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Is it time for accountants to start Learning their I-F-R-S?

Is it time for accountants to start Learning their I-F-R-S?. Don Schwartz, J.D., CPA National University, San Diego CA. U.S. Securities and Exchange Commission. [Release No. 36-7807; File No. S7-22-13]

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Is it time for accountants to start Learning their I-F-R-S?

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  1. Is it time for accountants to start Learning their I-F-R-S? Don Schwartz, J.D., CPA National University, San Diego CA ACCOUNTING DAY MAY 12, 2008

  2. U.S. Securities and Exchange Commission [Release No. 36-7807; File No. S7-22-13] Requirement that all U.S. public companies prepare financial reports in accordance with International Financial Reporting Standards for years beginning on or after January 1, 2013. Earlier adoption is permitted. Agency: Securities and Exchange Commission Action: Final rule. Might we see such a ruling by the end of 2008? ACCOUNTING DAY MAY 12, 2008

  3. Same transactionsTwo entirely different outcomes ACCOUNTING DAY MAY 12, 2008

  4. First 32 years… • 1973 Formation of IASC • 2000 SEC Concept Release on allowing IAS-based financials for non-U.S. • 2002 SOX questions rule-based GAAP, FASB and IASB start work on Convergence • 2005 Deadline for EU countries to adopt IFRS ACCOUNTING DAY MAY 12, 2008

  5. Countries in dark blue either require or allow IFRS Canada and India are adopting IFRS in 2011 U.S. accepts IFRS but only from non-U.S. companies ACCOUNTING DAY MAY 12, 2008

  6. Canada joins the IFRS ranks… Canadian Accounting Standards Board (AcSB) Announces 2011 As Official IFRS Transition Date • On February 13, 2008 the Canadian Accounting Standards Board confirmed that Canadian companies must start using International Financial Reporting Standards (IFRS) for years beginning on or after January 1, 2011. • Private companies (non-publicly accountable enterprises), and not-for-profit organizations are not required, but are permitted, to adopt IFRSs in 2011. The financial reporting models for these two sectors are still under consideration by the AcSB. ACCOUNTING DAY MAY 12, 2008

  7. U.S. is behind, but gathers steam in 2007 • July SEC proposal to allow IFRS-based 2007 financials for non-U.S. registrants without reconciliation to U.S. GAAP • Dec SEC ruling to allow IFRS-based 2007 financials for non-U.S. registrants • Aug SEC Concept Release: should U.S.2007 companies be allowed to use IFRS? ACCOUNTING DAY MAY 12, 2008

  8. ACCOUNTING IN 5 SELECTED COUNTRIES - 2008 ACCOUNTING DAY MAY 12, 2008

  9. “Given the unfathomable complexity of Enron’s multi-layered SPE structuring, it is unlikely that qualitative criteria such as that used by international standards would have had any more success in deterring Enron’s off balance sheet maneuvering than did the 3% bright-line.” ACCOUNTING DAY MAY 12, 2008 From the book “Power Failure: The Inside Story of the Collapse of Enron” by Mimi Swartz and Sherron Watkins

  10. SEC Concept Release – August 2007 Question No. 1 “Do investors, U.S. issuers, and market participants believe the Commission should allow U.S. issuers to prepare financial statements in accordance with IFRS as published by the IASB?” ACCOUNTING DAY MAY 12, 2008

  11. Responses to Question No. 1 Should SEC allow U.S. issuers to use IFRS ? • FASB – No, a two-GAAP system would create unnecessary complexity • CalPERS – No, important issues need to be addressed first • Chevron – No, coping with two sets of rules would be a distraction from one global set • NASBA – No, focus on convergence • Illinois State Society – No, two sets of standards is counterintuitive to mission of SEC • NYS Society of CPAs – No, requiring U.S. GAAP is a significant incentive for convergence • Standard & Poors - No, two systems would significantly complicate our analysis ACCOUNTING DAY MAY 12, 2008

  12. Responses to Question No. 1 (continued) Should SEC allow U.S. issuers to use IFRS ? • KPMG – Yes, as part of a transition plan • Deloitte – Yes, early adopters would provide experience • Ernst & Young – Yes, impetus for analysts and investors to improve their understanding of IFRS • Grant Thornton – Yes, issues that arise now will benefit later participants • Morgan Stanley – Yes, would encourage convergence effort • UBS – Yes, as part of a transition plan • Microsoft – Yes, as an interim step before requiring IFRS • AICPA – Yes, an important step toward global standards ACCOUNTING DAY MAY 12, 2008

  13. SEC Concept Release (continued) Question No. 33 “Should the opportunity, if any, to switch to IFRS reporting be available to U.S. issuers for a particular [limited] period of time? If so, why and for what period? At the end of that period of time, could commenters foresee a scenario under which it would be appropriate for the Commission to call for all remaining U.S. issuers to move their financial reporting to IFRS?” ACCOUNTING DAY MAY 12, 2008

  14. Responses to Question No. 33“Should the Commission call for all remaining U.S. issuers to move their financial reporting to IFRS ?” • NASBA – No, continue convergence but at accelerated pace • AICPA – question was not addressed • IMA – question was not addessed • Illinois Society of CPAs – No, continue convergence • NYSSociety of CPAs – question was not addressed ACCOUNTING DAY MAY 12, 2008

  15. Responses to Question No. 33 (continued) “Should the Commission call for all remaining U.S. issuers to move their financial reporting to IFRS ?” • FASB – Yes, once a “blueprint” has been developed and implemented • KPMG – Yes, once key conditions are met • PriceWaterhouseCoopers – Yes, assuming 5 to 7 year transition period • Ernst & Young – Yes, pending essential changes and actions • Grant Thornton – Yes, after reasonable timeframe • UBS – Yes, for comparability and reduced cost of capital • CalPERS – Yes, once key conditions are addressed • Microsoft – Yes, begin 4-year transition in 2011 or 2012 • Chevron – Yes, global standards rather than slow convergence • Standard & Poor’s – Yes, SEC should develop a comprehensive plan ACCOUNTING DAY MAY 12, 2008

  16. Response to Concept Release “The Concept Release asks, “…could commenters foresee a scenario under which it would be appropriate for the Commission to call for all remaining U.S. [non-governmental] issuers to move their financial reporting to IFRS?”We believe the answer to that question is “yes”. In our view, now is the time to develop a plan for moving all U.S. public companies [from U.S. GAAP] to an improved version of International Financial Reporting Standards (IFRS).” (emphasis added) ACCOUNTING DAY MAY 12, 2008

  17. Some of the major differences…Excerpted from “A Comparison of IFRS and U.S. GAAP" PriceWaterhouseCoopers October 2007 ACCOUNTING DAY MAY 12, 2008

  18. Some of the major differences… ACCOUNTING DAY MAY 12, 2008

  19. Source: Iofe., Y. And M.C. Calderisi, eds, 2005, Accounting Trends & Techniques, 59th Edition, (New York, NY: AICPA), pp. 169-170. Petroleum refining 11 79 12 92 ACCOUNTING DAY MAY 12, 2008

  20. Trend in use of LIFO by 600 Fortune 1000 companies 80% 1966 2004 LIFO used for some inventoryfor majority of inventory ACCOUNTING DAY MAY 12, 2008

  21. TESTIMONY OF GEORGE A. PLESKOUNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESSBEFORE THE COMMITTEE ON FINANCE UNITED STATES SENATEJUNE 13, 2006 In contrast to U.S. generally accepted accounting procedures (GAAP), International Accounting Standards (IAS) generally prohibit the use of LIFO. Congress could repeal the LIFO conformity requirement and allow firms to use LIFO for tax reporting only, but doing so would create additional administrative complexity, as well as increased book-tax reportingdifferences. Since many companies that use LIFO for external reporting purposes do not use it for internal decision making (such as pricing or compensation), allowing LIFO for tax purposes in the absence of LIFO-conformity would appear to generate no benefit other than the deferral of income taxes by LIFO firms. ACCOUNTING DAY MAY 12, 2008

  22. TESTIMONY OF GEORGE A. PLESKOUNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESSBEFORE THE COMMITTEE ON FINANCE UNITED STATES SENATEJUNE 13, 2006 Continued… With respect to a LIFO repeal, the $60 billion aggregate LIFO reserve reported represents the amount of additional net income publicly-traded firms would report on their tax returns if a tax change required them to recognize this reserve as income. ACCOUNTING DAY MAY 12, 2008

  23. “Some of the key infrastructure elements to consider for the blueprint “ • How a move to IFRS will affect audit firms and auditing standard setting • How a move to IFRS by public companies might affect financial reporting by private and not-for-profit entities • How to effectively train and educate issuers, their auditors, investors, and other users of financial statements about the improved version of IFRS, including implications for the U.S. education system and the uniform Certified Public Accountant examination ACCOUNTING DAY MAY 12, 2008

  24. First, the chicken has to lay the egg SEC • The SEC has to commit to IFRS by setting a due date for public corporations, say January 1, 2013 • That would stimulate: • FASB and IASB to accelerate convergence effort • AICPA and IMA to provide IFRS training to their members • AICPA and IMA to include questions on IFRS in the CPA and CMA exams……which would in turn motivate universities to include IFRS in accounting and auditing curriculum • Congress to repeal LIFO-conformity rule • FASB to decide what to do about non-public entities ACCOUNTING DAY MAY 12, 2008

  25. Thank You ACCOUNTING DAY MAY 12, 2008

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