Slide 2 By Bill Conner Slide 3 The world economy is global now,
and so there is a need for global accounting rules. 40 % of the
Fortune 500 use International Financial Reporting Standards (IFRS)
The European Union has required IFRS for publicly traded companies,
as of 2005. Slide 4 Currently, over 100 countries require IFRS. The
Unites States requires Generally Accepted Accounting Principles
(GAAP), but is considering a switch to IFRS. The Securities and
Exchange Commission arm of the U.S. Congress may require conversion
to IFRS by 2014. Slide 5 Investments No AFS or HTM under IFRS
Inventory No LIFO costing so Tax Consequences with switch to IFRS
Property, Plant and Equipment Revaluing under IFRS is not limited
to impairment Slide 6 Differences in the following between IFRS and
GAAP: Contingent Liabilities Short and Long-Term Debt
Classifications Debt vs. Equity gray areas Slide 7 No Completed
Contract Method under IFRS IFRS is principles based, GAAP is rules
based. Switch to IFRS could improve monitoring. Slide 8 Inventory
Assets Under GAAP, firms choose among several ways of accounting
for inventory. They may choose to remove inventory cost from the
books by assuming a first-in-first-out (FIFO) flow of goods, by
assuming an average cost, or even last-in-first- out. Finally, a
firm could make no assumption at all and remove the actual cost of
each sold item. This method is called specific identification.
Slide 9 Inventory Assets IFRS allows FIFO, Average Cost, or
Specific Identification. Notice that LIFO is not mentioned as an
acceptable costing method. Analysis: This may be the most important
change required by IFRS. The result of a political compromise by
the United States Internal Revenue Service, the LIFO costing Slide
10 Inventory Assets Analysis (Cont.): method has little basis in
the true flow of goods through a businesss operations. If costs are
rising though, the effect of using LIFO can be an indefinite tax
deferral because high (inflationary) costs of sales deducted from
net sales result in lower net income. With tax computed as a
percentage of net income, low tax follows. Slide 11 Inventory
Assets Analysis (Cont.) The catch in IRSs compromise approach is
that it requires businesses to use the same flow of goods for
financial statement and tax purposes. A change to IFRS could cause
many U.S. firms to immediately owe millions in deferred taxes.
Slide 12 Inventory Assets Analysis (Cont): Both a wise and a
foolish approach have been offered to deal with the back tax issue.
The foolish approach involves uncoupling the financial and tax
accounting methods. This is foolish because it doesnt resolve that
LIFO is an illogical method of accounting for inventory. The wise
approach would require a change from LIFO, but offer the adopting
company a long time period, perhaps in excess of ten years, to pay
the back taxes without penalty. Slide 13 Investment Assets Under
current U.S. GAAP, any bonds or other debt of another company held
as an investment can be accounted for uniquely, depending on
whether it will be held until maturity or may be sold before
maturity. If to be held No gains or losses are reported until
maturity of the investment. If to be sold Gains/losses may be
reported periodically as equity or other comprehensive income.
Slide 14 Investment Assets For IFRS purposes, these bonds/debt will
always be treated as if they could be sold. Therefore, gains or
losses may be recognized periodically. Analysis : In effect, IFRS
requires the treatment of such bonds and other debt using
mark-to-market rules. The Held To Maturity category was a political
compromise to bring fair value accounting to U.S. GAAP. Conversion
to IFRS ends the compromise as it should. Few companies can be
certain they will never sell such items. Slide 15 Property Plant
and Equipment There are two differences between IFRS and GAAP.
These involve Fair Value Accounting and Leases: Fair Value
Accounting may be done under IFRS, whether the property, plant and
equipment has appreciated or deflated in value. Under GAAP,
property, plant and equipment can be written down, but not marked
up. Slide 16 Property, Plant, and Equipment Leases are considered
operating (no ownership) or capital (the property rented is
considered purchased with a loan) depending on four rigorous tests
for GAAP. Under IFRS, the GAAP tests are considered indicators, but
are not the only information considered. Slide 17 Property, Plant
and Equipment Analysis: The problem with fair value is that it can
be very hard to value factories in Detroit in an economical and/or
accurate way. The Lease change allows flexibility, which in the end
may allow companies not to structure lease arrangements to achieve
the desired financial statement effect. Slide 18 Liabilities and
Equity There are a number of relatively minor differences between
IFRS and GAAP. Chief among them is the possibility of considering
certain financial interest liabilities under IFRS while they
qualify as equity under GAAP and vice-versa. Slide 19 Construction
Revenue Recognition Under IFRS only a variation on the Percentage
of Completion method can be used, while GAAP permits the Percentage
of Completion or the Completed Contract methods in certain
instances. Analysis: The Completed Contract method is inconsistent
with accrual basis accounting, which is the foundation of both IFRS
and GAAP. Slide 20 Construction Revenue Recognition Analysis: Like
switching from the LIFO inventory method, a switch from the
Completed Contract method could cause a tax burden. Many small US.
construction contractors use the Competed Contract method for tax
purposes, resulting in deferral of taxation until contract
completion. This should be considered during transition to IFRS.
Slide 21 IFRS has been considered a principles based approach. GAAP
has been considered a rules based approach. Analysis: With
philosophy, principles based approaches are usually wise because
slight Slide 22 Analysis (Cont.): differences from the principle
can usually be forgiven if the spirit of the principle is
maintained. Unfortunately, law, and related positive and punitive
measures, is usually forged based on compliance with rules.
Compliance is rewarded and/or noncompliance is punished. While the
principles approach (IFRS) is likely to produce easier agreement
between different national governments, cultures, etc. it is quite
Slide 23 Analysis: Possible that a global switch could produce
financial information that is not comparable from company to
company. The inability to compare financial investments has often
been cited as one contributing factor to the Great Depression.
Slide 24 Opportunity to Improve Monitoring of Financial Reporting
by Public Companies: A public corporation today purchases its own
audit from a public accounting firm. This transaction is not arms
length in appearance. The public accounting firms often refer
former employees for employment with the audit client, which can
produce conflicts of interest. Slide 25 Opportunity to Improve
Monitoring (cont.) A public accounting firm can be under enormous
pressure to make accounting judgments that favor its clients rather
than investors. Such pressure can include loss of a major audit
client in exchange for an unfavorable ruling. Slide 26 Opportunity
to Improve Monitoring (cont.) Analysis: The switch to new standards
provides an opportunity to revisit the monitoring structure in the
United States. The Securities and Exchange Commission or Public
Companies Accounting Oversight Board could be charged with hiring
the auditors of public companies. Alternatively, these government
bodies could review the auditor selection process on a regular
basis. Slide 27 Global adherence to a single set of accounting
principles is clearly worthwhile, if not necessary. IFRS has the
potential to wipe away poor U.S. practices such as LIFO inventory
accounting, held-to-maturity accounting for financial assets, and
completed contract revenue recognition, which developed for
political rather than economic reasons. Slide 28 IFRS could also
usher new poor practices into the U.S. method of accounting for
public companies. Inflated values could be attributed to property,
plant and equipment, for example. Also, an anything goes attitude
may develop in the U.S. accounting profession if we replace rules
with principles. Slide 29 A unique opportunity for oversight could
develop with a switch to IFRS. The United States could back away
from the concept of privately purchased audit opinions. Slide 30
There is a need for global standards. There is a responsibility for
national leadership. Will the United States, the largest economy in
the world: Participate in the financial reporting revolution?
Ensure quality reporting by American firms? Slide 31 References
Bloom, Robert and William Cenker, (2009), The Death of LIFO?
Journal of Accountancy, January: 44-49 Dorata, Nina, and Ibrahim
Badawi, (2008), International Convergence: The Case of Accounting
for Business Combinations, The CPA Journal, April: 36 -38. Slide 32
References Epstein, Barry Jay, (2009), The Economic Effects of IFRS
Adoption, The CPA Journal, March: 26-31. King, Alfred, (2008), GAAP
vs. IFRS: Will the Real Fair Value Please Stand Up?, Financial
Executive, December: 14-16 Slide 33 References Tribunella, Heidi,
(2009), Twenty Questions on International Financial Reporting
Standards, The CPA Journal, March: 32-37
