1. Major Differences in U.S. GAAP & IFRS and Latest Developments Accounting Day Town & Country Convention Center May 18, 2009 | Track A | 9:15am - 11:10am Stephen G. Austin, CPA, MBA Swenson Advisors, LLP Norbert Tschakert, Ph.D., CPA, MBA San Diego State University
16. Accounting Scandals Under IFRS 2007 - controversial use of overriding principle in IAS 1 to provide a ‘true and fair view’ on financial statements. … Yes, there are likely more to come, but so far things look very good. … How is this possible? … Because of the (intended) lack of guidance, IFRS force accountants to think about properly displaying the substance of transactions, resulting in more meaningful Financial Statements. Accounting Day 2009
67. 9) IFRS Resources, Self-Study Opportunities and SDSU IFRS Curriculum Accounting Day 2009
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76. Thank You! Accounting Day 2009 Stephen G. Austin, CPA, MBA Firm managing Partner Swenson Advisors, LLP [email_address] Phone: 619-237-3400 Norbert Tschakert, Ph.D., CPA, MBA Charles W. Lamden School of Accountancy San Diego State University [email_address] Phone: 619-594-3736
Notes de l'éditeur
Thanks a lot for the introduction and welcome to our presentation. Start out with holding up the book and explain that the standard volume is much less than under US-GAAP. True IFRS text is only half of the book. Compared to German GAAP, IFRS is huge. German GAAP is ultra principles based and it would fit in my pocket. There are 195 independent countries in the world. Currently 55% of all countries in the world are using IFRS and this number will go up to 77% very soon. The number of countries where IFRS is mandatory is currently 85, so the difference between the 110 and 85 (25) are countries that permit IFRS as an alternative. The number 110+ is somewhat misleading. The are not all requiring IFRS. North and South of us will be using IFRS very soon. Essentially we will be surrounded by IFRS. The United States is not an island. There is significant cross-border trade going on with Canada and Mexico. San Diego is directly affected by trade with Mexico and we need to be aware of their change to IFRS. Before Canada made the decision to adopt IFRS they had plans to switch to US-GAAP. I want to read to you a few words from IASB Member John Smith from a recent conference organized by the European Commission entitled ‘Financial Reporting in a changing world’: "I believe it is in the interest of the United States to adopt IFRSs in the next five years… The cost to the United States of failing to adopt IFRSs will be high…If it doesn't adopt, the United States will be the outlier and those countries already adopting and committing themselves to IFRSs will not accept a situation where the United States remains outside the system indefinitely, yet has a seat at the table.” The Internet Sources you see on this slide are also great Sources to start learning about IFRS and I will explain them in more detail at the end of this presentation.
If you look at this slide it appears that IFRS are very young. That is not the case. The predecessor of the IASB, the IASC was founded in 1973. The FASB was also founded in 1973. I always claim that International Accounting truly started in 1494 when Luca Pacioli published his book ‘Summa de Arithmetica’ which was instantly translated and used in many European Countries. For the first time someone really wrote down standards for Accounting and sheer market forces made them successful - because they made sense. 2002 = Breakthrough Event for IFRS = EU passes regulation to adopt IFRS. Only 3 years later a whole continent is making the shift to IFRS. 25 Countries agree to have one single set of accounting standards. Before this there were 25 countries with 25 different accountings standards. How in the world can you claim to have a common marketplace and then conduct business with 25 different accounting standards? You simply can’t. I have worked there and I once had French GAAP and Italian GAAP in front of me and had to reconcile all this to German GAAP for a German Investor and to US GAAP for an US Investor. In addition the notes were in French and in Italian and a Translater had to come in. This was not fun for anyone involved and you can imagine that the reliability of such an accounting Rollercoaster might not be 100%. After the successful adoption of IFRS in the EU, other countries were motivated to look at IFRS and decided to also go this route. Before the European Union decided to switch to IFRS, US-GAAP was the big thing and everyone thought US-GAAP would become the world standard. The EU decision caught many companies by surprise. Daimler for example was reconciling German GAAP to US-GAAP to get listed in New York. Then they suddenly had to shift from German GAAP to IFRS, but were still listed in New York under US GAAP. In addition came the German Tax Accounting, so Daimler was running 4 sets of different books simultaneously for years. This back and forth needs to be prevented for the U.S. In 2006 the IASB said thank you to the European Union and announced a stable platform period to make it easier for companies to get used to IFRS. No company that is already applying IFRS will be forced to apply new IFRS for the next three years. If the U.S. adopts IFRS it is more than likely that the same will happen again. This will be such a massive switch with thousands of companies affected, that it is the only thing that makes sense. It will greatly facilitate the adoption of IFRS in the U.S. 2007 was the breakthrough event for IFRS in the U.S. Now, IFRS was suddenly relevant within the U.S. and if it is permitted to file your statements under IFRS without a reconciliation to US-GAAP, IFRS can’t be all that bad. Also, the SEC gave a clear sign to the market, that IFRS are an option for the U.S. and that all the years of converge might one day lead to the adoption of IFRS. This is the time when the Big4 started to invest into building up IFRS Knowledge in the U.S.
The first bullet point on this slide is not that obvious, because initially the costs of preparing IFRS Financial Statements will be very high and that is one of the main reasons why we see so much opposition to IFRS in the U.S. But if you think about Multinational Corporation, there are situations were there are already cost benefits of switching to IFRS. These companies already deal with IFRS through their subsidiaries all over the world and a shift to IFRS would finally enable them to have a single set of Accounting Standards. In the 1960’s and 1970’s global trade was not as prevalent as it is today. Back then it was not that important to understand foreign financial statements. Today it is, because we live in a truly global economy. If an investor is not able to understand foreign financial statements, he will demand a risk premium for his investment or he will simply walk away. Accounting is the language of business and we need to be able to communicate with each other.
READ SLIDE IN FULL . What we see on this slide is the big accounting dream that stands behind IFRS. This is what is possible and why people all over the world are enthusiastic about IFRS . When Europe introduced its plan to change to one single currency, the Euro, there was an uproar in every single country. The French loved their Franc, the Germans had the German Mark, the Italians the Lira and everyone had deep feelings attached to their currencies. Whole countries had referendums against the Euro, hundreds of economics professors signed petitions and published statements against the Euro. At that time Ireland had a much higher GDP growth rate than any other country in the European Union. The professors argued that the local economies and the local inflation rates within the European Union are much too different to make this possible. They clearly said you can’t do that. The answer they received from the European Commission was: Yes, you can. Texas and California are also not identical, yet they share the same currency. In order to achieve something truly great you also have to risk something. The Euro is a huge success story. In November 2008 the Euro surpassed the USD and is now the currency with the highest circulation in cash value. London has recently bypassed the New York Stock Exchange and now has the highest market capitalization in the world.
This slide is the Macro Economics of IFRS. It is very abstract and it does not directly affect you, yet it contains important and true statements. The number of Foreign Listings in the U.S. is declining. For German Companies a listing in the U.S. has proven to result in very high compliance costs due to SoX and very high legal risks. Siemens was found liable for corruption and had to settle with the SEC in the Billion Dollar range. How do you explain these issues at home to your German shareholders? IFRS could be a way to make the U.S. Capital Market more attractive again. The last bullet point is highly relevant for third world countries. There is a free high quality of the shelf solution that will establish an immediate international recognition. How much better is that compared to developing your own standards?
This shows the micro economics of IFRS and these arguments also make a lot of sense. IFRS is understood around the world and it will provide easier access to financing. Theoretically lenders are willing to reduce their risk premiums under IFRS. All of these benefits are substantial and have to be considered if people complain about the high costs of adopting IFRS.
Besides the global benefits and the company specific benefits there are a couple of other benefits. ARB 43 – issued in 1953 (Restatement and Revision of Accounting Research Bulletins) ARB 51 – issued in 1959 (Consolidated Financial Statements) These standards are older than most of us in the room, certainly myself. If you want to have an international career or if there is a recession in one country, as an accountant or auditor you are now much more flexible. You can work anywhere in the world. That is maybe also one reason why the Big4 are pro IFRS. They can rotate their employees through countries wherever the demand is highest.
I want to talk for a moment about the difference between rules-based (US-GAAP) and principles-based standards (IFRS) The last point is interesting because it will affect the business model of the Big4. Under IFRS there is a huge professional judgment issue. Professional judgment requires work experience and can only be developed over time. This means that audits under IFRS will likely require more manager hours compared to audits under US-GAAP and that associates need stronger supervision, training and guidance.
The last point sounds extreme, but it is exactly what happened with Accounting for Derivatives . Standardsetting was simply not able to keep up with the never ending variety of new financial products that were introduced. There is a simpler way to illustrate the difference between Rules-based and Principles-based Standards. If I am raising my child principles based and you are all raising your child rules based, your child will get creative and will tell you how they did not break your ever increasing rules. My child will know the difference between right and wrong in any situation and it would certainly have a good idea of what daddy would think about their decision.
In respect to the guidance, IFRS is not meant to have strong guidance. Oftentimes you have to make up your own mind of what represents a fair presentation and what reflects the substance of a transaction. Also, IFRS are not fully developed yet. The IASB is still working on it and it will take a few more years until all the old IAS Standards are updated. The current IFRS Framework is over 20 years old and will be updated soon. Let’s have a look at the accounting scandals in more detail.
As you can see there was not enough space here to contain all of these accounting scandals under US-GAAP. Essentially this slide is just an embarrassment. The range of fraud that happened within these companies is sheer unbelievable and this topic would be a great presentation all by itself.
Compared to the prior slide it is pretty empty on this slide… IFRS have been around for quite a few years now. There should be more on this slide, but there is really nothing. A trader for Société Générale (SG) concealed from management that he was making huge bets with the bank’s money. At 31 December 2007, these fraudulent trades had an unrealized gain of EUR 1.5 billion. However, when the fraud was exposed in January 2008, the market had taken a turn for the worse and resulted in a realized loss of EUR 6.4 billion. In its annual report, SG quotes the ‘true and fair’ provision of IFRS which provides that ‘in the extremely rare circumstances in which management concludes that compliance with the rules would be so misleading that it would conflict with the objective of financial statements’ a company can depart from these rules (IAS 1.19). In the past, this provision has been rarely used within IFRS. In moving the loss from 2008 - when it actually occurred and was realized - to 2007, SG has created an uproar in accounting circles and raised questions about whether IFRS can be consistently applied in the countries around the world. IASB Member John Smith said: ‘There is nothing true about reporting a loss in 2007 when it clearly occurred in 2008.’ SG said that its two auditing firm, Ernst&Young and Deloitte&Touche approved of this accounting, as did French regulators. If you look at other Presentations and Articles you will find more examples for Accounting Scandals under IFRS. People seriously quote Parmalat, Alstom, Vivendi, Adecco and Royal Dutch as IFRS related Accounting Scandals. That is not the case. That all happened BEFORE the transition to IFRS. There is the idea that all accounting in Europe is automatically IFRS. You have to be very careful with that. Overall there is a lot of incorrect information out there on IFRS. I will talk more about good sources for IFRS Information later on.
Read Slide Managers use internal reporting for their purposes and external reporting is different from the information that managers have. In certain areas IFRS merges internal with external reporting. Under IFRS, External Reporting becomes more relevant for decision making.
1) German Daimler and Dutch Unilver are examples for this 2) Sempra Energy and General Electric 3) Nestle and BMW
Proactive smaller entities could publish audited IFRS Financial Statements on a voluntary basis and could receive low-cost automatic ratings through XBRL Filings, potentially leading to a lower cost of capital.
Out of the 180 comment letters only three are from the actual Users of Financial Statements = Analysts. All other comment letters have been written by companies, academia and standard setting bodies around the world. So, the people that we do all this for, are not participating in the process and don’t show a high interest in it. This is quite remarkable and surprising.
The first group are those U.S. companies that operate in an industry where the majority of their competitors are already using IFRS and where Investors would have a benefit if the U.S. company would also report under IFRS. There is no more requirement to present U.S. GAAP Financial Statements. This requires the written approval of the SEC. Large accelerated Filers = public float of at least USD 700 million Accelerated = public float of at least USD 75 million Overall, the bigger the company, the more relevant the topic. For most companies in the U.S., IFRS will not be a requirement until 2016. However, we are already in mid-2009 and it makes sense to get informed now.
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Shapiro is stating the obvious. Everyone familiar with IFRS knew these issues already and the IASB is actively working towards solving them. The IASB created a new Monitoring Board, significantly enhancing the IASB’s public accountability. The Monitoring Board comprises the IOSCO, the SEC and the Japanese Financial Services Agency.
The SEC currently has three objectives. These are enforcement, enforcement and enforcement.
How relevant is Mary Shapiro if the Group of twenty announces that they want to see IFRS implemented? Paul Volcker is one of the economic advisors for President Obama. Volcker served on the IASB for years and is obviously very much pro IFRS. Will Shapiro act against Obama’s interest?
READ ALL QUOTES I now have listed a few citations from comment letters to the Roadmap and I simply want to read through these comments.
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READ THEIR FIRST COMMENT. This is how they start their letter. If you get a letter that starts with ‘we do not live in an ideal world’, don’t expect it to get any better. READ REST
READ FULL STATEMENT This sounds like a fair solution. That’s the american way. Let the market figure it out and we will know what is best. But this is not always good. It is sometimes good to have industry standards. Do you remember the big fight between blue ray dvd and HD (High Density) DVD and how many resources were burned along the way? Consumers were insecure of what technology to buy and if the product they chose might end up being the losing one. For how long do you want to have two sets of Accounting Standards?
The U.S. had the luxury of a long convergence process and there is really not all that much different to IFRS when you compare it to other countries that made the shift to IFRS. The “I“ in IFRS stands for International. There are other countries in the world. It is not appropriate to just cater to the U.S. How do you evaluate if the 7 Milestones have been accomplished? When will IFRS be high quality enough for the SEC to approve them? How do you measure this quality or is this more of a subjective and political decision?
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A Significant Part of the Stimulus Package will go towards renewing America’s Infrastructure, Roads, High Speed Railway System and Electricity Grid. In Accounting there is a very similar process going on. When you came here this morning you have likely used the I8 and while you where driving you were likely not thinking about is happening underneath you. Under the I8 and under all Highways there is a huge amount of infrastructure, pipes for water and gas, cables for communication and electricity. It is crowded and without that infrastructure underneath the surface we are not able to have a modern live above the surface. Right now all of these pipes and wires are getting replaced with new ones and the names of these new pipelines and wires are: IFRS XBRL International Auditing Standards If you do not pay close attention to this new infrastructure you are at risk that you might not be able know how to use it. These changes all make a lot of sense and they might get implemented quicker than you think. Europe was quite surprised about its rapid move to IFRS. There is a high speed train coming through and it is a much nicer view if you are sitting inside this train. If the U.S. is procrastinating on IFRS, it will get more difficult down the road. Right now the U.S. can be part of the process and influence IFRS, later on it will be a take or leave deal. IFRS does not need the U.S. any more. The title of this conference is ‘Building Foundations’ and sometimes it is necessary to reevaluate the foundation you are standing on. America was always a country of great innovation and now is the time to make important changes towards a new foundation. With that I pass it over to Steve. Thank you very much. NEXT SLIDE.
The Framework is really the basis and you will find components of the Framework in many Standards. If you understand the Framework, IFRS will make sense to you much quicker compared to starting with individual standards. There are certain beliefs within IFRS that repeat themselves over and over again, discounting all future cash flows that relate to the company, to provide a fair presentation and true and fair view, fair value, Impairment testing with revaluation, etc.... Last Point is particularly important. Don’t constantly compare IFRS to US GAAP. Accept it as something fresh and new. Only this way you are able to come to the correct conclusions.
This is obviously the main website for IFRS which is full of content. What I find most interesting is the Project Timetable. There you can see the upcoming Discussion Papers, Exposure Drafts and IFRSs.
The AICPA has invested a lot of money and effort into this website. AICPA should be busy with U.S. GAAP. Instead they are developing IFRS Websites. That is another clear sign that IFRS is a serious thing. What I liked on this website was the IFRS Email Newsletter. This Newsletter is really good and subscribing to this newsletter alone will keep you updated on IFRS and greatly improve your IFRS Knowledge over time.
All Big 4 firms have IFRS Information and Websites at this point. Deloitte was the first that invested heavily into IFRS and they still have the upper hand. The IFRS E-Learning Tools are just wonderful. They are very interactive and very entertaining and I can only recommend these E-Learning Modules.
Explain Certificate Program.
If you work in academia you can get very cheap access to E-IFRS through the International Association for Accounting Education and Research (25 Dollars).
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