International Standards Stir Accounting Debate

Who says accountants lead a humdrum existence?

As of July 1, the seemingly bottomless pool of Generally Accepted Accounting Principles will be available at one handy-dandy spot — a Web site that allows users to navigate their way through the Financial Accounting Standards Board’s rules and regulations. The site is a result of FASB’s codification project.

“It’s a big deal for us,” HoganTaylor LLP audit partner Todd Wisdom said with a smile. “I think the idea was, ‘We’re going to try to make it as plain English as we can, and make it as user-friendly as possible.'”

And while codification has landed, it’s the potential arrival of International Financial Reporting Standards that’s creating the biggest buzz in United States accounting circles. Codification, after all, essentially amounts to teaching old accountants new clicks.

IFRS is more complicated. Adopting IFRS would come with a gaudy price tag, too, one a U.S. Securities and Exchange Commission report placed in the billions.

That cost would be absorbed not just by companies, but their investors.

“This changes the rules,” Wisdom said. “This changes the playing field.”

IFRS is a set of accounting standards developed by the International Accounting Standards Board, and one proponents view as the eventual global guideline for the preparation of public company financial statements. If accepted by the SEC, IFRS also would affect information technology systems, tax reporting requirements, and the tracking of stock-based compensation among other operations.

More than 100 countries currently operate in accordance with IFRS, and the U.S. and Japan are the only major world economies expected not to be in observance within the next year. President Barack Obama in mid-June called for substantial progress toward a single set of high-quality global standards by the end of 2009.

Some of the benefits of such a system are readily apparent.

“The obvious pro is consistent accounting standards for the global marketplace,” said Shawn Grotte, a Little Rock CPA and senior manager at BKD LLP, which also has offices in Rogers and Fort Smith.

That consistency, at least theoretically, would make it easier for investors to compare financial statements of companies worldwide, at a lower cost and with less possibility of error than is currently possible. The result would be easier cross-border investing opportunities.

Proponents of U.S. acceptance of IFRS also believe its principles-based system allows more leeway than FASB’s codified standards, which would fill about 17,000 pages if printed, according to University of Arkansas accounting professor Karen Pincus. IFRS, she estimated, would fill about 2,500 pages.

“The current U.S. standards are probably the most complex of any domestic set of rules out there, so not having to learn them all wouldn’t be very hard,” Pincus said with a laugh.

Not everyone shares Pincus’ ability to derive humor out of the debate. While former SEC Chairman Christopher Cox proposed a 2011 deadline to determine if U.S. issuers will be required to use IFRS beginning in 2014, newly appointed SEC Chairwoman Mary Schapiro said she “will not be bound by the existing roadmap” during her January confirmation hearings.

Opponents of U.S. adoption of IFRS have more points of contention than just the cost. Some believe FASB’s GAAP is a higher-quality set of standards, and fear a lack of consistency in terms of implementing, interpreting and enforcing IFRS. The interpretation part of the equation seems particularly worrisome.

“Is someone in the U.S. going to come to the same conclusion as someone in Europe?” Grotte said. “I don’t know.

“Our judgments are going to be based on what we’ve been practicing for the past 10 to 15 years, and their judgments are probably going to be based on what they’ve been practicing.”

Wisdom sees another potential pitfall in shifting from a rules-based set of standards to one that’s principles-based.

“How is that going to work in the litigious society of the United States?” he said.

There also are concerns about an adoption of IFRS sparking the need for an overhaul of what is taught in American colleges and universities. Pincus said current classroom discussion of IFRS is limited.

“The part that is hard for U.S. educators is we have to teach so many rules that we don’t have a lot of leftover time to teach, ‘OK, how would you apply these principles if the rules didn’t exist?'” Pincus said, adding professors would spend more time teaching principles and how to apply them than specific rules if IFRS is adopted.

Despite the array of differing viewpoints and potential shifts in practice and training, however, most believe a movement toward a global standard is looming. Drew Speed, a partner at BKD, said “the needs of the global marketplace” make such a shift practically imminent.

What remains to be seen is how quickly the change will take place and under what circumstances. Wisdom believes U.S. implementation is 5 to 10 years down the road, due in large part to recent and more pressing economic matters.

“If the SEC is more concerned with the Bernie Madoffs of the world, then IFRS gets pushed to the back,” Wisdom said.

In the meantime, the SEC also can reinforce its desire to have some input in the standard setting process. The federal and international boards already have done some joint work in hopes of a possible convergence of standards.

The idea of convergence makes more sense than strict adoption to many of the parties involved. Gerhard G. Mueller, former FASB board member and past president of the American Accounting Association, said as much during a recent interview with the Journal of Accountancy.

“My thought is that the ‘convergence’ process is likely to remain a three-way affair: FASB will adopt some IASB positions outright, same thing in reverse,” Mueller said, “but for most standards there will be negotiation, background research, exposure drafts and finally a measure of compromise to arrive at full convergence.”

Mueller also believes U.S. educators should start planning for some form of convergence immediately.

“I would abandon completely the teaching of separate international accounting courses at this time and seek full integration of IFRS throughout the curriculum,” Mueller said in the interview.

Such a move might make sense to companies that currently dual report according to domestic and international standards. Those companies, most agree, will begin using IFRS or some form of universal standards sooner than smaller companies that don’t have international dealings. Those smaller companies actually might suffer from adoption or convergence, as they would be forced to bear the cost of transitioning without significant benefit.

Regardless, Pincus said, the time for some form of global continuity is here. She pointed to a recent economic catastrophe as an example.

“The rapid spread of the U.S. subprime mortgage crisis to other countries’ financial services industries and capital markets showed how our international economies are already intertwined,” Pincus said. “That’s not a future possibility; it’s already here.

“When markets are globalized, you need a common set of accounting standards. That’s where the push for IFRS is coming from.”

What is IFRS?
International Financial Reporting Standards is a set of accounting standards developed by the International Accounting Standards Board. Some believe IFRS will become a global guideline for preparing public company financial statements.

What is the International Accounting Standards Board?
The IASB is an independent body, based in London, that sets accounting standards. Originated in 2001, it consists of 14 members from nine countries, including the United States.

How widespread is IFRS?
More than 100 countries have adopted IFRS.

What is the biggest advantage of converting to IFRS?
Businesses can present financial statements on the same basis as foreign competitors, resulting in easier comparisons.

Are there any disadvantages?
The total cost of conversion for United States-based companies could run in the billions, according to multiple reports. Some also question the plausibility of implementing, interpreting and enforcing IFRS.

What are the odds of the Securities and Exchange Commission adopting IFRS in place of the Financial Accounting Standards Board’s Generally Accepted Accounting Principles?
Most believe some form of IFRS will be accepted in the United States, perhaps within the next five years. The FASB and IASB already are working in conjunction on several platforms, making some type of convergence practically imminent.

Source: American Institute of Certified Public Accountants