Working With IFRS
Shifting from rules-based U.S. GAAP to IFRS can be a challenge. Gain valuable information on developing a strategy by learning from those who have worked with the international standards.
September 3, 2009
by Paul Parks, CPA
In the wake of Enron and other financial reporting scandals in the early part of the decade, the debate over principles- versus rules-based accounting standards heated up in the United States. Since then, International Financial Reporting Standards (IFRS) have gained significant worldwide acceptance. Today, leaders of the G-20 nations are calling for a single set of global accounting standards.
Principles-based standards are based on a conceptual framework, avoid the use of percentage tests (“bright lines”) and include far fewer detailed rules than a rule-based set of standards. The lack of detailed rules requires the experienced professional’s judgment. IFRS are considered to be principles based. At its foundation, U.S. GAAP (Generally Accepted Accounting Principles) are principles based, but have more quantitative tests and rules to support the standards.
Much has been written about which is better or worse. Proponents of principles-based accounting standards argue that there will be less financial engineering because contracts or transactions will not be designed to circumvent percentage or bright-line tests. Conversely, opponents argue that the opposite is true. The lack of rules opens the door to subjective interpretation of accounting standards and could promote interpretations that are favorable to the company applying the standard.
Proponents argue that IFRS are simpler and more concise and as result easier to understand. Opponents say the lack of detail will lead to more difficulty in implementation. They further argue that one of the reasons IFRS are less detailed, is because the standards are newer, and that over time the need for interpretation will push IFRS towards a rules-based set of standards.
Setting the debate aside, the reality is that you may be faced with working with IFRS in the future. Maybe, you already are.
Using IFRS for the First Time
If you are trained in U.S. GAAP, initially the lack of rules can be frustrating. Working with IFRS in which implementation choices had to be made, I found myself in one Internet search after another looking for implementation guidance to back decisions to be made. The searches yielded little detailed guidance. Where was the international version of an Emerging Issues Task Force (EITF) or Statements of Position (SOP) that answered my question?
In the absence of extensive rules, a useful tool to help guide decisions were published reports of other companies in the same industry. They show how other companies are applying the standards. One requirement of IFRS is that judgments made by management in the process of applying accounting policies that have the most significant effect on amounts recognized in the financial statements are required to be disclosed. These disclosures can be helpful.
Another important tool for an IFRS implementation is a company-specific IFRS accounting manual. This manual should be developed early in the process. Development of this tool will provide the framework for selecting among options available under IFRS, help accounting personnel focus on key accounting standards that apply to their company and document the company-specific policy decisions needed to comply with the accounting standards. This document will evolve as the project progresses, but can be a valuable tool and guide through the process.
Learning From Others
A case study available at IFRS.com — Laying the Groundwork for IFRS — describes how United Technologies is preparing for IFRS. An important part of their preparation included incorporation of IFRS reporting considerations in the UTC Financial Manual for use by its reporting entities around the world.
Lewis Dulitz — vice president, Accounting Policies and Research for Covidien — explains the importance of training, developing a strategy and creation of a core project team in preparing an organization for adoption of IFRS. In his article, IFRS: A Preparer’s Point of View in the Journal of Accountancy, Lewis says internal education is the first step in the process.
Aaron Anderson — director, IFRS Policy and Implementation for IBM — says the first question you should ask is where are you doing IFRS today? If you are an international organization, chances are your company is preparing statutory reporting using some form of IFRS already. You can read more in Profession Reacts to IFRS Plan.
In my role at the AICPA, I have had the opportunity to talk to and learn from individuals with extensive, hands-on IFRS experience. Some have worked with extremely large multinationals and others with smaller organizations. Each brings a different perspective. The war stories are great and extremely educational. This interaction has been a valuable experience in building IFRS knowledge.
AICPA/IASC Foundation Conference
On October 29-30, 2009, the International Accounting Standards Committee Foundation and the American Institute of Certified Public Accountants are co-sponsoring the International Financial Reporting Standards in North America 2009: The U.S. Perspective conference in New York. Noted speakers include Sir David Tweedie of the IASB and Robert Herz of the FASB. Paul Volcker, former Chairman of the Board of Governors of the Federal Reserve System and a current economic advisor to President Obama, is scheduled to deliver the keynote address.
The agenda includes numerous sessions including the progress of convergence, the U.S. perspective of adopting IFRS, audit implications of using IFRS in SEC filings and IFRS for small- and medium-sized entities. The conference will also include several participatory breakout sessions and roundtable discussions on a host of technical and special interest topics.
Of special interest for preparers will be presentations from individuals who are preparing for IFRS or have already gone through an IFRS adoption. Preparers’ Perspectives moderated by Olivia Kirtley (former Chair of AICPA) will feature Margaret M. Smyth (VP, Controller United Technologies Corporation), Peter Day (former CFO, AMCOR) and Lewis Dulitz (VP, Accounting Policies & Research, Covidien). A preparers’ roundtable will be moderated by Aaron Anderson (director of IFRS Policy and Implementation, IBM) and Gary Fullmer (solution architect, MI6 Solutions Group).
This information will be invaluable for anyone working with IFRS, including an adoption project. The opportunity to ask questions and participate in roundtable discussions could potentially move you a long way up the learning curve. You can learn more about the conference here.
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Paul Parks, CPA, works for The American Institute of Certified Public Accountants and oversees the maintenance and content of IFRS.com making sure the site provides comprehensive news and resources to accounting professionals, finance managers, audit committees, boards, investors and other users of financial statements.