IFRS Returns to the Front Burner

by Marie Leone, CFO.com

Leading the charge to convert the world to International Financial Reporting Standards, David Tweedie says many of the problems opponents cite are being addressed and resolved. Is he right?

The debate over whether U.S. companies should be forced to use international accounting standards took on new life last month when the Securities and Exchange Commission assured investors, companies, and accountants that the project is still active. Once the SEC announced it hadn't lost sight of the project, criticism of International Financial Reporting Standards bubbled up again, with opponents making the same arguments they did when the SEC released the IFRS roadmap in 2007.

The main criticisms: training U.S. accountants and auditors by the proposed 2014 deadline would be impossible; the SEC would cede its regulatory power to a global regulator; the standard-setter that wrote the rules — the International Accounting Standards Board — would buckle under political pressure; and compared with U.S. generally accepted accounting principles, IFRS is weak and would therefore invite accounting abuse.

But IASB chairman, David Tweedie, says those old complaints don't conform to current realities. He contends there won't be many differences, in fact, between U.S. GAAP and IFRS by the year 2015 if the current project to converge the two sets of rules continues at its current pace.

The agenda and time line for the convergence project, which was launched seven years ago by the IASB and its U.S. counterpart, the Financial Accounting Standards Board, will be updated at the end of the month during a three-day joint board meeting. As of today, the time line does not extend past 2011 — the year the SEC expects to vote on whether to move forward with mandatory adoption of IFRS, or to abandon the project.

Speaking to reporters at a Deloitte client conference in New York this week, Tweedie said obstacles regarding U.S. education have already fallen. For one thing, IFRS textbooks are already available in English from publishers in the United Kingdom and Australia.

What's more, by mid-2008 each of the Big Four accounting firms — who are major supporters of IFRS — had begun working with colleges to revamp curricula to include IFRS. (The American Accounting Assn., whose members are accounting professors, created a task force two years ago to develop IFRS curricula that could be rolled out to colleges.)

The notion that auditors are unprepared for the change also is a stretch, argued Tweedie. By his lights, any accounting firm that works with big or small multinationals already deals with financials prepared using IFRS. Further, the American Institute of Certified Public Accountants, which develops audit standards for privately held firms, has launched www.ifrs.com, a website aimed at providing its 300,000 members with training, resources, and updates on lobbying efforts on behalf of CPAs.

Last year, the AICPA also recognized the IASB as a standard-setter, which in effect allows U.S. auditors to express opinions on financial statements prepared using IFRS.

"The AICPA put IFRS on the same plane as U.S. GAAP"says Barry Epstein, a CPA and partner with litigation consultancy Russell Novak & Co.

"David Tweedie is right: the Momentum for IFRS is there; it is like a snowball rolling down a hill."

Epstein says the "watershed" event that fueled the creation of the SEC's IFRS roadmap — the proposal to move U.S. companies to IFRS by 2014 — was the 2007 SEC rule that waived the reconciliation requirement for foreign private issuers. As a result, foreign companies listed on U.S. stock exchanges were no longer required to reconcile their IFRS results with U.S. GAAP.

By giving permission "to the visiting team" to use IFRS, the SEC created an outcry among companies and investors for a level playing field that included a plan to allow American companies to file financial results in IFRS, says Epstein, adding that:

"... investors and companies must face the reality that IFRS is here to stay."

But opponents who contend that U.S. GAAP is the global gold standard for transparent and robust financial reporting say the lack of rules and guidance in IFRS invites accounting abuse. Critics taking that view include the New York State Society of CPAs, which, with its 30,000 members, is one of the country's largest groups of accountants.

In a comment letter filed with the SEC about the roadmap, the NYSSCPA panned the proposal, finding the quality of IFRS lacking and the conversion costs too hefty, and claiming that "carve-outs" — the exceptions to IFRS that different countries develop — impair the comparability and consistency of financial statements that investors rely on.

The group also echoed a common complaint heard among IFRS opponents: the IASB caved in to political pressure last year when it allowed companies to retroactively reclassify assets so they could "cherry-pick" those with significant losses and remove them from net-income calculations. Tweedie's retort is that if the IASB hadn't acted to control the rule change, the European Commission would have passed a law that changed the rule in a less desirable way.

The handful of comment letters that CFOs filed with the SEC about the roadmap reveal mixed reactions to IFRS. For instance, C. Bradford Richmond of Darden Restaurants wrote:

" The large majority of U.S. public companies, like Darden, serve primarily domestic customer bases and are adequately capitalized without tapping overseas capital markets. Rather than mandating IFRS for all companies, we believe it would be more appropriate to allow large multinational organizations to adopt IFRS on a voluntary basis."

Similarly, Elyse Douglas of The Hertz Corp. noted:

" In our opinion, there has been no groundswell of public opinion promoting a conversion to IFRS. In fact, we have never heard an investor in our company, any stock analyst covering Hertz, or any lender with which we do business suggest to us that they would prefer we report our results in IFRS."

Conversely, Martyn Webster of XenoPort Inc. wrote:

" If the U.S. remains outside of the IFRS framework, then we will somewhat compromise our ability to participate in, and influence, important matters related to the overall operations of global capital markets."

A new Deloitte survey that polled 150 corporate finance executives concluded that:

- 51% - of the respondents would support the SEC's roadmap for adopting IFRS, if the regulator considered pushing back the mandatory deadline a year, to 2015
- 19% - said they supported the roadmap "as it is"
- 15% - rejected the proposal.

The remaining executives said they were unsure how the SEC should proceed.

Tweedie contends that while some critics claim the SEC will lose power if American companies switch to IFRS, the opposite is true. "The SEC will increase power" if the U.S. moves to IFRS, he says. "The beauty of the SEC is that it is one of the world's most effective regulators, and that puts peer pressure on others."

That pressure will extend to private companies as well, noted D.J. Gannon, a Deloitte partner and the firm's IFRS expert, who also took part in the press briefing. He said that once the SEC acts to require public companies to file results using IFRS, larger private companies will follow in order to keep up with the competition. In addition, lenders to smaller private companies will demand it from their borrowers. "It will take time; we are not going to go from zero to 60 in three months," noted Gannon, who thinks that over the next few years, momentum to use IFRS will grow.

It wasn't until recently that the SEC weighed in on the progress of its own roadmap. Since becoming SEC chair in late January, Mary Schapiro had remained quiet on the subject of the roadmap, a project her Republican predecessor, Christopher Cox, launched during his term. Schapiro's silence led some observers to believe the SEC was backing off from IFRS altogether.

But recent public statements made by Schapiro and James Kroeker, the SEC's chief accountant, assured constituents that the IFRS project had a green light. Schapiro's silence was a way of "establishing her territory [and] showing she was not doing the bidding of the previous Administration," contends Epstein. "I don't think it is possible to stop [the move to IFRS] or delay it. It costs money to keep companies in limbo."

Others, including Charles Niemeier, a member and former acting chair of the Public Company Accounting Oversight Board, have criticized the "rush" to deploy IFRS in the United States. For his part, Niemeier would like to see the IASB-FASB convergence project finished before requiring U.S. companies to file in IFRS. That, he thinks, would ensure that the combined standards remain stringent.

A precipitous exit from GAAP undermines the U.S. regulatory system and places "in jeopardy the thing that gives the U.S. a competitive advantage," he noted at an industry meeting in 2008.

" All research shows that the U.S. is unique in its regulation. No country is as effective.... We have the lowest cost of capital in the world. Do we really want to give that up"?

Additional reporting by: David McCann & Jason Karaian.

AICPA : IFRS Background Document

The American Institute of Certified Public Accountants (AICPA) has recently issued a background document on International Financial Reporting Standards (IFRS).

The growing acceptance of International Financial Reporting Standards (IFRS) as a basis for U.S. financial reporting represents a fundamental change for the U.S. accounting profession. Today approximately 113 countries require or allow the use of IFRS for the preparation of financial statements by publicly held companies. In the United States, the Securities and Exchange Commission (SEC) has issued a proposed roadmap for the possible mandatory use of IFRS for U.S. public companies.

Download the document at:
http://www.ifrs.com/pdf/IFRSUpdate_V8.pdf

The American Institute of Certified Public Accountants, with approximately 340,000 members, is the national professional organization for certified public accountants in the United States. Well before IFRS began to gain traction in the U.S. business and regulatory communities, the AICPA was publicly supporting the goal of a single set of high quality, global accounting standards to be used in public company financial reporting throughout the world. In May 2008, the AICPA's governing Council voted to amend Rules 202 and 203 of the AICPA's Code of Professional Conduct to recognize the International Accounting Standards Board as an international accounting standard setter in the U.S.

American Institute of Certified Public Accountants

Lessons Learned from the Financial Crisis

Journal of Accountancy

Personal financial planning specialists discuss the altered investment landscape.

Since the onset of the economic crisis last fall, many CPAs who are personal financial planning specialists have been working overtime to reassure clients overwhelmed with fear about the future and safety of their investments and to reassess and reorient investment portfolios when necessary.

Members of the AICPA’s Personal Financial Planning (PFP) Section recently reflected on their experiences from the past year and their outlook for the future. Lyle Benson, a member of the AICPA’s PFP Section for 20 years, moderated the discussion on behalf of the JofA.

Here are some excerpts from that gathering:

COMMUNICATE WITH CLIENTS

Journal of Accountancy:
When the economy took a downturn, what was the reaction of your clients? What steps did you take to work with them through the turbulent market?

Jerry Love: I strongly emphasized the overstatement of the state of the economy by the mainstream news media and my firm belief in the existence of underlying economic principles that would prevent the country from going into another Great Depression. When I reminded my clients in West Texas of what we experienced during the late ’80s—an oil and gas industry crash, along with a major collapse of commercial real estate and the almost complete disappearance of the savings and loan industry causing many community banks to fail and resulting in double-digit unemployment and a major contraction of the available lending options, most would say, “You’re right. It can be very bad and still recover.”

Michael Goodman: We spent a lot of time reaching out to clients during this period, taking the focus off what was happening “today” in their portfolios and putting it back on their original goals and the time frame for when they actually need money and where the markets will be when they likely need their funds, whether it’s seven, 10, 20 or 30 years out

Beth Gamel: People were really worried that they were going to run out of money and not have enough to provide for themselves. Because people were so agitated, it was important to have more frequent meetings, phone calls, and e-mail exchanges with clients because they needed a lot of handholding and to know that you were available to them and that you were listening.

Scott Sprinkle: We wanted to reach out to our clients in as many ways as possible to make sure they understood their investment policy statement and overall investment plan. While the market pullback was severe and the degree of the pullback unexpected, the risk had been planned for in advance. We “stress tested” the client’s portfolio, looked at asset allocations, and made sure that clients understood the construction of their portfolio. Specifically, for retired individuals, our plans recommend three to five years of living expenses allocated between cash, short-term bonds and other high-quality, low-risk assets.

We reminded clients of the amount of work completed to establish their investment plan and that the plan accounted for market volatility. This provided some comfort and allowed clients to stay prudently allocated until the market rebounded. The last thing we wanted any client to do was panic and sell out at the bottom.

That’s where CPAs in general do a better job than most advisers: focusing on the front end and the development of a comprehensive plan versus just buying assets. This allows clients to focus on what is important in tough times and allows them to stay disciplined in their investment approach.

RE-EDUCATE, RE-ASSESS
AND REVISE WHEN NECESSARY

Did anyone else follow this approach of stepping back and re-educating clients on their portfolios in light of market changes or in terms of their overall goals and planning? What did you do to help reorient investment portfolios in light of these times?

Gamel: In my practice, I only do financial planning and investment advisory work. In order for a client to become an investment advisory client, we have to go through an initial financial plan, which involves retirement projections and asset allocation development. Even if you’d done that within the last couple of years, many clients no longer had confidence in those numbers. One of the most important first steps was to sit down and reassess people’s risk tolerances. In many cases that meant starting with what their asset base is today and redoing those projections to see if they might be at risk of running out of money or if some tweaking of their asset allocation or their spending could give them the confidence to believe that they could manage with their current assets.

Goodman: We had our clients go through an independent score-based risk tolerance test. We sat down and discussed the reconciliation between what their risk tolerance is saying their portfolios could be and their required rate of return. For example, if their risk tolerance says they need a portfolio that’s only 40% stocks but we know that their need from a rate of return standpoint is 60% or 70% stocks, the difference has to be reconciled.

Susan Tillery: When the downturn hit, our clients did not get anxious due to our firm’s philosophy. When we initially sit down with our clients, we discuss a conservative approach: seeking the lowest rate of return with the least amount of risk (standard deviation) to be able to achieve their goals. Because this is a long-term approach, no changes were necessary in their asset allocation or portfolios. Our clients understand the purpose of their investment portfolio is not to get rich quick, or accumulate money for money’s sake. We also use software to determine a client’s risk tolerance/indifference curves.

DEVELOP A DEFENSIVE STRATEGY
GOING FORWARD

If a client’s risk tolerance has changed as a result of stock market volatility, how are you advising them?

Goodman: It’s become standard in some portfolios to put aside a certain amount of a year’s cash flow for clients that are taking income aside. Such that the client could say, “For the next five years, I can see where my cash flow is coming from. So I’m not so worried about this other money I have invested for the present because I don’t need it at a minimum until year 6.” We were doing this in the past but are being more diligent about it now.

Also, within the portfolio asset allocation there’s always been stocks, bonds, and “other,” which is a bucket of things like commodities and real estate that are less correlated to the movement of stocks and bonds. Now we are looking harder at trying to mix different things like structured notes into the “other” bucket in order to give clients some diversification from traditional stocks and bonds.

Sprinkle: During volatile times, diversification and understanding what you are investing in becomes even more important. We reduced client municipal bond allocations in the last quarter of 2008 due to quality concerns and looked for additional diversification and more secure asset classes. Part of the allocation was moved to well- diversified investment-grade corporate bonds, and the rewards were immense. Additionally, we analyzed cash returns. While during the meltdown, cash was the place to be, real returns were still zero, particularly after tax and inflation. We completed significant due diligence on high-quality, ultra-short funds.

By increasing the duration of the investment paper from 30-day instruments to 90-day instruments, we were able to pick up 300 to 400 basis points of return. We are continuing to communicate with clients on their risk tolerance while looking for investment alternatives that further diversify their portfolio and take advantage of pricing discrepancies in the market. There are significant opportunities in many misunderstood sectors. Currently, long-term investors have an opportunity to achieve significant returns with reduced levels of risk in several market sectors and asset classes.

Some of you don’t get directly involved in managing the clients’ assets. What role do you play in the planning process?

Tillery: As part of our financial planning process, we sit down with the client and write their investment policy statement. We then meet with their investment professional to discuss the client’s asset allocation. The investment professional then brings back suggestions for each asset class with an explanation of why they’re making the suggestion. We always make sure that the portfolio has some negatively correlated assets within each asset class.

Love: Our strategy is not to manage investments, so we pair the client with a broker to help ensure that the products and the overall mix make sense for the client. I’ve seen an increase in people who have been trading and picking their own investments who are now more willing to go to an active manager. They have begun to see the value of having the funds actively managed by someone who’s got a good track record who knows how to figure out the market.

PURSUE TAX-PLANNING OPPORTUNITIES

What tax and estate planning strategies/ opportunities do CPAs need to act on with clients?

Gamel: This is where CPAs who don’t have all of the credentials or whose practice doesn’t incorporate investment planning can provide a lot of services to clients. Probably the only positive thing about last year’s market meltdown was it gave people the opportunity to make some changes or reposition their portfolio or simply take capital losses, which offset gains earned earlier in the year or provided capital loss carryforwards. The other thing is talking to clients about the gifting and valuation opportunities, where you would then use less of your unified credit or your GST (generation-skipping tax) because you’re transferring assets that have a depressed value.

And while the section 7520 rate has gone up a little bit, it was really, really low, and so there were opportunities to create charitable lead trusts and GRATs (grantor retained annuity trusts) and consider other sorts of estate planning and gifting strategies. Lastly, we’re all poised to be talking to clients about Roth conversions in 2010 because of the ability to do that regardless of what your AGI is and the two years to pay the tax on the conversion.

But there’s a good reason to be talking to clients who might have the ability to keep their AGI below $100,000 even this year to do a conversion with the depressed value of their portfolios.

Love: The depressed economic environment is giving an opportunity for conversion from C corporation to sub S. Just like the stock market, most businesses would have a lesser value right now for a number of factors than they might have earlier, so if you do your valuation on a C corporation and convert to a sub S, you’ve got a great window for that.

Sprinkle: When clients are panicking, it is a hard time to convince them to take advantage of historically low interest rates and estate planning techniques that should be a slam dunk to implement. Congress is currently reviewing several tried-and- true estate planning techniques that have been used successfully for years.

Examples include GRATs, GRUTs (grantor retained unitrusts), SCINs (self-canceling installment notes), charitable trusts and family limited partnerships. Clients who hesitate may lose the opportunity to implement some of these techniques. It is a beneficial time for several of these techniques, and CPAs should be reviewing alternatives with clients while opportunities still exist.

SEIZE OPPORTUNITIES FOR GROWTH

These last 12 months have had a significant impact on the things CPAs are doing with their clients. Has it caused you to rethink your business models? For example, the assets under management (AUM) business model has a huge impact on revenue streams, which may have been affected by the uncertainty in the market. Is this causing you to reassess your business models going forward?

Goodman: If your firm operates under the assets under management revenue model, compensation and revenue have most likely been down. It’s been a tough period, but I have no intention of changing my model. With any business there are risks to revenue streams. While the markets are down, it is also a good opportunity to get out into the marketplace and bring in new revenue through people who are looking to potentially change advisers. One might even argue that this downturn has been a significant opportunity to grow the business, and when the markets do get back, we’ll all potentially be way ahead of where we would have been anyway.

When you’re taking a new client, there’s a lot more work done upfront especially in terms of financial planning. How does this type of work relate to your compensation model (retainer- based, AUM-based, or hourly)?

Gamel: Our firm has a variety of ways to get compensated. We have pure AUM, and those fees clearly have gone down. Fortunately, the performance of our accounts is better than the typical market, so our fees are not down as much as 30%, for example. We also have fixed fees, retainers and a few hourly clients, so our income stream hasn’t gone down nearly as much as if we were in a pure AUM environment.

The bigger struggle is that we do a lot of financial planning along with investment advisory work, and yet many of our fees are strictly AUM. So there is a disconnect, where you’re doing more work than ever on the financial planning side, but your fees keep going down. The current environment presents a struggle between the amount of work you’re doing and the fees you’re getting.

Sprinkle: As a family office that provides several client services, it is very important for us to have our fee model unbundled and to separate investment management from the other projects. That is not to say that we don’t offer some free planning advice to investment clients. However, when we get involved in significant financial, estate or tax planning projects, we bill separately. Some of these projects may require hundreds of hours, and including them under an AUM model would be cost-prohibitive. All of our services are billed on a fee-only basis (AUM, hourly or a fixed fee).

Additionally, we spend a significant amount of upfront time communicating and disclosing to clients how they will be billed for services. Managing client expectations and providing value for services rendered will be the key to your success. There are several fee models available for CPA firms, and it is important to analyze which model fits your firm’s practice.

What’s the outlook for the future?

Love: Because of the downturn in the economy and what’s happening in the market, people are cutting back greatly on their spending. The second quarter savings rate was 5.2% in the U.S., compared with 4.0% in the first quarter. A USA Today article indicated about 27% to 32% of people are spending less now and intending to continue saving. I think the AICPA’s financial literacy program is starting to make sense to a lot of people because they’ve had a life lesson here to make it make sense.

Tillery: There is an incredible opportunity, especially for small to medium CPA firms, to viably grow their practices through financial planning. It is time for CPAs, as the client’s trusted adviser, to merge financial planning into the process. CPAs who want to offer financial planning should become certified through the PFS credential.

The Panelists:

Lyle K. Benson Jr. CPA/PFS, CFP, is president and founder of L.K. Benson & Co., a CPA financial planning firm based in Baltimore. He works with high-net-worth families and individuals in the areas of personal financial planning, investment advisory and tax services. He has been an active member of the AICPA PFP Section for more than 20 years and currently serves on the AICPA Advanced Personal Financial Planning Conference planning committee.

Beth C. Gamel CPA/PFS, is co-founder and executive vice president of Pillar Financial Advisors in Waltham, Mass. She has been a financial planner for 25 years, helping wealthy individuals evaluate, coordinate and implement sophisticated investment, estate, income tax and charitable giving strategies. For seven consecutive years Worth Magazine has named her one of the “best financial advisers” in the country. From 1996 to 2001 she wrote “Money Makeovers” for The Boston Globe, which described her as one of “New England’s leading financial planners.”

Michael E. Goodman CPA/PFS, CFP, is president of Wealthstream Advisors Inc., a wealth management firm in New York. He is also a member of the AICPA PFP Executive Committee and chair of the Advanced Personal Financial Planning Conference.

Jerry Love CPA/ABV/PFS/CFF, CVA, CFP, is the president and CEO of Davis Kinard & Co. PC, which is the largest CPA firm in Abilene, Texas. In 2006–07, he was chairman of the Texas Society of CPAs (TSCPA). He received the TSCPA “Distinguished Public Service Award” in 2000. CPA Magazine named him one of the Top 100 Most Influential Practitioners in the country for 2006, and in May 2009 the magazine named him one of the Top 40 CPAs to Know During a Recession.

Scott Sprinkle CPA/PFS, CFP, is a co-founder and managing member of Sprinkle & Associates LLC and Sprinkle Financial Consultants LLC. He has more than 20 years of experience serving high-net-worth individuals and family offices. He is a member of the AICPA’s Personal Financial Planning Executive Committee and the AICPA Investment Resource Panel. He is also a trustee and board member of the Colorado Society of CPAs and an editorial adviser to the JofA.

Susan Tillery CPA/PFS, CFP, is a fee-only comprehensive financial planner. She and her firm do not manage assets or sell products. She is president and CEO of Paraklete Financial Inc.

PCFRC Eyes Global Standards for Small Business

By Michael Cohn, WebCPA

The Private Company Financial Reporting Committee took a close look at the International Accounting Standards Board’s new “IFRS for SMEs” standards at its meeting last week.

The committee, a joint effort of the Financial Accounting Standards Board and the American Institute of CPAs, spent the bulk of the two-day meeting examining the IASB’s stripped-down set of International Financial Reporting Standards for Small and Midsized Entities (see International Accounting Standards Issued for SMBs)

Various members of the committee were assigned different sections of the standards, and will discuss what might work for U.S. companies and what might not, but the committee did not reach any conclusions on adopting the standards.

“As a committee, we did not come up with any specific recommendations on that, other than that we believe the issue of private company accounting should be on FASB’s agenda at some point,” said PCFRC chair Judy O’Dell. Most of the committee believes there should be differences in accounting between public and private entities, she noted.

One issue that needs to be addressed in the “IFRS for SMEs” standards is that last-in-first-out accounting is not permitted for inventory. “That’s a real sticking point in the United States,” said O’Dell. On the other hand, the committee liked some of the simplifications in the standards, especially one that allows accountants to simply amortize goodwill, rather than do costly impairment evaluations. O’Dell recommended that accountants should visit a section of the AICPA’s IFRS.com site that provides a set of questions and answers on the “IFRS for SMEs” standards.

The committee also discussed the state of several other projects, such as revenue recognition and financial statement presentation, but O’Dell noted there has not been a great deal of movement on those. However, a document on FIN 48-d, “Application Guidance for Pass-through Entities and Tax-Exempt Not-for-Profit Entities and Disclosure Modifications for Nonpublic Entities,” should be issued fairly soon.

The PCFRC is also likely to write letters commenting on the applicability of proposed loan-loss disclosure standards to private companies, and the flexibility of EITF 08-01, which covers revenue arrangements with multiple deliverables.

IFRS Risk Planning and Controls Execution

Strategic considerations for financial managers

by Steve Arnold, CPA, steve.arnold@ey.com
Senior Manager, Ernst & Young, Advisory Services Practice
September 2009

Conversion to IFRS will be far more than a technical accounting exercise. Implementing IFRS will impact many, if not all, aspects of your business operations, including information technology. It may bring companywide changes that will spawn new risks.

These include system changes, modifications to processes impacting employees’ day-to-day duties, and new accounting policies.

U.S. GAAP and IFRS share many similarities, but they are also different in many areas. Staff responsible for internal control over financial reporting (ICFR) under Sarbanes-Oxley (SOX) section 404 and operational audits will need to understand how your company plans to apply IFRS so they can take appropriate actions based on both operational risks and the risk of material weakness in ICFR. (See author Steve Arnold, CPA, outline how to leverage your SOX investment for conversion to IFRS in this Steps to Success video.)

While your company may be familiar with the general principles of IFRS, such as a potential need to depreciate components of fixed assets on a detailed level, a thorough review will make clear that there are many rules and requirements in these principles-based standards. Once they have analyzed the standards, companies may realize they do not have much flexibility under IFRS, but ICFR staff can assist with that analysis.

Companies will also need to evaluate the impact these differences may have on their accounting policies, as well as the underlying information technology systems that support the company’s financial reporting structure. Changes to policies and systems on this scale will invariably give rise to additional risks that your organization may need to monitor and control.

PARALLEL REPORTING RISKS

Under the SEC’s proposed road map, companies would need to maintain a parallel reporting environment for approximately three years. In creating a parallel reporting environment, your ICFR and operational audit staff will need to consider the ramifications of modifying your company’s systems and processes. These staff members will need to review the company’s enterprise resource planning (ERP) and consolidation systems’ ability to manage parallel accounting. This can be complicated and expose the organization to additional risk.

ERP and consolidation systems will need to be assessed to determine if they can handle the requirements of dual ledgers and reporting. Although the system may be structured to handle the requirement, consider the volume of data that will pass through the ERP system. Is bandwidth sufficient to process transactions in a timely manner?

For example, your parallel accounting environment may be structured to process a single transaction into two separate accounting streams, which may cause processing lags due to volume. Systems will need to be configured and controls created to avoid cross-pollination of IFRS transactions with U.S. GAAP transactions (and vice versa). Also, for most companies a plan will be needed to maintain statutory reporting ledgers.

Beyond systems, your organization may also need to modify its accounting processes for simultaneous IFRS and U.S. GAAP accounting. The financial statement consolidation of this information, even with systems modifications, will be time-consuming and will more than likely lead to additional resource requirements for the controller. Staff training for the new processes will also need to be developed and implemented.

CONTINUAL MONITORING AND TESTING

As these changes are implemented, your ICFR/operational audit staff will need to continually monitor risks and test controls. These activities are necessary, not optional. The responsibility for determining accounting standards may be shifting to or converging with the International Accounting Standards Board (IASB).

However, U.S. regulatory oversight of financial reporting will likely stay with the SEC. As such, the first set of financial statements published under IFRS may be subject to SOX section 302 and section 906 certification rules.

Controls through the conversion process such as new policy approvals and reviews of conversion calculations will be equally important. Just as it is impractical to assume the conversion to IFRS can happen in a short time, the same is true for internal control testing.

This means documentation and testing will need to move in parallel with the accounting changes and processing your company performs. With the same rigor you apply today, your company will need to prove its internal control over financial reporting is effective and maintain supporting documentation.

Your company’s external auditors will presumably be taking similar actions, as audit opinions will need to cover multiple years of IFRS-based financial statements. Throughout the IFRS conversion phases, it will be critical to get feedback from your external auditor on your project plans and execution.

HOW INTERNALCONTROL/AUDIT STAFF CAN ASSIST IN IDENTIFYING CHANGE?

ICFR and operational audit staff are in a great position to assist your company in evaluating impact areas with the IFRS conversion. Their financial and accounting backgrounds, combined with the knowledge of the underlying processes and systems, will provide in-depth knowledge for conversion planning.

ICFR personnel will be able to assist your company by:

- Inventorying the areas where the company has applied the principles of Accounting Principles Board Opinion 28 (FASB Accounting Standards Codification Topic 270) in estimating costs and expenses during interim periods—IFRS requires each interim period to be discrete and does not recognize the smoothing of costs and expenses between interim periods.

For example, your company’s process for expensing marketing and advertising on an interim basis may be different under IFRS.

Operational audit staff will be able to assist by:

- Documenting the current process for valuing inventory and identifying the system interfaces that may need to be modified under IFRS.

- Interviewing production personnel to determine how the manufacturing of trials/samples is planned and performed and then discussing the results with accounting personnel—U.S. companies often value these items in inventory, but IFRS normally requires these to be expensed as produced. Your ICFR staff will want to work with operational audit/risk management staff to plan your company control structure not only to avoid the development of material weaknesses in ICFR but also to provide for operational risk coverage.

START PLANNING

The IFRS conversion will be a multiyear effort impacting your entire organization, and it is likely not too far away. If you have not started to plan for IFRS, you need to take some initial steps in the near future, especially if your company is subject to the potential 2014 implementation date. (See author Steve Arnold, CPA, outline how to form your IFRS team in this Steps to Success video.)

Risk mitigation and controls play a huge role in the overall conversion plan. It is critical for ICFR and operational audit staff to get involved early to help guide the company in the planning, and to ensure that their portion of the cost estimate is included.

With an increase in risk and testing documentation, the ICFR and operational audit functions will need to assess their employee competencies. More resources may be necessary to cover the parallel risk remediation and control period.

As the SEC continues deliberating the future of IFRS in the U.S., your company will need to maintain the momentum and continue along the path toward conversion. Your ICFR and operational audit staff will need to ensure that they have a seat at the table at the outset to avoid any unwanted surprises.

Strategic IFRS Planning Questions for ICFR (SOX) Management

• How many resources should be assigned to the IFRS conversion project team?
• Do the personnel have adequate accounting training to understand the differences between U.S. GAAP and IFRS?
• Can the current SOX 404 process and systems documentation assist the company in estimating change impacts?
• Does the company have sufficient resources/flexibility to handle the increased controls testing?
• What can ICFR staff do to assist with mitigating the risks of change management in this significant conversion process?
• Is there IT knowledge within the department to assist in identifying risks that may arise for system modifications for the parallel accounting period?

EXECUTIVE SUMMARY

Based on the current SEC road map, your company will need to evaluate how to perform U.S. GAAP/IFRS parallel accounting over a multiyear period.

In creating a parallel accounting environment, your internal control and operational audit staff may need to consider the ramifications of modifying your company’s systems and processes.

Internal control and operational audit staff are in a great position to assist your company in evaluating impact areas with the IFRS conversion. Their financial and accounting backgrounds, combined with the knowledge of the underlying processes and systems, will provide in-depth knowledge for conversion planning.

It is critical for internal control and operational audit staff to get involved early to help guide the company in the planning and to ensure that their portion of the overall conversion cost estimate is included.

Disclaimer: The opinions expressed in this article are those of the author and not necessarily those of Ernst & Young LLP.

Steve Arnold, CPA, Author steve.arnold@ey.com
Matthew G. Lamoreaux, Senior Editor mlamoreaux@aicpa.org
Journal of Accountancy: www.journalofaccountancy.com

XBRL Europe welcomes the European Federation of Financial Analysts Societies

http://www.xbrl.org/

XBRL Europe is pleased to announce that EFFAS, the European Federation of Financial Analysts Societies, will join XBRL Europe (X-EU) as a direct member. X-EU is a division of XBRL International, the global consortium leading the development and market introduction of XBRL (eXtensible Business Reporting Language), an interactive data format which will radically change financial and business reporting.

Discover the XBRL history at:
http://xbrl.org/Home/AICPA_XBRL_history_09_web_final.pdf

IAS for Small and Medium Business Entities

The International Accounting Standards Board has published a stripped-down set of International Financial Reporting Standards aimed at small and midsized privately held businesses. www.iasb.org

The 230-page set of standards is the product of a five-year effort. The IASB said it consulted with a 40-member working group of experts on small and midsized entities to develop the “IFRS for SMEs” standards. The standards are much simpler than the full IFRS set for public companies. However, they are designed to provide improved comparability for users of accounts, enhance overall confidence in the accounts of small and midsized entities, and reduce the significant costs involved in maintaining standards on a national basis. The standards take a cost-benefit approach. IASB director of standards for SMEs Paul Pacter will lead a group to support international adoption of the standard.

IASB Chairman, Sir David Tweedie said:
“The publication of IFRS for SMEs is a major breakthrough for companies throughout the world,” ... “For the first time, SMEs will have a common high-quality and internationally respected set of accounting requirements. We believe the benefits will be felt in both developed and emerging economies.”

U.S. accounting standard-setters have also been involved in consulting on the standards as IFRS continues to converge with U.S. GAAP. The American Institute of CPAs commended the release of the standards.

“ The AICPA welcomes the introduction of IFRS for small and medium entities as an alternative accounting and reporting option for private companies,’’ said AICPA president and CEO Barry Melancon in a statement. “It is indicative of a growing trend toward alternatives for private companies in both the U.S. and worldwide, reflecting the fact that users of private-company financial statements have different needs than users of public-company statements.”

To support the implementation of IFRS for SMEs, the IASC Foundation is developing comprehensive training material and working with international development agencies to provide instructors for regional workshops to train people in the use of the training material, particularly within developing and emerging economies.

The training material will be published in a number of languages. The English-language training material will be downloadable free of charge from the IASB’s Web site in late 2009.

Discover more on IFRS for SMEs at: http://go.iasb.org/IFRSforSMEs

Σχολιασμός:
Δρ. Δημήτριος Ντζανάτος, Πρόεδρος Grant Thornton

" Το λογιστικό πρότυπο για τις μικρομεσαίες επιχειρήσεις, δεν είναι άλλο ένα πρότυπο που εντάσσεται στα IFRS, αλλά αποτελεί ένα αυτόνομο σύνολο. Αφορά το 95% περίπου του αριθμού των εταιριών, παγκόσμια αλλά και στη χώρα μας.

Είναι ένα κείμενο πολύ απλοποιημένο σε σχέση με τα IFRS , ώστε με μικρό κόστος να μπορεί να εφαρμοστεί από τις ΜΜΕ. Οι διαδικασίες λογισμού και αποτίμησης έχουν απλοποιηθεί, ζητήματα που δεν αφορούν τις ΜΜΕ έχουν παραλειφθεί, οι γνωστοποιήσεις έχουν μειωθεί δραστικά σε σχέση με τα IFRS . Επειδή τα IFRS αλλάζουν διαρκώς και αναθεωρούνται και μία ανάλογη πρακτική για τις ΜΜΕ θα αποτελούσε μεγάλο πρόβλημα, έχει αποφασιστεί οι αναθεωρήσεις να γίνονται κάθε τριετία.

Το πρότυπο, για το IASB , ισχύει με τη δημοσίευσή του. Αυτό φυσικά δεν σημαίνει ότι ισχύει στη χώρα μας ή σε άλλες χώρες, πριν γίνουν οι απαραίτητες νομοθετικές ρυθμίσεις.
Κάθε χώρα μπορεί να ορίσει αυτή το περιεχόμενο της έννοιας «Μικρομεσαίες Επιχειρήσεις» και επομένως το εύρος της εφαρμογής του προτύπου, ενώ μπορεί να υιοθετήσει αυτό το πρότυπο, χωρίς να έχει υιοθετήσει τα IFRS . Το IASB αντιμετωπίζει το πρότυπο για τις ΜΜΕ με έναν ιδιαίτερο τρόπο σε σχέση με τα IFRS . Το διανέμει δωρεάν, επεξεργάζεται διαδικασίες εκπαίδευσης των λογιστών, θα διανείμει εκπαιδευτικό υλικό δωρεάν. Είναι φανερό ότι έχει τεράστια σημασία για αυτό η διεθνής αποδοχή του.

Είναι προφανή τα οφέλη, από την εφαρμογή ενιαίων λογιστικών προτύπων σε όλο τον κόσμο, για τις ΜΜΕ. Θα αυξήσει την αξιοπιστία στους λογαριασμούς αυτών των εταιριών και κατά συνέπεια θα διευρυνθούν οι διεθνείς επιχειρηματικές συνεργασίες. Θα ανοίξει περισσότερο τις πόρτες του πιστωτικού συστήματος σε αυτές τις επιχειρήσεις.

Προετοιμάζει τις επιχειρήσεις για εισαγωγή τους στις κεφαλαιαγορές, αν πληρούν τα κριτήρια και το θέλουν. Θα μειωθεί παγκόσμια το κόστος συντήρησης και αναβάθμισης των λογιστικών προτύπων, αφού θα γίνεται σε κεντρικό επίπεδο.

Παρόλαυτα, υπάρχει και ένα πλήθος ζητημάτων που προφανώς θα αξιολογήσουν τα εθνικά κράτη ή οι υπερκρατικές οντότητες:

1. Το κόστος μετάβασης, το οποίο εκτός της χρηματικής του αποτίμησης, συνεπάγεται μεγάλες αλλαγές στην εκπαίδευση και στην πρακτική των επαγγελματιών.

2. Η πρακτική αποτελεσματικότητα. Η εμπειρία από τα IFRS , όπως άλλωστε διαπιστώθηκε και από το G 20, εμφάνισε πολλές αρνητικές πλευρές και κενά.

3. H ευελιξία αυτών των προτύπων. Κάθε χώρα έχει ιδιαιτερότητες και πρέπει άμεσα να δίνει λύσεις σε ειδικά προβλήματα που αναφύονται. Δεν μπορούν αυτές οι λύσεις να δοθούν κεντρικά.

4. Ο έλεγχος. Το εθνικό κράτος ορίζοντας το λογιστικό πλαίσιο ασκεί πολιτική. Δεν είναι εύκολο να εκχωρήσει αυτή του τη δυνατότητα σε ένα υπερεθνικό και μη ελέγξιμο από αυτό όργανο.

Ειδικά για τη χώρα μας, αυτό το πρότυπο έχει τεράστια σημασία. Η Ε.Ε. ξεκίνησε την κούρσα εφαρμογής των IFRS και είναι προφανές ότι θα το υιοθετήσει. Θα αφήσει σημαντικά χρονικά περιθώρια όπως κάνει συνήθως και ίσως θα αφήσει ευχέρειες στα εθνικά κράτη. Επομένως οι επιχειρήσεις, οι λογιστές, οι ελεγκτές, το εκπαιδευτικό σύστημα και όλοι οι σχετικοί οργανισμοί θα πρέπει να κινηθούν με βάση αυτήν την προοπτική". http://www.dntzanatos.gr/