new Obama appointee to head the SEC, has “distanced herself” from Cox’s enthusiasm, which has “translated into slower movement.” Illiano, a supporter of the move to IFRS, is not worried. “They [Schapiro’s actions] are unfortunate, but not surprising, and not insurmountable.”

Fewer hiding places

Alex Kennedy, a partner at Salt Lake City law firm Jones Waldo Holbrook & McDonough and an expert in M&A and in securities law, comments that the switch will cause some discomfort in business circles. “U.S. GAAP is the gold standard of accounting. There are thousands and thousands of pages [more than 30,000 pages, according to Illiano] to which accountants and lawyers can refer. IFRS is based more on the ‘spirit of the law,’ being principles-based rather than rules-based. It fits into one volume.”

Although a principles approach might create more ambiguity, there are fewer rules and loopholes to hide behind. Kennedy points out, “Enron was hiding debt using GAAP. Their accountants were following GAAP rules and were technically legal. The IFRS system might catch those things.”

Similarly, Illiano likes IFRS because “with fewer rules and more principles, it allows for smart people to make choices that reflect the economic realities.”

Fewer business obstacles

The clearest advantage of IFRS for Utah and other U.S. companies is in international business. Currently, if an American company has interests in an IFRS country, accounting often has to be conducted in two different accounting systems. This not only adds confusion — it adds significant costs; it could be quite costly, especially in cross-border mergers and acquisitions. Kennedy cites an example of the current system. “A Utah company is buying a French company. They say, ‘Okay French company, you’re doing your books under IFRS. We have to pay significant fees to convert the books to U.S. GAAP.’ After the switch to IFRS, lots of money will be saved, which can stimulate the economy.”

Illiano indicates that the savings will be beneficial to “both companies and countries.”

(Guest)

“Banking Lawyers Employment Act”

Illiano cautions that opponents will argue on behalf of higher front-end costs as American companies convert from GAAP to IFRS, with much of that cost going to pay accountants. “However,” he says, “the long-term will see great savings. Companies will no longer have to keep current and report in two accounting languages.”

Kennedy jokes that, short term, the conversion can be called “The Banking Lawyers Employment Act,” because attorneys will be quite busy during the conversion process. One scenario he uses is of a company that has borrowed money from a bank. “That company has certain debt covenants with the bank. Now the company has switched to IFRS, and could actually find itself in violation with the bank, and will have to hire a law firm to unravel and fix the problem.”

Writers Sarah Johnson and Marie Leone for CFO.com report that “executives are worried about the cost of conversion.” Further, they cite that “James Campbell, corporate controller at Intel, estimated an IFRS conversion would cost his company $50 million, prompting him to ask the SEC to study the issue more thoroughly before issuing a mandate.”

Timeline

Sentiment among most experts is that the U.S. move to IFRS is inevitable. Illiano points out that in addition to the 115-plus countries already using it, “by 2011, we’ll have significant countries already converted. Japan, the second-largest economy in the world, Canada, our largest trading partner, and India all will be on IFRS. Most of the world has said they’re not moving to U.S. GAAP. We won’t be able to sit at the table for long.”
Under Chairman Cox, the SEC was in line to require publicly traded American companies to convert completely by 2016. Johnson and Leone have indicated that current chair Schapiro, in addition to having cost concerns, has “reservations about the independence of the overseas standards-setter that writes IFRS and the quality of the rules themselves.”

Better start learning … and keep learning

Dr. Marlene Plumlee, associate professor of accounting at the University of Utah, wagers that although right now, IFRS is about one-tenth the length of GAAP, “I would bet that in 10 years, it will look more like GAAP. IFRS is so new right now, like a new car without any dings.” Yet she cautions Utah businesses to remain calm. “People are worried because balance sheets will look different. Some of my students get worried just hearing ‘IFRS.’ But accounting isn’t hard. Just jump in and start learning.”

(Guest)

Closing the GAAP

Anticipating the adoption of IFRS, the SEC already allows foreign companies listed on American exchanges to make the switch from GAAP.

Stepping toward the inevitable switch to IFRS, the SEC has since November 2007 let foreign companies listed on American exchanges report their financial results using International Financial Reporting Standards (IFRS). Before that time, such companies had to reconcile whatever standard they reported in to that of U.S. Generally Accepted Accounting Principles (U.S. GAAP). In effect, such international companies had to prepare two accounting reports.

The SEC made the move in part because of growing pressure from the American Institute of Certified Public Accountants (AICPA). On June 5 of this year, the AICPA’s IFRS website (www.ifrs.com) reported that it (the AICPA) testified before Congress in October 2007, urging that the SEC “take comprehensive steps to harmonize U.S. and international financial reporting, including allowing American public companies to report financial results using international accounting standards.”

The next step is for the SEC to allow U.S. companies to report in IFRS. The AICPA site states, “The SEC is weighing whether to allow U.S. firms to report financial results using international financial reporting standards rather than U.S. GAAP” — a step that would effectively cut out GAAP altogether. With the U.S.’s difficulty in gaining foreign underwriting to its shaky economy, this could be a great move to facilitate easier investment in American companies.

According to the website of Fulcrum Inquiry (www.fulcruminquiry.com), a financial investigations and forensic accounting firm based in Los Angeles, requirements to use GAAP might be “an impediment for foreign companies to invest in the United States, and/or participate in the U.S. capital markets. This impediment comes with little perceived benefits, as many financial analysts indicate that (i) the differences between the sets of accounting standards are becoming less pronounced, (ii) the reconciliations are information overkill, and (iii) the additional reporting comes too infrequently — only once a year

Varun Malhotra (Chartered Accountant) (207 Points)
Replied 14 November 2009

Good article

Thanks for sharing.

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CA Devanshi Gandhi (Ajani) (FCA DISA Mcom CIFRS & LLB) (9058 Points)
Replied 20 November 2009

nice one

Muzaffar (Team Leader) (21 Points)
Replied 15 February 2011

Impact of IFRS on the Valuation of M&A of banks in India.

https://spreadsheets.google.com/a/mba.christuniversity.in/viewform?formkey=dGFmcFBlOWtsSEZ6RG5ZajQ4VHVOQlE6MQ

Regards

Muzaffar

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