“The simple truth is that when you have two independent, highly competent boards, sometimes they will agree with each other, and other times they will not,” he said. “It’s not that one is right and the other wrong; they just reach different conclusions. The same would be true if I were to split my board in two and ask them to consider 10 projects. I doubt each smaller board would reach identical conclusions on all 10 projects, so convergence would require compromises to be made. Convergence therefore does not always result in the highest quality outcome. It has served its purpose, but now it is time to move on. [AT]
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For Some Large Companies, IFRS Is the Financial Reporting Equivalent of Y2K but What About the Little Guy?
- Caleb Newquist
- May 3, 2010
It turns out that for many of the largest global companies, all this IFRS anxiety might be completely overblown. Companies with massive accounting departments and gurus leading the IFRS charge don’t seem to be all that concerned about accounting adjustments or costs, two areas that could cause headaches for smaller companies that are forced to adopt IFRS.
At the accounting conference at Pace University last week, some of the accounting gurus from the largest global companies reacted to the switch with “meh”:
They will be “underwhelmed,” says Aaron Anderson, director, IFRS policy and implementation at IBM…”When I look at the impact on IBM and compare it to whether investors will care, frankly, I don’t think they will.”
…
He pointed out that if the company moves all of its financial reporting to IFRS — and some of its foreign subsidiaries are already reporting under the international standards — the change wouldn’t be material in areas that investors “care about,” such as service contracts and product backlog, which are “numbers that are not reported in GAAP, anyway.”
Unfortunately, not every company has the good fortune to have a “Director of IFRS Policy and Implementation.” For some small businesses, the IFRS adoption could very well be headed up by the CFO of the company, assisted by the controller, with a couple of senior accountants pitching in. If things really get complicated (we’re talking about accounting rules, after all), then consultants could be called in to straighten help out but at what cost?
But even companies that do have someone spearheading this effort have a few concerns. Alcoa’s IFRS implementation director said the company won’t be on board until the inventory and derivatives issues have been worked out but everything after that will be NBD:
Klingler said that Alcoa won’t bless a conversion to IFRS until issues around inventory accounting are settled. Currently, Alcoa and other U.S. companies receive a tax benefit from using the last-in, first-out (LIFO) accounting method, which is banned by IFRS. Being forced to dump LIFO could cost those companies significant cash tax payments.
Alcoa executives are also concerned with understanding how hedging rules will change, said Klingler, since the company is a commodities supplier. However, “everything else will be small numbers” with respect to accounting adjustments, he said.
So a couple big ticket issues that will certainly be resolved and then Alcoa will be marching to IFRS no problem. For small companies, dumping LIFO or figuring out hedge accounting (again) could have a huge effect.
Back to the money issue. Many are worried that since the last big change in the industry — Sarbanes-Oxley — resulted in huge compliance costs, companies will spend another king’s ransom to adopt IFRS. But again, for the largest companies, they’ve more or less got the cost of conversion nailed down and aren’t that concerned:
Anderson conceded that switching to international standards will require “a lot of work,” but added that IBM, which has already started the process of preparing for a switch, knows “within a tight range” what it will cost — and in relative terms, “it won’t be very much.”
The concession of “a lot of work” is the cause for concern for small companies. Naturally, the more complex a business, the more work will be required to adopt IFRS but at least those companies have the manpower and the resources to weather the initial learning curve. Smaller companies may find themselves short staffed which could result in need of outside expertise (and thus spending a small fortune) to make adoption happen.
Unfazed by IFRS [CFO]
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What’s on Incoming IASB Chairman Hans Hoogervorst’s Plate?
- Adrienne Gonzalez
- February 9, 2011
Your next IASB chairman, Hans Hoogervorst, already has a few things on his to do list (right after scratching Sir David Tweedie’s name off the door), one of which involves restoring investor confidence by redoing last year’s bank stress tests in Europe since it seems they were not really credible, “One reason for scepticism was that sovereign bonds on the banking book were deemed to retain their full value, despite the fact that many were trading at steep discounts in the market,” he said. “The fact that some Irish banks that had passed the test later turned out to be insolvent only served to reinforce the doubts in the market.”
Doubts? That’s a kind way to put it.
Speaking at the two-day European Commission financial reporting and auditing conference, Hoogervorst also wanted to make sure everyone is clear on who rules the IASB. Despite appearances that rules are made by a handful of influential Europeans who like to play with accounting regs, he insisted the IASB is a multi-national group in which everyone gets a say. Or rather, he insisted that he’ll be trying to make sure the IASB is perceived as such, “It’s very important that we develop a governance structure that is more inclusive. At all costs we should avoid the perception that IFRS is dominated by a small group of nations,” he said. He did not seem to clarify if he was more worried about the actual structure of the IASB or just the appearance, nor did he mention how many U.S. delegates will have at the IASB’S table if we were to stop dragging our feet and just adopt already.
While auditors are taking a lot of heat for failing to catch just how bad off European banks were, H-squared doesn’t seem to feel they deserve so much criticism as they were simply following the rules. “How critical will auditors be when they see that regulators consider that severely discounted securities carry no risk?” he asked, obviously rhetorically.
Also in attendance at the conference, Federal Reserve senior associate director and chief accountant Arthur Lindo, who is hopeful that we here on this side of the pond will “move diligently towards some form of IFRS in the near future.” What Lindo did not say was whether or not the Fed would also adopt these rules or continue to use their freakish hybrid of GAAP and government accounting that they make up each and every year. Perhaps convergence will mean throwing in some IFRS into their 300+ page financial accounting manual.
Looks like Hans is going to have his hands full for the foreseeable future. Veel geluk met dat!
Accounting chief calls for more credible bank test [Reuters]
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NYU Chair: The World Won’t End if the United States Converts to IFRS
- Caleb Newquist
- June 21, 2010
Now that convergence has been delayed, the anti-convergence/IFRS contingent is hopeful that this is a major sign of defeat. Whether that’s the case or not remains to be seen but don’t expect the debate to go away.
We recently spoke with Dr. Frederick Choi, Dean Emeritus and Distingu��������������������sor of Business and Chair of the Accounting Department at New York University’s Leonard N. Stern School of Business about the latest current events and what Stern does to prepare its students for IFRS in their careers and on the CPA Exam.
GC: So the number one question on everyone’s mind – will the world end if the United States converts to IFRS?
Dr. Frederick Choi: [laughs] My answer to that is to not to worry, the world will continue as it always has, so we’ll continue to have fun with accounting like we always have in the past.
GC: So there’s no risk that the U.S. will lose its imperial superpower status as a result of this?
FC: No, I don’t think so. I think there’s sufficient flexibility in international accounting standards so that we can continue on as before.
GC: So why do you think the SEC is so cautious? Are all those lawyers scared because there might be numbers involved?
FC: First of all, the U.S. environment is a very litigious environment so I think there’s a concern that IFRS will permit more judgment for the company presenting the numbers. U.S. GAAP, because of the litigious environment, has to be a little more prescriptive, that is, “here are the rules, here are the exceptions.”
At one time in the US, our accounting rules were principles-based and required a lot of judgment. In the ‘60s some companies were were cooking the books which resulted in reporting scandals and class-actions. Then someone said, , “hey, the audit firms have a lot money, so let’s go after the auditors.” That’s when accounting prescriptions became much more rules-focused. So I think the big fear is that moving from an environment that is more rules-based to one that is more principles based will require much more judgment and perhaps invite more litigation.
GC: So a little current events question – what do you make of the FASB and IASB’s announcement that the convergence project is going to be a tad late? Was the June 2011 to get those G20 guys off their backs or did they really think they were going to get this pulled off?
FC: I think when they first started the project towards convergence they did so in good faith but there are some significant differences that need to be ironed out. And given the vested interests, it’s going to take a while. I’m not surprised that the deadline has been extended.
GC: And the SEC seems completely all right with it.
FC: Yes.
GC: Say I’m against IFRS – in fact, I’m a militant for U.S. GAAP. I don’t want IFRS anywhere near our capital markets because it’s too principles-based, countries need financial reporting autonomy and that it doesn’t really benefit anyone except a bunch of big accounting firms that need a new revenue stream? Plus, it’s going to be a nightmare for companies to convert to and it doesn’t really help small and medium-sized businesses…
FC: That’s correct.
GC: …having said all that, your response to me is…
FC: I look at this from the point of view of the the analyst. From the point of view of the analyst, the name of the game is to read the tea leaves and get as close to the underlying transaction as possible. The one strength of U.S. GAAP is that there’s a lot of research that goes into the pronouncements. I think U.S. GAAP – without sounding nationalistic – is the best researched, empirically as well as conceptually, accounting standards in the world.
I think an analyst should not be bogged down by whether U.S. GAAP is better or IFRS is better. Analysts have always taken the numbers and massaged them to get closer to what he or she thinks the underlying economics are. In fact, if you look at the not-so-sharp analyst who will say, “Oh, we’re going to IFRS and that’s going to make my life easier,” my response is “No, it’s not.” I think it will be more complicated.
GC: Okay but there are going to be some tricky areas, right? What are those going to be?
FC: I think the biggie is the ability to write down an asset and write it back up. Here in the States, when we impair an asset we cannot go back and reverse it. The rationale behind that was you don’t want to give firms the option to manage the bottom line.
Firms that write asset back up will be able to smooth earnings. Say you and I are in business and we have a good year, so we write down an asset and take the loss. Next year, we say “Oh my god, results are horrible. How can we pump up the bottom line?” We reverse the write-down. So, that’s a big concern that I have. That applies to intangible assets, it applies to plant & equipment, it applies to inventory. So this is a biggie.
Another difference worth nothing is if management feels that the standard they are following is misleading, they can actually deviate from the standard. That’s a major concern as well.
GC: How familiar are you with integrated reporting? How do you think it fits in with the transition and is this something we’ll see more of or are we still at the baby steps stage?
FC: I think from an investor’s point of view, that’s going to be confusing because you’re going to have hard numbers combined with very soft numbers and I’m not so sure that’s going to make life easy. I think if you keep the soft stuff in a separate statement then the analyst can look at the hard numbers and come to a preliminary conclusion and looking at the soft numbers make some professional judgment – do you bump the number up a little bit or do you interpret it a little more cautiously. To me that’s the better state of the world.
GC: And as it stands right now, there’s no way to audit the non-financial information
FC: That’s correct.
GC: What are you doing to prepare your students at NYU for the transition?
FC: I put together a team here at Stern and we looked at all the courses that deal with financial reporting and basically I think the whole approach that we’ve taken is that our responsibility is not to teach students to memorize rules, our responsibility is to teach them how to think and think critically. We say here is an international accounting standard. Let’s talk about various measurement issues that we normally talk about and when a new standard is issued, I’ll expose you to both the U.S. standard and the international standard. For now, those two sets of standards will continue for the next several years. If the international standard is different from the U.S. standard we’ll say “here’s the implications on the financial statements and profitability, liquidity, ratios, etc.” So students can identify the impact of the different measurement framework on the financial statements.
GC: How have you balanced, from a curriculum standpoint, IFRS education and the requirements for the upcoming changes to the CPA Exam?
FC: Our approach is not to teach students to pass the CPA Exam, our approach is provide an education. Students need to learn and think critically because rules will change over time and I think it’s best to develop those critical thinking skills. We infuse international reporting standards throughout the curriculum but not in the sense where we say, “Here, memorize this rule and be able to spit it out and ace that question on the CPA exam.” We’re basically saying, “here are the standards, here are the differences, here’s how they will impact the financial statements and be aware of that.” We have a combined BS/MS in accounting program that prepares students for the 150 hours and a required international accounting and reporting course is part of that degree.
GC: So in other words, they’ve got this on lockdown and they will all be go-to experts on IFRS at their firms?
FC: I think they’ll be able to speak intelligently about IFRS but they won’t be rulebooks.
GC: What are you hearing from the firms that recruit at NYU (other than “send us the smartest ones) on this issue?
FC: I think the market likes our product because we develop those critical thinking skills and our placement rate at the Undergraduate College is close to 100%, so they like the product irrespective if they know IFRS or not because if you’re smart and have the critical thinking skills you can pick up IFRS in very short order. Given a choice between two students – one that has been exposed to IFRS and one that has not, but they’re both bright, and the firm can only take one, of course the firm will take the one with the familiarity with IFRS but I don’t think that’s ever been an issue.
GC: Back to the CPA exam. Of course everyone at NYU will be passing no problem but what about students and instructors elsewhere? Should they cram it in and get it passed in 2010 or will they be ready for the 2011 exam?
FC: I think many schools are already gearing up. We have shared our approach with many schools via workshops, conference presentations and the like. We are always ready to assist. Our approach is, “ We’ve exposed you to IFRS and if it is on the exam, youlcan get more details in a review course or you can bone up on IFRS on your own, but it shouldn’t be a big issue.