For corporate controller and financier, Peter Bridgeman, standardizing international financial reporting standards (IFRS) across borders would make life a lot easier for his team and his stakeholders. “It’s a comfort to us to have IFRS statements when looking at international companies for acquisition,” said Bridgeman, SVP and Controller of PepsiCo’s international operations. “Pepsi would not have to translate international standards back and forth for U.S. Generally Accepted Accounting Principles (GAAP). Things like revenue recognition, brand valuation and the like. They seem to be fairly equivalent across borders under IFRS.”

“We believe there can be only one interpretation of IFRS and that’s by ISB (Independence Standards Board),” said John Gallagher, Managing Director & Global Head of Technical Accounting Analysis for UBS. “People have to understand that’s part of life — different people and different cultures will have different views.”

Gallagher and Bridgeman were among the thought leaders, academics and journalists debating the integration of global accounting standards at a recent International Accounting Standards Board (IASB)/Pace University forum in New York City attended by AICPA magazine and
e-newsletter staffers.

Donald Robertson, VP, Senior Accounting Analyst in the Corporate Finance Group of Moody’s Investors Service, cautioned that IFRS is still relatively new. “In Europe, it’s a lot easier to compare and contrast European companies than it was pre-IFRS. We have standard adjustments we apply to different companies, but there has to be a limit.”

“As global institutional investors, we’re looking for companies to fully explain their approach to their financials and principles,” said Hye-Won Choi, Head of Corporate Governance for retirement investment giant, TIAA-CREF. “We ask the markets to agree on those principles.”

Janet Pegg, formerly Senior Managing Director, Global Equity Research for Bear Stearns and Company, said she reminds her clients that analysts have to get trained on IFRS, and not just focus on finding the right answer. “I don’t think most U.S. investors have taken the time to think about how IFRS will affect them with respect to principles-based versus
rules-based accounting.”

“In principles-based (accounting) it’s harder than in rules-based (accounting) to evade the economic answer that supports a company’s position,” explained UBS’s Gallagher.

PepsiCo’s Bridgeman said “IFRS gives you flexibility to apply the accounting to the operating result, which is a benefit to both preparers and auditors. It’s going to put more pressure on audit committees to get up to speed.”

“I’m all for principles-based and judgment-based accounting,” said Pegg, “but you need adequate disclosure to allow investors to compare
companies fairly.”

Choi said TIAA-CREF is now putting 25 percent of its investments overseas. With that kind of commitment, she said, “We need to make sure that disclosures and transparency are adequate and consistent. As investors, we want companies to have customized disclosure to explain their judgments.”

“Until there’s a firm timetable in place, I don’t expect a big effort to keep parallel calculations, financials, etc,” said Bridgeman.

Does Lack of IFRS Enforceability Worry the Experts?

“We wouldn’t really support a single arbiter,” said Choi. “We’d like to see a collective approach, not a single regulator.”

”At the end of the day, regulators are people,” said UBS’s Gallagher. “Intelligent people will always have different opinions from each other. There needs to be less structure in place to push forward these issues. It can take several years. The question is about what to do in the interim.”

“How do you get regulatory regimes across borders to talk to each other?” asked Moody’s Robertson. “Ninety-five percent of adjustments are made for things like leasehold and pension accounting,” said Robertson. “Going to IFRS from US GAAP will have a certain level of noise. Both systems are broken — eventually you’ve just got to move on with your analysis. That’s why we need a single set of consistent standards universally applied.”

Preparing Today’s Accounting Students for the Future

Pegg thinks business schools should offer a less rigid, more intelligent approach based on “lots of case studies and lots of discussion.”

Samir El-Gazzar, a Pace University business school professor, said accounting programs should re-think their course offerings by combining a holistic approach to corporate finance, management accounting and international finance into a single module. “We should be making it more practical for today’s students and their future employers. Don’t just focus exclusively on IFRS — it may all change in five years.”

Julie A. Erhardt, SEC Deputy Chief Accountant, teaches fifth-year business school students in her off hours. What students are telling her in class discussions is that even though it’s a global economy, they think it’s “still very costly” for U.S. companies to comply with international standards. Students seem to find IFRS more consistent with their current thinking, since it’s not “bogged down in so many amendments.”

What is the difference between today’s and tomorrow’s accountant? pondered Joseph Baczko, Dean of Pace University’s Lubin
School of Business?

“It’s in their skill set” said Erhardt. “You need the ability to assess and understand the economics and incentives of various parties involved in a transaction. For example, what are economics of the lease? What makes this industry go? You also need soft skill-set — the ability to communicate, think on your feet.”

Does the SEC Still Play a Key Role in an IFRS Future World?

“The move to IFRS is a positive development as the U.S. share of global capital markets is now down to about 33 percent of the total from 45 percent,” said Erhardt. “My experience overseas is that we have good thinkers, resources, capital markets here,” said Erhardt. “U.S. experience seems to be very welcome abroad. Securities regulators tend to think a lot alike regardless of which country they’re from. We do the ‘hard yards’, to borrow an Aussie term, and wrestle the transaction to the ground, so you can get to the bare facts of the transaction.

IFRS Backdrop

More than 100 countries require or allow companies to use the IASB’s International Financial Reporting Standards (IFRS) today and the IASB expects that figure to reach 150 countries within five years.

The U.S. Securities and Exchange Commission last year issued a concept release to gauge public interest in allowing U.S. companies to use IFRS when getting their financial statements ready for SEC filing. However, as we’ll see later in this article series, many cultural and compliance cost hurdles will have to be cleared, not to mention philosophical differences on transparency and principles-based international standards versus rules-based U.S. accounting standards.

“Recognizing the accelerating pace of global acceptance of IFRS, we at the AICPA are working to provide the U.S. accounting profession with the tools CPAs need to learn about, understand and apply IFRS,” said Barry C. Melancon, president and chief executive officer of the American Institute of Certified Public Accountants in a recent news release.

While a 55 percent majority of CPAs said in a May survey by the AICPA that they expect U.S. introduction of IFRS will have a direct impact on their firms and their work, 59 percent said they have not yet begun to prepare for IFRS adoption. Just 17 percent said they were actively preparing and 24 percent said they were having preliminary discussions about how to get ready for IFRS, according to the survey of 1,240 respondents.

According to SEC’s Erhardt, the Commission is developing a timetable to move U.S. companies to IFRS, but speaking on behalf of the SEC, couldn’t commit to a firm start date.

Late last year, the SEC gave foreign private issuers the option of filing their financial results using international standards instead of using U.S. GAAP to square up their financial statements. Erhardt said 37 companies have opted to report their results via IFRS so far, and of those, 35 provided investors with the IASB version of IFRS. Of the 35 who provided results using the IASB version, 29 also presented their results in their local IFRS. Erhardt expects about 70 companies to submit their results using IFRS by the June 30 filing deadline.

Hank Berkowitz is the Publisher of AICPA’s Insider™ electronic newsletter group in
New York City.