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The Embattled IFRS

Standard-setters have upped the ante. How do their intensified efforts to meet the FASB/IASB MoU (Memorandum of Understanding) deadline affect your firm?

December 3, 2009
by Sukanya Mitra

Now infamous, it’s the four-letter abbreviation many corporate finance executives love to hate. IFRS (International Financial Reporting Standards) was the new wave, the Gen Y of accounting rules and regs that was going conquer U.S. GAAP (Generally Accepted Accounting Principles) and make for a unified global standard. As with the Bruce Willises and Steven Seagals, though it has been hit with several setbacks, the standard-setters have intensified their efforts and are working diligently towards the summer 2011 deadline.

“It will be interesting to see how those [regulating] boards react to the pressure, certainly the politicians and the policymakers are calling for the completion of this work-plan within the next 18 months,” said D.J. Gannon, CPA, partner at Deloitte & Touché LLP, at AICPA’s recent IFRS 4Q update webinar. Gannon was joined by fellow panelists Bob Laux, CPA, CMA, senior director of financial accounting and reporting at Microsoft Corp. and Rick Lynch, CPA, partner at Ernst & Young LLP.

Update

There is a new deadline for convergence. “We’re all trying to shoot for a deadline of June 30, 2011, which is not that far away,” pointed out Laux. “And the standard-setters have indicated that they are going to be working even harder on convergence.” He explained that with both Bob Herz and Sir David Tweedie saying that they would be tripling their efforts, it means that those of you who are auditors and preparers need to also be tripling your efforts in “what’s being done and having a say in due process,” some of which will have very short time-frames.

The U.S. Securities and Exchange Commission (SEC) has recently said it would revisit the roadmap and have said that they would look at the time frame again and what can be achieved noted and will come out with an update in early first quarter of next year. While Laux believes that much of SEC’s public report may hold disappointment, he also thought, “I think they’re just going to be talking about the roadmap, more definitive on the dates on the roadmap and setting up some dates, but there’s still going to be some uncertainty for those of us in the financial and accounting supply chain.”

Convergence

The primary focus will be on converging general principles and “converged” standards are likely to have differences. These differences in outcome may arise due to:

  • Policy alternatives elected under IFRS;
  • Differences in detailed application of a general principle; and
  • Differences because of first-time adoption elections.

Gannon pointed out that some of the major projects that are to be tackled in the upcoming 18 months are huge and based on regular standard-setting processes can take up to four or five years to complete and yet, the regulating boards are hoping to get these projects done within this short period of time.

While the preliminary notion of convergence was to make U.S. GAAP and IFRS one and the same, Gannon said, that in theory that seems ideal and easy, but in reality there will always be some differences.

While U.S. GAAP is changing quite significantly, it is closer to IFRS noted Gannon. If the two boards can come to an agreement about revenue recognition, “that will help people quite a bit because that has a lot of sting in the implementation,” said Lynch and while these initial projects will help bridge the gap so to speak, Lynch said there would still be other differences, but would consider them “manageable differences.”

There are three major projects relating to presentation. While Discontinued operations — Amendment to IFRS 5 and Statement of comprehensive income — Amendment to IAS 1 are relatively small, Gannon pointed out that Replacement of IAS1 and IAS 7 will essentially be a complete rewrite. “There will be a radical change between the look and feel of the financial statements individually,” said Gannon.

Accounting for Financial Instruments

The FASB and IASB are expected to significantly change the accounting for financial instruments. IFRS 9, Financial Instruments that was released on November 12 addresses the classification and measurement of financial assets. According to the IASB, IFRS 9 “does not change the classification and measurement requirements of financial liabilities that are set out in IAS 39. In the near future, we intend to consider further the accounting for financial liabilities.” The IASB noted the reason for the replacement was to make it “easier for users of financial statements to assess the amounts, timing and uncertainty of cash-flows arising from financial assets.” They further pointed out that “IFRS 9 achieves this objective by aligning the measurement of financial assets with the way the entity manages its financial assets (its ‘business model’) and with their
contractual cash-flow characteristics.”

FASB is expected to release an exposure draft in early 2010 that will address classification, measurement, impairment and hedging.

For more IFRS updates, visit AICPA’s IFRS site.

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Sukanya Mitra is Managing Editor of the Insider™ e-newsletter group.