Two years ago, Bob Bunting saw the writing on the wall for U.S. GAAP.As former chief executive and chairman of super-regional firm Moss Adams LLP, Bunting established resources to prepare for the reality of International Financial Reporting Standards becoming the future of financial reporting for public companies in the United States.
“We started an internal awareness program,” said Bunting, who is now the firm’s chair for its International Services Group in Seattle and deputy president of the International Federation of Accountants. “In the past two years, Canada, China, India and Korea, among many others, have begun the process of adopting IFRS. Since many of these countries have, in the past, based their standards on GAAP, this is another important signal about where things are headed.”
LOOKING BACK, MOVING FORWARD
The convergence of GAAP and IFRS is building steam and seems inevitable. According to a backgrounder published by the American Institute of CPAs, nearly 100 countries require or allow the use of IFRS. In that same document, the AICPA referred to a study conducted by IFAC that surveyed 143 accounting leaders from 91 countries. Some 90 percent reported that a single set of international standards was “very important” or “important” for growth in their countries.
In February 2006, Securities and Exchange Commission Chairman Christopher Cox opened the possibility that U.S. financial statements could be prepared using IFRS or GAAP. One year later, the commission voted to allow foreign private issuers to file financial statements prepared in accordance with IFRS as issued by the International Accounting Standards Board without reconciliation to GAAP. A concept release on allowing U.S. public companies to use IFRS was put out for public input and, more recently, Cox has charged SEC staff with presenting a proposal this summer that will serve as a roadmap that will include a schedule and milestones for eventual acceptance of IFRS.
At press time, the SEC had not released a roadmap or disclosed any substantial details regarding its nature.
“The roadmap will go on for a period of time, which means not a current commission action but a commission action two years from now to finalize everything,” said SEC Chief Accountant Conrad Hewitt. “The concept of the roadmap is to have a date set, and the commission in a couple of years will have to decide what that date should be. We had two roundtables about this subject matter — on IFRS being used by U.S. registrants — and they all indicated there should be a mandatory certain date; otherwise people will not do anything. I believe that.”
Hewitt said that there could also be an optional period of time for U.S. companies that may want to go and convert to IFRS — another issue that the roadmap will need to take into consideration.
“I don’t think personally U.S. companies are ready to switch today to IFRS, because there is a lot of training for people, changing to accounting systems and working out the details,” Hewitt said, adding that there may be a three-year phase-in, with large accelerated filers going first, followed by “normal” filers and smaller companies last, much as Sarbanes-Oxley Section 404 was, and XBRL is, proposed to be implemented. “We do know that by the year 2011, there will probably be over 150 countries using IFRS throughout the world, and we may be one of the major countries not using it. So something tells me that after 2011, the U.S. probably needs to seriously consider a switch to IFRS, whether it be 2014 or whenever, to give the companies time.”
IN THE MEANTIME ...
The lack of timetable specifics has not helped to ease the minds of CPAs — many of whom are just now starting to understand the ramifications of IFRS.
“I think there are still a fair number of people who haven’t fully accepted what’s going to happen,” said Bob Dohrer, partner and practice leader of the International Assurance Services Group of McGladrey & Pullen in Raleigh, N.C. “Six months ago, I would have said that the majority of mid-market firms and their people were still hoping that convergence wasn’t going to happen. I think if you fast-forward to today’s world, I do think most people now accept the inevitability of convergence, but I think there are still many mid-market firms that are floundering.”
Moss Adams’ Bunting said that there is a “very, very low awareness” among small and midsized firms regarding IFRS, and the way they are finding out about the change is unexpectedly through their clients.
“The way they are getting that awareness is kind of interesting,” Bunting said. “They will get a call from a client that has been acquired by a foreign company or a private equity fund or something like that, and the company says, ‘Well, from now on we want you to report under IFRS because that’s what the rest of the company uses,’ and they don’t know what it is. So far what they’ve mostly done is turn it over to a larger firm who is dealing with it. So even though IFRS is not yet official in the U.S., the way a lot of firms are finding out about it is that they are losing a client because they don’t know anything about it.”
While the convergence process progresses, Bunting said, firms are jumping into IFRS suddenly to keep up with the needs of the companies they serve.
“The conversion process itself will continue, so GAAP will get closer to IFRS, but that’s not where the training is really required,” he said, adding that if you’re trained in GAAP, the road will eventually get you closer to IFRS. “The convergence issue to me is really a non-issue. The issue for practices is the sudden switch, one system from another, which is dictated by a client or a client’s creditors or the owners, and it’s not going to be as a percentage of any firm’s practice. I don’t think it’s going to be a huge percentage, but they’re going to probably be, for a lot of firms, their most valuable clients and it’s going to be a very demoralizing experience for firms that are not prepared.”
For Robert Sattler and his colleague, Grace Singer, both partners in the Quality Control Department at CPA and business advisory firm Berdon LLP in New York, a lot of questions remain unanswered.
“There are a lot of issues that have to be addressed,” Sattler said. “I think that’s one of the reasons these dates are so far out in the future, because different people have different interpretations for what needs to be done and how long they think it’s going to take. Traditionally, if you look at any type of new standards, my experience has been it takes longer than originally anticipated.”
Sattler said that he sees the AICPA, the Financial Accounting Standards Board and the SEC vying for leadership roles in the convergence project. He questioned how the role of FASB would be impacted if the U.S. does adopt the international accounting standards for public companies, and how private companies — his firm’s clients — would be affected by convergence, if at all.
“We’re not quite sure what to teach at this time,” added Singer, referring to what sort of international standards training to offer her staff. “Convergence is happening currently. FASB is working with the IASB. They’ve been trying more and more to find that middle ground which changes both sets of standards in the end. As Bob pointed out, will private companies comply with international standards or continue to be subject to the FASB rules in the future?”
“The AICPA position is, we think it’s a fair debate whether public companies in the U.S. should adopt IFRS,” said Dan Noll, director for standards at the AICPA and one of the point people working on IFRS for the institute. “Nevertheless, we believe that IFRS is going to hit our shores for public companies, and the reason for that is we believe that the capital marketplace is going to demand it.”
Noll said that one of the big challenges will be what happens after the roadmap is released by the SEC. “Now I emphasize that this [the roadmap] is an SEC staff document,” he said, explaining that the commissioners would then have to vote on it before putting it out for public comment and, ultimately, a final rule. “I dare predict that there is going to be continuing debate on this topic even when the SEC staff document comes out this summer,” he said.
As a response, the AICPA is working to raise awareness about the impact of IFRS on the entire scope of the accounting profession — from students to seasoned professionals.
“Our mentality right now is create awareness, get people talking about it, as we move down the accounting timeline,” Noll said, pointing to the AICPA’s www.ifrs.com, a Web site devoted to IFRS and convergence issues. “The next stage would be education, what is IFRS: Just like they had to learn what U.S. GAAP is, they have to learn what IFRS is. Then later down the timeline, it will be more of the implementation mentality. The AICPA is really stepping up and wants to assist its members and other financial professionals to get them ready.”
CPE ON IFRS
Mitch Bean, a CPA and SEC partner at Norfolk, Va.-based Goodman & Co., said that his firm has already started continuing education courses on the topic of convergence and is planning a two-day course in the fall.
“I believe that education is probably the key,” Bean said, adding that Goodman’s membership in Moore Stevens International provides the firm with much-needed audit content.
McGladrey & Pullen’s Dohrer suggested that firms need to obtain basic information from what’s already out there. His firm is offering two-to-three-hour Webcasts for their auditors that provide a status update on the convergence effort and address the bigger differences between GAAP and IFRS.
“It’s an awareness and indoctrination program,” Dohrer said. “For our firm, that will be followed by more intense, in-depth training. I think each firm, after obtaining the introductory level of knowledge, needs to take a look at their own specific client base and try to get a handle on what the impact will be for their clients and their constituents.”
It’s been two years since the internal awareness program started at Moss Adams, and during that time, a convergence team with six partners was created. An IFRS desk with a telephone hotline was made available for clients with questions. The firm is also bringing in European senior managers on a two-year rotation of duty to help train the partners and senior managers in the U.S.
“I’m absolutely convinced that there’s going to be a lot of dislocation of clients from one firm to another, and we just believe it’s going to be a growth opportunity,” Bunting said.
ADDITIONAL IFRS RESOURCES
There are a number of educational resources to help in the process of convergence to IFRS. The Big Four each have their own offerings: Deloitte provides an “IFRS in Your Pocket” downloadable guide at www.deloitte.com; KPMG has an institute full of information at www.kpmgifrsinstitute.com; PricewaterhouseCoopers offers a blogful of insight at http://pwc.blogs.com/ifrs/; and Ernst & Young publishes the IFRS Outlook, a monthly newsletter providing insights on U.S. GAAP at www.ey.com.
Below is an expanded list of sites with IFRS-related materials:
* The AICPA’s www.ifrs.com
* IFAC’s www.ifac.org
* The IASB’s www.iasb.org
* FASB’s www.fasb.org
* The Canadian Institute of Chartered Accountants’ www.cica.ca
* The CICA Accounting Standards Board’s www.acsbcanada.org
* The Institute of Chartered Accountants of Scotland’s www.icas.org.uk
* The Institute of Chartered Accountants in England and Wales’ www.icaew.com
* The Institute of Chartered Accountants in Australia’s www.charteredaccountants.com.au
