IFRS in the United States: Challenges and Opportunities.
The establishment of a single set of high quality global accounting standards is a matter of growing importance as the participants in the ever increasingly integrated world capital markets demand comparability and transparency of financial reporting worldwide. International Financial Reporting Standards (IFRS) is a set of accounting standards, developed by the International Accounting Standards Board (IASB) that is becoming the global standard for the preparation of public company financial statements. More than 12,000 public companies in over 100 countries have adopted IFRS, including listed companies in the European Union. Other countries, including Canada and India, are expected to transition to IFRS in 2011. In many countries, private companies also use IFRS for financial reporting.
Regulatory authorities in the United States recognize the changing needs of investors making allocation decisions in globally integrated markets. They also acknowledge a significant shift in global market capitalization with U.S. market share steadily declining. According to the September 2009 Standard & Poor report, the U.S. market is now less than 41% of global capital markets, a substantial decline from January 2004, when it was nearly 53% (Standard & Poor, 2009; 2004). More specifically, the New York Stock Exchange (NYSE) market cap at the end of 2003 was 41 times that of Bombay Stock Exchange (BSE) and 31 times that of Shanghai exchange. In July of 2009, NYSE was 9 times that of BSE and only 3.6 times that of Shanghai (Chakravarty, 2009).
The U.S. Securities and Exchange Commission (SEC) has been in favor of a core set of accounting standards suitable for financial reporting in cross-border offerings since the 1990s. Since 2002, it has supported efforts of the Financial Accounting Standards Board (FASB) and the IASB to develop a common set of high-quality global standards. In 2008, the Commission proposed a roadmap that will lay out a schedule and appropriate milestones for continuing progress toward acceptance of IFRS in the United States. In February 2010 the roadmap was revisited and the SEC staff released a statement outlining a work plan to evaluate the impact that IFRS would have on the U.S. financial reporting system. Although it is still not known what date the Commission will set, and whether it will set a date at all, for public companies to make the mandatory or voluntary switch from U.S. Generally Accepted Accounting Principles (U.S. GAAP) to IFRS, the IFRS have a real impact on an ever growing number of U.S. companies, public and private. Some companies are required to report, under IFRS, to meet the reporting requirements of an international parent or investor company. Also, U.S. companies have foreign subsidiaries that must report according to IFRS, and some have operations in jurisdictions where IFRS is mandatory. Furthermore, U.S. companies may recognize the need to voluntary supplement their U.S. GAAP-based financial statements with IFRS-based reports to allow for an accurate comparison with foreign competitors (Gannon and Ashwal, 2004). This article overviews the current status of IFRS worldwide and in the United States, and discusses challenges as well as opportunities of IFRS adoption from the perspectives of: (1) preparers of financial statements, (2) the accounting profession and (3) the academia.
International Financial Reporting Standards (IFRS) refer to a comprehensive, high quality set of accounting standards and interpretations used in the preparation of financial statements. IFRS are considered a principles-based set of standards in that they establish broad rules with greater emphasis on interpretation and the use of judgment, rather than reliance on specific "bright-lines." Many of the standards forming part of IFRS are known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2000 by the International Accounting Standards Committee (IASC). The Standing Interpretations Committee (SIC), the lASC's interpretive body formed in 1997, developed interpretations of IAS to be applied where the standards were silent or unclear. The interpretations were referred to as SICs.
In 2001, the International Accounting Standards Board (IASB), an independent, privately funded, full-time standard-setter and the International Financial Reporting Interpretations Committee (IFRIC), its interpretive body, replaced the IASC and the SIC, respectively. During its first meeting the new Board adopted existing IAS and SICs. (1) The IASB has continued to develop standards calling the new standards IFRS, while IFRIC issues interpretations referred to as IFRICs.
As of today, IFRS are used by public companies in 120 jurisdictions, including 90 jurisdictions where IFRS are required for all domestic listed companies (Deloitte, IASPIus.com, 2010). These jurisdictions include all European Union countries, Australia and New Zealand. As for private industry, unlisted companies in 93 jurisdictions use IFRS. Among them there are 27 jurisdictions where IFRS are required for all domestic unlisted companies (Deloitte, IASPIus.com, 2010). Furthermore, the remaining significant economies and capital markets outside the United States have declared a date for specific conversion of their financial reporting standards to IFRS in the near future. For example, Japan is due to decide in 2012 whether it will make adoption of IFRS mandatory for Japanese companies. The country's Financial Services Agency (FSA) took a big step in December 2009, when it decided to allow some domestic companies to start using IFRS designated by the Commissioner of the FSA in their consolidated financial statements starting from the fiscal year ending March 31, 2010. (2) Japan's FSA also ended the option for some Japanese listed companies to submit their consolidated financial statements prepared according to U.S. GAAP (FSA, 2009). In 2010, IFRS becomes mandatory for listed companies and banks in Brazil; 2011 will mark mandatory adoption of IFRS for listed companies in Canada, India and South Korea, while listed companies in Mexico and Singapore are required to comply with IFRS by 2012 (IASPIus.com, 2010).
A growing body of academic literature provides empirical evidence confirming the merits and quality of IFRS. For example, Beneish, Miller and Yohn (2009) find increased foreign investment by countries adopting IFRS in 2005, as well as increased foreign participation in debt markets of the adopting countries. Covrig, DeFond and Hung (2007) find increases in foreign mutual fund ownership in foreign stocks after voluntary IAS adoption between 1999 and 2002. A study by Daske, Hail, Leuz and Verdi (2008) on IFRS adoption in non-US markets indicates that it results in lower information asymmetry and greater liquidity, as compared to the domestic sets of standards used in these markets. Barth, Landsman and Lang (2008) find that firms voluntarily adopting IAS from 21 countries exhibit less earnings management, (3) more timely loss recognition and more value-relevant information than a matched sample of firms using their domestic standards. Studies comparing quality of IAS and U.S. GAAP using data from firms that traded in Germany's New Market, such as Leuz (2003) and Bartov, Goldberg and Kim (2005), find no significant differences between the two sets of standards, suggesting that IAS and U.S. GAAP appear to be of similar quality when applied in German capital market.
Current Status of IFRS in the United States
The Convergence Process
The movement toward IFRS in the United States gained momentum in 2002 with the Norwalk Agreement between FASB and IASB. It acknowledged the Boards' commitment to the development of high quality, compatible accounting standards that could be used for both domestic and cross-border financial reporting. At the time, the FASB and the IASB pledged to make their best efforts to make their existing financial reporting standards fully compatible as soon as is practicable and to co-ordinate their future activities to ensure that once achieved, compatibility is maintained (FASB, 2002). Since reaching the agreement, the Boards and their staff have been researching existing differences between U.S. GAAP and IFRS, monitoring and coordinating each others' agenda and working on a series of joint long-term and short-term convergence projects.
In February 2006, the FASB and IASB issued a Memorandum of Understanding (MoU) to reaffirm the Boards' shared objective of developing high quality, common accounting standards for use in the world's capital markets (FASB, 2006). The MoU set forth the relative priorities within the FASB-IASB joint work program in the form of specific milestones to be reached by 2008, although they knew that many of the major standards level projects would not be complete by that date. Also, the Boards decided to change their original approach to convergence of standards that are in need of significant improvements on both sides. Instead of expending resources on trying to eliminate differences between such standards, the Boards decided to seek convergence by replacing them with jointly developed new standards. At their April 2008 joint meeting, the Boards reassessed their priorities again and agreed on milestones to be achieved on major joint projects by 2011. The updated MoU released on September 11, 2008, describes the priorities and milestones related to completion of major joint projects by 2011 (FASB, 2008). Exhibit 1 summarizes the ambitious agenda.
Exhibit 1. The 2008 Memorandum of Understanding: Plans for Completion by 2011 Topic Convergence Objective Financial statement to develop a new format for the financial presentation statements Revenue recognition to create a revenue recognition standard that companies can apply consistently across various industries and transactions Leases to ensure that the assets and liabilities arising from lease contracts are recognized in the statement of financial position Financial instruments to simplify hedge accounting and to reconsider recognition and measurement requirements for financial instruments Liabilities and equity to reach consensus on a preferred model distinctions Consolidations policy and to improve financial reporting by procedure enterprises involved with variable interest entities and to reconsider consolidation guidance for voting interest entities Fair value measurement IASB: to develop guidance similar to FAS 157; FASB: to improve disclosure about fair value measurements and to review FAS 157 in light of lASB's deliberations Derecognition to develop a common standard Post employment benefits to place the full obligation on balance (including pensions) sheet and re-examine measurement
At the inception, the convergence process was envisioned to continue until the point when U.S. GAAP and IFRS achieve practical equivalence. Although the process produced some results, most notably in accounting for business combinations, share-based payment, and the fair value option, it turned out to be slower and more difficult than expected. Consequently, the progress on convergence has been limited. It became apparent that it would be very difficult, if not impossible, to replace about 25,000 pages of detailed rules, comprehensive implementation guidance, and industry interpretations with about 2,500 pages of broad and principles-based standards. Therefore, in 2008 the emphasis in the United States started to shift from the convergence approach to the conversion approach: that is, adoption of IFRS. Most recently, however, the SEC has reemphasized the convergence process as a necessary prerequisite for eventual incorporation of IFRS into the U.S. financial reporting system.
The SEC's Regulatory Decisions
In 2007, the U.S. SEC made two seminal IFRS-related decisions. In August 2007, the Commission issued the "Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance with IFRS" (SEC, 2007a). The SEC issued this Concept Release to gather input on whether U.S. registrants should be permitted to use IFRS when reporting with the Commission. In December 2007, the SEC adopted a final ruling: Securities Act Release No. 8879, "Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with IFRS without Reconciliation to U.S. GAAP," with an effective date of March 4, 2008 (SEC, 2007b). The ruling indicated the Commission's confidence that IFRS, as issued by the IASB, were robust enough to provide investors with reliable and relevant financial data. These two decisions present a dramatic new idea with significant implications for U.S. companies, the U.S. capital markets, and the accounting profession.
Most respondents to the Concept Release supported the idea of allowing U.S. issuers to choose between IFRS and U.S. GAAP during an interim period with an eventual move toward IFRS for all issuers. Moreover, many respondents advocated a date-specific mandatory adoption of IFRS. The FASB, American Institute of Certified Public Accountants (AICPA), Big Four accounting firms, as well as the Financial Executives International (FEI) (4), and many multinational corporations expressed their support for IFRS in their comment letters and during the following round tables, forum discussions and Congressional Hearings. Consequently, the SEC issued the proposed roadmap for potential adoption of IFRS by all U.S. publicly traded companies (SEC, 2008). The roadmap was issued in November 2008 around the time when the G-20 Group (5) called for the implementation of a globally consistent set of accounting standards.
The 2008 IFRS roadmap indicated that adoption of IFRS in the United States would be conditional upon achieved progress towards "milestones" including the following:
* Improvements in accounting standards: The SEC will continue to monitor the degree of progress made by the FASB and IASB regarding the development of accounting standards
* Accountability and funding of the IASC Foundation (IASCF) (6): The IASCF must show indications of securing stable funding that supports the independent functioning of the IASB
* Improvement in the use of interactive data for IFRS reporting: The SEC mandated filings for public companies in extensible Business Reporting Language (XBRL) format; the mandate came into effect for the largest 500 U.S. companies for financial disclosures made after June 15, 2009
* Education and training: The SEC will consider the state of preparedness of U.S. issuers, auditors and users, including the availability of IFRS education and training.
The milestones are intended to demonstrate improvement in the infrastructure of international standard setting as well as preparedness of U.S. capital market participants. The Commission envisioned that it would measure progress against these milestones in 2011 and, based on the evaluation results, make a final decision on whether and when to go ahead with adoption of IFRS in the United States. The SEC proposed a phased-in mandatory use of IFRS beginning with fiscal years ending on or after December 15, 2014, for large accelerated filers, 2015 for accelerated filers and 2016 for other filers (SEC, 2008).
The Private Sector
In the meantime, the AICPA has also made a seminal IFRS-related decision. In May 2008, the Institute amended Appendix A to Rules 202 and 203 of the AlCPA's Code of Ethics, giving its members the option to use IFRS as an alternative to U.S. GAAP (AICPA, 2008). The decision established IFRS as an alternative to U.S. GAAP or other consistent basis of accounting to be used by private companies. This development is especially significant in light of the IASB issuing in July 2009 "International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs)." The standard is designed to meet financial reporting needs of entities that do not have public accountability and publish general-purpose financial statements for external users (IASB, 2009). Taking into consideration the long-term dissatisfaction with U.S. GAAP expressed by many private companies, some observers believe that adoption of IFRS in the United States may actually happen through the private sector, where entities are interested in meeting user needs of assessing shorter-term cash flows, liquidity and solvency while balancing costs and benefits of compliance (Deloitte, 2009). This would be a different dynamic than in most other jurisdictions around the world, where adoption of IFRS by unlisted companies has been hindered by statutory reporting requirements.
Recently, the AICPA and the Financial Accounting Foundation (FAF) established a "blue-ribbon panel" to provide recommendations on the future of standard setting for private companies. The panel will address the question whether separate, standalone accounting standards for private companies are needed (AICPA, 2009).
The Most Recent Regulatory Developments
The SEC consistently identifies comparability of financial information to investors as a key benefit of moving to IFRS (e.g., SEC, 2007a, 2007b, 2008). In April 2009, at the inaugural meeting of the lASCF's Monitoring Board, SEC Chairman Mary L. Schapiro reiterated her support for a single set of global standards. More recently, Chairman Schapiro spoke about reforming the global financial system and the regulatory framework that governs it at a conference sponsored by the International Organization of Securities Commissions' (IOSCO) Technical Committee in Basel, Switzerland, on October 8, 2009. She said that financial reports prepared in accordance with high-quality, consistent accounting standards are one of the most effective tools for providing transparency to the markets and instilling confidence in investors. Yet the financial crisis has demonstrated that some standards must be improved. She reiterated the Commission's commitment to a global set of accounting standards.
In addition, the SEC has recently published its Draft Strategic Plan for fiscal years 2010 through 2015. The document includes drafts of the SEC's mission, vision, values, strategic goals, major initiatives, and performance metrics. In the plan, the SEC proposes an objective of promoting high- quality financial reporting worldwide through, among other things, support for a single set of high-quality global accounting standards and promotion of the ongoing convergence initiatives between the FASB and the IASB (SEC, 2009a). This is in line with the statement issued at the G-20 Summit held from September 24--25, 2009, in Pittsburgh, Pennsylvania. In an agreement reached at the Summit to make numerous changes to the regulation of financial markets, systems and institutions, the leaders of the G-20 Group called on "international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011" (Lamoreaux, 2009). In response, the IASB and the FASB have issued yet another joint statement reaffirming their commitment to improve IFRS and U.S. GAAP and to bring about their convergence. The Boards also express their agreement to intensify their efforts to complete the major joint projects described in their 2006 MoU, as updated in 2008. In the interest of timely and continued progress, the two Boards also committed to monthly joint meetings and to provide transparency and accountability by providing quarterly updates on their progress on convergence projects.
In the meantime, the SEC staff reviewed over 200 comment letters received in response to the 2008 IFRS roadmap. Responders expressed widespread support for the goal of having a single set of high-quality globally accepted accounting standards, but differed in their view how to achieve this goal. After careful deliberation the Commission met on February 24, 2010, to discuss the IFRS roadmap, and unanimously approved the 71-page Commission statement that provides an overview of the IFRS activities, summarizes some of the public feedback on the 2008 IFRS roadmap and outlines an approach going forward (SEC, 2010). The Commission statement directs the SEC staff to carry out a work plan prior to an SEC decision on IFRS. The key issues to be addressed in the work plan include:
* Sufficient development and consistent application of IFRS globally
* Independence of standard setting process
* Transition issues, such as:
* Investor understanding and education
* Impact on U.S. regulatory environment
* Impact on issuers, and
* Human capital readiness
According to the SEC statement, the decision about incorporating IFRS in the U.S. financial reporting system will be made in 2011. The document does not provide any details of potential transition dates or approaches, but the staff stated that 2015 or 2016 seemed reasonable based on comments received on the 2008 IFRS roadmap. The Commission also indicated that an early adoption is a viable option if the SEC decides to require the use of IFRS.
Challenges of IFRS Adoption Under the Proposed SEC Roadmap
Preparers of financial statements face significant challenges in adopting IFRS. The challenges run the risk of being underestimated by management, who may focus solely on direct changes occurring on the financial statements. Preparers can learn from those in jurisdictions that have already adopted IFRS.
In the current economic environment, the sheer cost of conversion is at the top of many executives' minds. Estimates vary depending on size and other factors, but in some cases entities can expect to incur up to nearly 1 % of revenue on the effort. It can be difficult to justify the short-term costs of converting to a new set of standards when the benefits of the conversion tend to be more long-term in nature. If adoption is mandated by the SEC, difficult decisions regarding resource allocation will be necessary.
Further, depending on the timeline ultimately decided upon by the SEC, considerable time pressure could result in further escalation of costs necessary to meet the timing. Ultimately, given the time it takes to fully implement IFRS, taking two years from the date of transition to the end of the first IFRS reporting period, sufficient up front planning of resource needs and allocation will be vital to a successful adoption and to keeping the costs of adoption under control.
Exhibit 2. Challenges of adopting IFRS, as perceived by potential early adopters Other 10% Cost to Convert 18% Lack of accounting technical guidance--no bright lines 33% Lack of skilled personnel 32% Insufficient technology technology 7% Source: November 2008 Deloitte survey of over 200 respondents Note: Table made from pie chart
A sizeable challenge of adoption is the need for skilled personnel. Training existing staff and management is a time consuming process, and there will also be a need for personnel with relevant experience in the application of IFRS to ensure a satisfactory transition. Availability of an appropriately trained and experienced workforce will be limited until educational programs, both at the collegiate and professional levels, can catch up to the need.
Information systems are another area where substantial changes will be necessary during the adoption of IFRS, especially for entities with global operations. Multiple systems running with multiple charts of accounts and consolidation methods will need to be brought in sync with each other. Further, during the two-year period of transition to IFRS, entities will need to run IFRS and local GAAP simultaneously, putting additional strain on already limited resources. Standardization of policies and procedures will be necessary to consistently apply the standards across borders. The impact to those outside of accounting should also be considered. The information necessary to support many accounting and reporting functions often comes from outside of the accounting department, and responsible parties will need to be educated as to the changes that will need to take place in their arena.
The Accounting Profession
As is the case with preparers, a significant challenge to the accounting profession will be the availability of sufficiently educated and experienced professionals. Audit professionals will need to demonstrate sufficient knowledge of IFRS in order to render an opinion on IFRS financial statements. Those who support auditors, such as tax professionals and information systems consultants, will also need to ensure that their understanding of IFRS is sufficient to adequately provide audit support. An example of this need is in the area of tax provision auditing. Tax professionals supporting IFRS audits will need to have a sufficient understanding of IAS 12, Income Taxes, in order to properly evaluate the tax provision.
In addition to sharing the challenge of resource constraints, accounting professionals will be facing an ever-increasing use of judgment in the application of IFRS, due to the principles-based nature of the standards, as opposed to the generally rules-based standards of U.S. GAAP. Convergence efforts have increased the use of judgment-based standards in recent years, in particular the recently adopted fair value and business combination standards, which require a much greater amount of professional judgment in their application than earlier standards. But still, changing the rules-based way of thinking of U.S. GAAP to the principles-based mindset of IFRS will take considerable effort on the part of accounting professionals.
IFRS knowledge in the United States is currently limited to expert groups mostly among financial analysts and institutional investors, credit-rating agents, Big Four accountants, actuaries, preparers reporting under IFRS to their foreign parent companies and regulators and standard-setters dealing with IFRS issues. Current accounting curricula at most U.S. colleges and universities include only limited IFRS content.
The 2008 survey conducted by the accounting firm KPMG in cooperation with the American Accounting Association (AAA) on the subject of IFRS education found that only five % of the surveyed professors expected the Class of 2009 to have a substantial knowledge of IFRS.
The responses revealed that 62% of professors have not taken any significant steps to incorporate IFRS into the accounting curriculum. They believed that although the first class of graduating seniors likely to have a substantial amount of IFRS education will be the class of 2011, it would take many years for graduating seniors to be sufficiently knowledgeable about IFRS. Although publishers have started to gradually add IFRS content to U.S. GAAP-based accounting textbooks and IFRS textbooks in English are readily available abroad, about 42% of the professors surveyed felt that IFRS-based textbooks would not be ready until the 2010-2011 academic year (KPMG-AAA, 2008).
The survey reflected the state of IFRS readiness in academia as of the 2008-2009 academic year, but the findings are still quite relevant today. The inherent uncertainty of the SEC roadmap, augmented by the recent financial crisis and economic recession, hindered any significant progress towards IFRS education in U.S. academic institutions. The Financial Accounting and Reporting Section and the Financial Reporting Policy Committee of the AAA, in their response to the SEC roadmap, concluded that U.S. colleges and universities are not equipped to teach IFRS at the level necessary for near term adoption of the Standards (AAA, 2009).
The Uniform CPA Examination, however, will be transformed beginning in 2011, with a new structure, format and content, and supported by enhanced technology. The improvements, designated CBT-e for Computer-Based Testing evolution, will be launched January 1, 2011, simultaneously with exam content updates that include, for the first time, testing on IFRS. Under the new Content and Skill Specification Outlines (CSOs/SSOs), CPA exam candidates will be expected to identify and understand the differences between financial statements prepared on the basis of U.S. GAAP and IFRS. Candidates will also be required to demonstrate proficiency in first-time adoption of IFRS (AICPA, 2009).
This reality puts significant pressure on academic units providing accounting education. The current uncertainty as to if and when the U.S. financial reporting system transitions to IFRS does not help in developing strategic and tactical plans. The possibility of a prolonged parallel accounting education system, where students would be required to obtain proficiency in both U.S. GAAP and IFRS, seems to loom on the horizon as the worst possible scenario. Curriculum overload and faculty shortages are almost certain to occur if parallel accounting education is to be delivered at the undergraduate level. Recent survey of Accounting Departments at two hundred universities throughout the United States indicated significant change to the intermediate accounting course sequence as a result of information overload. Twenty % of respondents indicated that they had made the change from a two to three course sequence. The remaining 20% are in the process of making the change or have made another change such as changing the intermediate accounting courses from 3 credit hours to 4-credit hours (Davidson and Francisco, 2009)
Opportunities in IFRS reporting
Preparers adopting IFRS will have the opportunity to take a critical look at their accounting policies to ensure that the economic substance of transactions is faithfully represented. IFRS allow the preparer to use a considerable amount of judgment in applying standards so as to achieve this goal. Extensive disclosure requirements are required to ensure that the judgments used in applying IFRS are clearly understood by users of financial statements.
The adoption of IFRS also presents a unique opportunity for preparers to streamline internal and external reporting structures. Using the same set of standards across borders can reduce or eliminate the need for reconciliations between subsidiaries and follow-up during the consolidation process. A consistent understanding of the accounting policies of entities should result in more reliable application of those policies entity-wide.
As the majority of global business is or may be using IFRS, a distinct advantage exists for those operating under IFRS. Users of IFRS financial statements may have the opportunity to have a more in-depth understanding of an entity through more informative disclosures and can hopefully make more knowledgeable decisions based on that understanding.
Exhibit 3. Benefits to adopting IFRS as perceived by potential early adopters Improved financial reporting and transparency 37% Simplifies financial accounting and reporting 37% Cost savings 4% Easier access to capital 5% Other 17% Source: November 2008 Deloitte survey of over 200 respondents Note: Table made from pie chart
The Accounting Profession
There are significant opportunities in the marketplace for accounting professionals who are prepared to take advantage of them. Organizations will most likely need a substantial amount of guidance from experienced, well-trained professionals on adopting and applying IFRS, whether in working through an implementation of IFRS on a consulting basis or through providing training opportunities for an entity's accounting and executive personnel.
Further, the adoption of IFRS can act as a catalyst to improve interaction between cross-border audit teams. Speaking the same accounting language can help to streamline the audit process, from identifying risks to concluding on consolidation. Once teams are properly trained and experienced in the application of IFRS, teams will be in better positions to serve their clients in a more effective and efficient manner.
The possible move to IFRS in the United States could be seen as an opportunity for a much needed overhaul of the accounting curriculum. Members of academia should analyze current undergraduate and graduate accounting curricula in light of the upcoming changes. The current accounting education model emphasizing memorization of rules and journal entries would no longer be sufficient. The transition to IFRS creates a great opportunity to restructure the accounting curriculum to meet the requirements of the new global financial reporting environment.
The top accounting firms are currently trying to bridge the gap between demand and supply of IFRS skills by developing IFRS curriculum materials for students and faculty. Members of academia should foster further cooperation by working closely with leading accounting firms in developing the most relevant contemporary content of accounting courses. Cooperation between Deloitte's University Consortium and the faculty of Virginia Polytechnic Institute on incorporating IFRS content into intermediate accounting could serve as an example (Fay, et al. 2009).
Furthermore, IFRS would not affect financial accounting alone. The conversion would impact a wide range of business functions beyond financial reporting. These may include changes to management's internal reporting, data gathering and IT systems, the use of key performance indicators, the content of employee and executive compensation plans, the activities of investor relations, changes to policies and procedures, and the resultant impacts on internal control documentation and certification requirements. IFRS also carries tax implications arising from a major change in how companies will measure the pretax income. Issues such as transfer pricing, international tax planning, and local taxes will come up if the conversion takes place. To respond, the revision of the accounting curriculum should take an inter-disciplinary approach. To succeed in the profession, students ought to be well educated not only in the IFRS-based financial, managerial and tax accounting, but also in finance and economics, with special emphasis on valuation and determination of the economic substance of transactions. Emphasis should be placed on statistics, logic and judgment formation, as well as proficiency in accounting information systems. Selected programs offered at leading universities located in IFRS jurisdictions could serve as models. For example, members of academia and practitioners in Germany observed that IFRS enforce a trend toward integration of financial and managerial accounting systems. Some German universities offer courses in IFRS-based managerial accounting and integrated accounting systems.
The perfect storm of financial reporting changes hovering over academia at this time may prompt a value-adding cooperation among accounting, finance and economics departments. But this would be a complex process of change rather than an immediate shift in education. Mary Barth, long time academic member of the IASB, suggests that in the meantime educators should start changing the way in which they teach in order to prepare for IFRS. In particular, a greater emphasis should be placed on the conceptual framework, foundational theories upon which financial reporting is based and valuation theory. Accounting faculty should teach how to audit estimates of asset and liability values and provide opportunities for students to exercise professional judgment (Barth, 2008). Larson and Brady (2009) offer useful suggestions for incorporating IFRS into the accounting curriculum and provide a list of numerous IFRS resources.
Higher education institutions are likely to face significant challenges to implement the new accounting curriculum, especially due to the well-publicized shortage of accounting faculty, especially with doctoral degrees. But this time of change offers a unique opportunity to reassess the priorities of accounting education, redefine the objectives and develop an accounting curriculum that reflects current market developments and equips students with a globally portable set of skills.
The potential adoption of IFRS in the United States would be much more than a technical accounting exercise. The principles-based approach reflected in IFRS, if adopted, will require future accountants and auditors to exercise professional judgment more often and to a greater degree than before. IFRS also have tax, internal reporting, and systems implications. This change is profound, especially when seen in the broader context of the current financial reporting environment, including an ever-intensifying movement towards fair value accounting, the implementation of the FASB Accounting Standards Codification and the mandatory use of XBRL by publicly listed companies.
Many are wondering about future of IFRS in the United States. The SEC indicated that the execution of the staff work plan and the completion of the convergence projects would position the Commission to make the informed decision in 2011 (SEC, 2010). Whatever the Commission's decision, given the globalization of capital markets and continuing transition of companies worldwide to IFRS, there is a rising need for financial reporting constituencies to educate themselves about IFRS.
AccountingWeb. 2009. Blue ribbon panel to address private company accounting standards. December 12, 2009. Available from: www.accountingweb.com/topic/blue-ribbon-panel-address-private-company-accounting-standards
American Institute of Certified Public Accountants. 2008. AICPA Council Votes to Recognize the International Accounting Standards Board as a Designated Standard Setter. May 18, 2008. Available from: www.ifrs.org/updates/aicpa/Press_Release_May18.html
American Accounting Association. 2009. Response to the SEC Release: Roadmap For the Potential Use of Financial Statements Prepared in Accordance With International Financial Reporting Standards By U.S. Issuers. File No. S7-27-08. April 17, 2009. Available from: ftp.sec.govlcommentsls7-27-08ls72708-143.pdf
American Institute of Certified Public Accountants. 2009. Content and Skill Specifications For the Uniform CPA Examination. Effective Date: January 1, 2011. Available from: www.cpa-exam.org/download/CSOs-SSOs-Final-Release-Version-effective-01-01-2011.pdf
Barth, Mary E. 2008. Global financial reporting: Implications for U.S. academics. The Accounting Review 83: 1159-1179.
Barth, M., W. Landsman and M. Lang. 2008. International accounting standards and accounting quality. Journal of Accounting Research 46 (3): 467-498.
Bartov, E., S.R. Goldberg, and M. Kim. 2005. Comparative value relevance among German, US, and International Accounting Standards: A German stock market perspective. Journal of Accounting, Auditing and Finance 20(2): 95-119.
Beneish, M., B. Miller and T. Yohn. 2009. The effect of IFRS adoption on cross-border investments: Evidence from the widespread mandatory adoption of IFRS in 2005. Working paper, Indiana University.
Chakravartly, M. 2009. The global shift in market capitalization. Available from: www.livemint.com/Articles. Posted August 24, 2009.
Covrig, V., M. DeFond, and M. Hung. 2007. Home bias, foreign mutual fund holdings, and the voluntary adoption of international accounting standards. Journal of Accounting Research 45 (1): 41-70.
Daske, H., L Hail, C. Leuz and R. Verdi. 2008. Mandatory IFRS reporting around the world: Early evidence on the Economic Consequences. Journal of Accounting Research 46 (5): 1085-1142.
Davidson, L. H. and W. H. Francisco. 2009. Changes to the Intermediate Accounting course sequence. American Journal of Business Education 2 (7): 55-59.
Deloitte. 2008. November 2008 IFRS Survey Results. Available from: www.financialexecutives.org/eweb/upload/FEI/IFRSSurvey_1208.Deloitte.pdf
Deloitte. 2009. International Financial Reporting Standards: What it Means for Private Company Reporting. April 27, 2009. Available from: www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_PE_IFRSPrivateCompanyReporting.pdf
Deloitte. 2010. IAS Plus--Use of IFRSs by Jurisdiction. Available from: www.iasplus.com/country/useias.htm#* Accessed on March 2, 2010.
Fay, R., J. Brozovsky, J. Edmonds, P. Lobingier, and S. Hicks. 2009. Incorporating IFRS into Intermediate Accounting. Virgina Tech, Posted 7/29/2008, Edited 8/14/2009. Available from: commons.aaahq.org/posts/327f0d42a0
Financial Accounting Standards Board. 2002. The Norwalk Agreement. Norwalk, CT: FASB. Available from: www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1218220086560
Financial Accounting Standards Board. 2006. Memorandum of Understanding. Norwalk, CT: FASB. February 27, 2006. Available from: www.fasb.org/cs/ContentServer?c=DocumentC&pagename=FASB%2FDocument_C%2FDocum entPage&cid=1176156245558
Financial Accounting Standards Board. 2008. Memorandum of Understanding. Norwalk, CT: FASB. September 2008. Available from: www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocum entPage&cid=1175801856967
Financial Services Authority of Japan. 2009. Summary of the Revised Cabinet Office Ordinances. December 11, 2009. Available from: www.iasplus.comasial0912ifrsordinancessummary.pdf
Gannon, D.J. and A. Ashwal. 2004. Financial reporting goes global. Journal of Accountancy 198(3): 43-47.
International Accounting Standards Board. 2009. International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs). London: IASB. July 9, 2009. Available from: www.go.iasb.org/IFRSforSMEs
KPMG-American Accounting Association. 2008. University Professors Weigh in on Building IFRS Into Curricula: Small Number of Universities Will Be Ready for 2008-2009 Academic Year, According to KPMG-AAA Survey. September 4, 2008. Available from: www.financialexecutives.org/eweb/upload/FEI/KPMG%20AAA%20IFRS%20Professor%20Survey%20Press%20Release_9.4.08.pdf
Lamoreaux, M. G. 2009. G-20: Achieve Single Set of Global Accounting Standards by June 2011. G-20: Achieve single set of global accounting standards by June 2011. Journal of Accountancy. September 27, 2009. Available from: www.journalofaccountancy.com/Web/20092188.htm
Larson, R. K. and T. J. Brady. 2009. Incorporating IFRS into the accounting curriculum. Strategic Finance, February 2009: 23-25.
Leuz, C. 2003. IAS Versus U.S. GAAP: Information asymmetry-based evidence from Germany's New Market. Journal of Accounting Research 41 (3): 445-472.
Securities and Exchange Commission. 2007a. Concept Release on Allowing U.S. Issuers to Prepare Financial Statements in Accordance With International Financial Reporting Standards. Release No. 33-8831; 34-56217; IC-27924. August 7, 2007. Available from: www.sec.gov/rules/concept/2007/33-8831.pdf
Securities and Exchange Commission. 2007b. Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP. Release No. 33-8879. December 21, 2007. Available from: www.sec.gov/rules/finall2007l33-8879.pdf
Securities and Exchange Commission. 2008. Roadmap For the Potential Use of Financial Statements Prepared in Accordance With International Financial Reporting Standards by U.S. Issuers, Release Nos. 33-8982; 34-58960. November 14, 2008. Available from: www.sec.gov/rules/proposed/2008/33-8982.pdf
Securities and Exchange Commission. 2009a. Strategic Plan For Fiscal Years 2010-2015--Draft for Comments. October 8, 2009. Available from: www.sec.gov/about/secstratplan1015.pdf
Securities and Exchange Commission. 2009b. Speech by SEC Commissioner Elisse B. Walter: Remarks Before the AICPA National Conference on Current SEC and PCAOB Developments. Washington, DC December 9, 2009. Available from: www.sec.gov/news/speech/2009/spch120909ebw.htm
Securities and Exchange Commission. 2010. SEC Release No. 33-9109, Commission Statement in Support of Convergence and Global Accounting Standards. Washington, DC February 24, 2010. Available from: www.sec.gov/rules/other/2010/33-9109.pdf
Standard & Poor. January 2004. Monthly Report: World by Numbers, February 11, 2004. Available from: www2.standardandpoors.com/spflpdflindexlworldbynumbers_Jan04.pdf
Standard & Poor. September 2009. Monthly Report: World by Numbers, September 30, 2009. Available from: www2.standardandpoors.com/ spflpdflindex/WBN_Sept09.pdf
(1) The IASC issued standards IAS 1 through IAS 41, of which 29 are still in effect. The SIC issued 33 interpretations, of which only 11 are still in effect; others have been incorporated into standards.
(2) Designated IFRS include all IFRS and Interpretations issued on or before December 31, 2009.
(3) The authors used metrics for earnings management based on the variance of the change in net income, the ratio of the variance of the change in net income to the variance of the change in cash flows, the correlation between accruals and cash flows and the frequency of small positive net income.
(4) FEI is the preeminent association for CFOs and other senior finance executives.
(5) G-20 is the Group of Twenty Finance Ministers and Central Bank Governors from 20 world's largest economies: 19 countries, plus the European Union (EU). It has also met three times at heads-of-government level: Washington, DC in November 2008, London in April 2009, and Pittsburgh in September 2009. Collectively, the G-20 economies comprise 85% of global gross national product, 80% of world trade (including EU intra-trade) and two-thirds of the world population.
(6) In January 2010 the Trustees of the IASC Foundation approved changes to the Foundation's Constitution. As a result, the IASC Foundation has been renamed the IFRS Foundation, effective March 1, 2010.
Sylwia Gornik-Tomaszewski, The Peter J. Tobin College of Business, St. John's University
Steve Showerman, Deloitte & Touche, LLP