From global reporting standards to adjusted security pricing, companies are facing new and unchartered territory within the accounting field.

Changes aplenty

According to Kim Tredinnick, partner in the Quality Assurance/Risk Management Group at Baker Tilly (formally Virchow Krause and Co.), the recessionary situation has affected the accounting procedures used by companies as reflected in the new accounting rules referred to as FAS 157.

“This requires entities, mostly financial institutions, to carry their financial assets, including loans, at amounts that more accurately reflected current values of those assets,” Tredinnick says. “This also requires financial institutions to recognize potential losses in loan portfolios earlier than in the past. It presents a truer picture of the value of the banks’ loan portfolios than has existed in the past.”

The accounting profession also continues to expand the scope and documentation required in the audit process. For example, the implementation of the recently adopted Risk Assessment Standards requires auditors to understand and document clients’ business and financial systems well beyond previous requirements. Auditors have always been required to adopt an approach of professional skepticism during a client audit; the new standards have increased not only the assessment of risk and misstatement, but also require substantial documentation related to the client’s system to address various types of risk.

“The most significant adjustment has occurred regarding the ‘mark-to-market’ accounting,” says Ted Hart, managing partner with Clifton Gunderson in Milwaukee. “In April 2009 the Financial Accounting Standards Board released new guidance allowing more discretion in the pricing of certain securities when the market for those securities is deemed inactive. This is significant because the valuation of these securities directly affects the equity of the company.”

While the changes above are paramount to accurate accounting measures, one of the biggest changes is the increased push toward global transparency in accounting standards. Known as the International Financial Reporting Standards (IFRS), this relatively new set of financial reporting standards commenced in 1973 with the establishment of the International Accounting Standards Committee (IASC).

What is IFRS?

According to Karin Gale, managing shareholder at Schenck Business Solutions in Milwaukee, global transparency is needed to allow for information that can be easily accessed and compared across country borders.

“IFRS began as an effort several decades ago by industrialized nations to create standards that could be used by developing and smaller nations unable to establish their own accounting standards,” Gale explains. “As business became more global, regulators, investors, large companies and auditing firms realized the importance of common standards in all areas of the financial reporting chain.”

The global interest and commitment in IFRS increased substantially in June 2000 when the European Commission issued a policy document that proposed that European-listed companies be required to report under IFRS.

“This policy proposal was supported by the Economic and Finance Ministers of the European Union (ECOFIN), and in February 2001, the European Commission presented draft legislation to the Parliament and the Council of Ministers proposing that all EU companies listed on a regulated market be required to prepare consolidated accounts in accordance with IAS effective by 2005,” says Hollis Skaife of the Wisconsin School of Business at the University of Wisconsin-Madison. Skaife serves on the Standards Advisory Council (SAC) of the International Accounting Standards Board (IASB), which is the organization responsible for issuing International Financial Reporting Standards (IFRS). “The European Commission acknowledged in this proposed legislation that financial reporting is a key element of an efficient capital market, and the accounting standards followed in financial reporting contribute to meeting investors’ information needs and promoting global economic development.”

In 2005, the European Union began requiring companies listed on the EU-regulated stock exchange to utilize IFRS. Other countries, including Canada and Mexico, have indicated their intent to require use of IFRS by publicly traded companies. “A 2007 survey of world accounting leaders agreed that a single set of international standards is important for economic growth,” Gale says.

In May 2008, the American Institute of Certified Public Accountants (AICPA), Council membership voted overwhelmingly to recognize the IASB as an international accounting standard setter, giving U.S. private companies and not-for-profit organizations a choice to follow IFRS or GAAP (Generally Accepted Accounting Principles) for financial reporting.

“Currently the IFRS discussion is centered on publicly traded companies; however privately held and not-for-profit companies might adopt IFRS even though they are not mandated to do so,” Gale says. “This has already been the case for those companies owned by a foreign parent.”

In late 2008 the SEC also issued a proposed roadmap with a timeline and key milestones for moving to IFRS and allowing early adoption for U.S. public companies meeting certain criteria.

Currently more than 100 countries use IFRS as their reporting standards or the basis for their reporting standards. The U.S. SEC allows U.S. foreign issuers to report under IFRS. However U.S. domestic issuers must use U.S. GAAP.

“In late 2008 the SEC issued a proposed roadmap with key timelines for adopting IFRS,” Gale says, noting it has hit a few curves. “Most recently, the new SEC Chairman, Mary Schapiro, has expressed concerns about the roadmap and IASB governance.” Additionally, a recent Accenture survey of U.S. executives estimates that, depending on the company size, companies will spend between 0.1 percent and 0.7 percent of annual revenue to move from U.S. GAAP to IFRS. This compares to an estimated 0.05 percent spent by European companies when they made the switch. The European switch was a bit easier since their rules were fairly similar to the principle-based IFRS rules versus GAAP, which is rules-based.

The U.S. continues to receive international pressure to continue moving forward. In fact, the current global crisis has heightened the recognition that we are a global economy requiring consistency in reporting.

“A lot of other countries have started to or are anticipated to adopt the international standards for their public reporting,” says Scott Wrobbel, managing partner of Deloitte in Milwaukee. “One of the key benefits is to have a common set of standards that apply across borders so when a company that is global in reach, prepares some information, worldwide users know that it has been prepared under a consistent set of standards.”

And while the United States is the slowest to jump on the bandwagon, all of the countries in the European Union were required to adopt IFRS for public reporting. “Larger countries such as the United Kingdom and some countries in the Asian Pacific region, such as Korea, are going to be adopting in the next couple of years,” Wrobbel says.

Benefits aplenty

Experts agree that globalization is driving acceptance of IFRS. “Multinational companies and national regulators and users believe that the use of common standards will make it easier to compare financial results especially of reporting entities from different countries,” Gale says. “Uniformity will allow financial professionals including CPAs to easily transfer between reporting entities.”
According to Dan Gorecki, partner at Baker Tilly (formally Virchow Krause and Co.), the benefits of convergence would be:

• Improve the comparability of financial reporting among global entities using a single set of high-quality accounting standards;

• Facilitate capital formation throughout the world by simplifying capital allocation decisions, and comparisons between global opportunities;

• Improve investor understanding and confidence;

• Ease the financial reporting burdens for large multinational corporations.

The IFRS also provides for greater comparability of firms’ financial information in measuring earnings, book values, assets and liabilities under a common set of standards.

“Another potential benefit is lower information processing costs within firms as their consolidated financial statements and contracts are developed and written, respectively, in accordance with one set of financial reporting standards,” Skaife says. “There are trade-offs, however, in that one cost faced by U.S. firms is the short term conversion cost of converting from US GAAP to IFRS.”

Allen Larsen, controller at Trace-A-Matic Corporation, a dynamic subcontracting machining company in Brookfield, and affliated with IMA's Wisconsin's chapter, sees the IFRS as beneficial because it would put the U.S. on the same accounting standards as most of the rest of the world. “In theory, if the U.S. insists on its own accounting methods, it could be more expensive for us to raise capital,” Larsen says. “Consistent accounting standards would also make it easier for regulators (whether national or international) to regulate international financial institutions. A U.S. regulator may set a minimum standard for equity, but if the U.S. branch of a German company, for example, is following different rules, it makes the minimum standard inconsistent.”

U.S. accounting standards are often referred to as “rules” based standards, which have a significant set of facts and circumstances and a related answer. On the other hand, IFRS is often referred to as a “principles” based set of standards, with wider principles, that obviously result in more interpretation, and often in more divergences in practice as to how the standard is applied, and thus less uniformity in reporting similar transactions.

Also, there is some reconciliation that needs to take place, and the U.S. SEC needs to become comfortable that following IFRS satisfactorily represents the financial results of companies reporting in the United States. Adoption of IFRS has significant cost and time impact on U.S. companies.

“Obviously, this will all take time and cannot be done over night,” Tredinnick says. “Most people believe the timeframes for adopting IFRS have been postponed for at least a year or two. We need to make sure the benefits of adopting IFRS outweigh the costs of implementation.”

Hart states that accounting standards will continue to evolve to address the ever-expanding issues arising from worldwide commerce. “The implementation of IFRS will be an evolutionary process.”

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