The Securities and Exchange Commission was somewhat ambivalent last August when it approved a "roadmap" towards accepting International Financial Reporting Standards for U.S. publicly held companies.Indeed, several months after agreeing on the framework for its ultimate mandate of IFRS accounting beginning in 2014, the regulator still hadn't published an official document outlining its decision. But that apparently isn't dampening accounting firms' commitment to gearing up for IFRS, or to alerting clients to IFRS's sweeping ramifications.
And while the U.S. divisions of the top firms with multinational clients have been moving full speed ahead on IFRS for many months and even years - leveraging the expertise of professionals who already work with IFRS-compliant European clients - the time to act is now for second-tier firms with middle-market and even smaller privately held clients to plunge into the IFRS fray.
"That's where the real opportunity is for those firms to educate their clients and help them transition over," said Patrick Daugherty, a securities attorney and partner with Foley & Lardner in New York. "IFRS is inevitable, and coming sooner than Americans would have thought."
Rebecca Albarelli, the global practice leader for the finance and accounting unit at internal audit consultancy Jefferson Wells, concurred. She also does not doubt the SEC's ultimate commitment to IFRS.
Albarelli believes the commission's decision merely to "put this 2014 [compliance deadline for the largest public companies] out there but not make a final decision until 2011" was a wise move. "They're recognizing that there are a lot of things that the country as a whole needs to do, prior to saying we're ready to actually put a date or draw a line in the sand."
One of those things is to train the next generation of CPAs to apply IFRS standards - a challenge that some leading accounting schools are readily embracing.
Albarelli is confident that, even with the expected change in leadership of the SEC next year following the presidential election, the commission will stick to the roadmap's basic timetable. The 2014 deadline would likely apply to firms with at least $5 billion in market capitalization, 2015 for firms in the $500 million-$5 billion bracket, and 2016 for smaller firms. However, some large companies could decide as early as next year to adopt IFRS - an opportunity some might welcome.
SHARPENING FOCUS
Daugherty predicted that the SEC chairman appointed by the next president "will stay on the path of convergence, but will sharpen its focus on issues such as fair value accounting, asset valuation and the like," due to the ongoing financial industry turmoil triggered in part by "suspect valuations of assets."
IFRS, with its broad principles-based emphasis in contrast to U.S. GAAP's rules-based orientation, will require a substantial intellectual re-tooling on the part of many CPAs. For its part, the American Institute of CPAs has sought to help members come up to speed. It launched the Web site at www.ifrs.com in May as a "central repository for intellectual property on international accounting," an institute spokesman said.
Big Four firms such as Deloitte, with extensive global client bases, had major internal training efforts underway many months prior to the AICPA's launch of that Web site. Deloitte has established a set of education standards for any of its people working with clients who issue or will issue IFRS-based financials. "We're in an all-out mode now to get folks trained up," said D.J. Gannon, a Deloitte partner who leads the firm's "IFRS Solution Center" in the U.S.
The basic Deloitte IFRS crash course, which generally takes "a couple of weeks" to complete, includes both e-learning and instructor-led elements, Gannon explained. The e-learning, on which students are tested, typically covers the more basic elements. For example, "In an area like presentation, you've got things like earnings per share, segment disclosures, discontinuing operations treatments," he said. And the classroom training generally delves into "more of a discussion of the implementation issues, what we're seeing in practice, some of the hot topics." Gannon predicted that between 1,500 and 2,000 Deloitte staff will become IFRS-certified this year. "And by 2011, everybody will be trained up according to the accreditation standards."
CPAs with certain specialized practice areas, such as financial instruments or mergers and acquisitions, will undergo additional IFRS training, Gannon said, and the order in which staffers are dispatched to IFRS boot camp is a function of the nature of their clients.
IFRS FLIGHT SCHOOL
For second-tier and smaller CPA firms, the question of how much to invest in IFRS training today is not a simple one, given the cost and the multi-year anticipated scenario for IFRS adoption by middle-market clients.
"There's an argument that if you train people too early, they don't use the skills, the skills deteriorate and you end up with unskilled people," said Gary Illiano, Grant Thornton's partner-in-charge for international and domestic accounting. "But the attitude I've taken is when I get on an airplane, I don't want the pilot to have just finished training last week. I would like for him to have taken training a long time, and have had recurring training along the way."
Grant Thornton has adopted that approach, Illiano said. "We have plans to train a lot more of our auditors, and give specialized training for the tax and other professionals. We will have recurring training so they will maintain their skills, because of the uncertainty of the timing - when will IFRS come in? Who will it affect first?"
Individual offices proposed particular CPAs for IFRS training based on their clients and personal interest; and about two thirds of them have been trained so far, Illiano said.
That training has to orient CPAs to IFRS's effort to "maintain the pre-eminence of principle, and push the judgment down to the preparer and auditor and regulator level," according to Illiano. "IFRS said, 'Look, this is what we're trying to accomplish here. You guys are looking at what is, in effect, economic reality. You ought to have the flexibility to reflect that economic reality.' That's very different from what people are up against now" with U.S. GAAP.
Illiano illustrated the point with reference to the treatment of leases. IFRS states that, "If you have effectively bought this thing, then you ought to be showing it on your balance sheet." In contrast, under U.S. GAAP, one factor in determining ownership is whether the present value of future payments equals 90 percent of the asset's value. "I can have one company come to me and show its estimate at 89.9 percent, and another with 90.1 percent, and they'll get different treatments. But the economic reality is very similar."
Said Deloitte's Gannon: "That changes the whole dynamic in terms of skill sets, how you go about educating and testing people." But that challenge may be tougher for "someone who's been ingrained for 30 years in the U.S., than for a relatively new person," he adds. "Getting people to think in principle mode is going to occur over time."
PRINCIPLES-BASED THINKING
In its internal training efforts, Deloitte's instructors seek to help their students along by engaging in a lot of dialogue, according to Gannon. "They will ask, 'Tell me how you got to where you got'" in an answer, "rather than just saying, 'This is what IFRS is.'"
Of course CPA firms will need to help their clients understand these same issues. Some clients - including those who already have experience reconciling different countries' GAAPs - will find it easier than others, noted Jefferson Wells' Albarelli: "Companies will have to make sure they have a really robust process for assessing how they interpret those standards."
And when should they start building that process? What should CPA firms be telling those non-multinational clients that aren't already hip-deep in IFRS?
On the timing question, experts say that CPAs should be encouraging all their clients to begin the IFRS impact assessment process immediately. For one thing, even though the SEC roadmap suggested that the IFRS switch-over deadline for companies under $500 million in revenue might not come until as late as 2016, such firms might gain the regulatory approval - and have an incentive - to switch sooner.
He believes that firms of all sizes will encounter some trials and tribulations as they make the transition, and that middle-market firms would be naïve to assume they can have a smooth switch simply by watching the process play out with the largest companies. However, the SEC has yet to give smaller firms the green light to adopt IFRS early.
Rather than thinking of IFRS conversion only as a necessary evil to be deferred as long as possible, some companies - particularly those with international operations - may see IFRS "as a way to drive down costs," according to Albarelli. "If you streamline your reporting process across the entire company, you have that opportunity" to save, she tells clients.
Even where that prospect is lacking, there may be other reasons to move to IFRS sooner, depending upon how IFRS-based statements may change the way a company looks to investors.
In any case, Albarelli said, the message to clients should be that they should take advantage of the fact that, in contrast to the rushed SOX compliance "fire drill" experience, companies have enough time to implement IFRS thoughtfully. "We should plan" the conversion "so that there can be a lot of value that's driven from this."
For example, if a company has a lot of disparate accounting IT systems, "This may the impetus that says, 'OK, now's our opportunity to actually try to bring them together,'" she said.
NOT JUST ACCOUNTING
Illiano advised CPAs to stress to clients that conversion "is not just an accounting issue; it's going to permeate throughout the organization. It's going to affect their systems, their contracts, their compensation." Thus, the sooner they plunge into "diagnostic mode," the better.
Gannon offered the illustration of revenue recognition, which may be treated differently under IFRS. "Are there going to be different kinds of data you're going to have to capture - will there be systems changes? What does that mean from an internal communication perspective? What does it mean in terms of communicating with investors? Or from a tax perspective?"
Albarelli noted that companies with five-year budget and planning cycles may already be developing projections that will be impacted by IFRS. "Also," she added, "if you have some long-term contracts or debt covenants that take into consideration your financial performance, you may want to look at that now to decide if you need to make any changes, and when."
Michael Marks, a consulting actuary with Sibson Consulting in New York, pointed out that in the realm of pensions and employee benefits, IFRS might treat some plan provisions differently than FAS rules.
Finally, experts stressed that even privately held companies ultimately will be drawn into the fray. "The International Accounting Standards Board has a private-company version of IFRS, but it's still being developed," said Gannon. "Most folks aren't aware of this. It's the sleeping giant out there."
For information on what educators are doing to prepare for IFRS, see "Accounting schools retooling for IFRS" in the Accounting Today section of WebCPA.com.
