international accounting

Achieving a Single Global Standard

By D.J. Gannon

t would be an understatement to say that the past couple of years have been chaotic for financial reporting. Issues related to the financial crisisthe use of fair value accounting, consolidation policy, and financial asset derecognitionhave dominated the discussion. Today, terms like Repo 105 have now made their way into mainstream conversation. The financial crisis has shown that sometimes there is a disconnect between the accounting outcome recognized in the financial statements and the economic reality that underlies the transactions that are being accounted for. These issues remind us of the challenges that we still face in trying to improve the quality of financial reportingthe need for more transparent financial information and accounting outcomes that reflect economic reality. They also remind us of the need for having a global perspective on financial reporting, which is no longer a choice but, rather, a necessity. The bigger picture is that the global financial reporting environment continues to evolve. The movement toward a single global standardInternational Financial Reporting Standards (IFRS)is impacting how accounting and financial reporting standards are developed, written, and applied. For over a year now, the worlds policy makers, led by the G-20, have been calling for changes in the approach to regulation. The G-20 also emphasized the importance of having global standards, and the need to avoid differences in standards and the potential for accounting arbitrage. So while the past couple of years have had a bit of chaos, hopefully the next few will bring some order.

the proposed IFRS road map that was issued in late 2008. The statement provides an overview of the SECs IFRS activities to date, summarizes certain aspects of the input received on the road map, and presents the way forward for IFRS in the United States. Perhaps most importantly, the commission has directed its staff to execute a work plan, the completion of which, combined with the completion of the convergence efforts, will allow it to decide on a mandate next year. This is consistent with the decision-making time frame outlined in the IFRS road map.

Foundation (FAF), the AICPA, and the National Association of State Boards of Accountancy (NASBA) have convened a blue-ribbon panel to address private company reporting in this country. As the financial reporting environment continues to evolve, its also important that regulatory and auditing standards keep up with what is happening with financial reporting. This would include addressing the use of forward-looking information in financial statements and the increasing use of judgment in applying standards.

As the financial reporting environment continues to evolve, its also important that regulatory and auditing standards keep up with what is happening with financial reporting.
These actions have demonstrated the SECs continued commitment to moving toward IFRS. While the SEC did not define a date certain for IFRS adoption, the statement acknowledges that the first-time adopters in the United States would be required to report under IFRS in approximately 2015 or 2016. This time frame is also consistent with what was outlined in the prior road map. While much of the focus has been on public companies, private companies should not be forgotten in this discussionafter all, the vast majority of companies are private, not public. Perhaps the most unnoticed, and underappreciated, financial reporting development over the last year was the issuance of IFRS for Small and Medium-Sized Entities (SME) by the International Accounting Standards Board (IASB). IFRS for SMEs culminates decades of global discussion and effort on the accounting for private companies. While these efforts have largely been driven by forces outside the United States, expect more of a discussion around the accounting for private companies in the United States, because the Financial Accounting

Convergence Work Continues for Now

Last year also brought a reaffirmation of the convergence efforts between FASB and the IASB. While FASB and the IASB have been working for over a decade to converge U.S. GAAP and IFRS, they have been called on to redouble their current efforts. The boards are working jointly on several projects that would significantly change U.S. and global financial reporting requirements. Discussion papers have been issued on financial statement presentation, revenue recognition, and leases. The boards have also issued or will issue exposure drafts on consolidation policy, financial asset derecognition, fair value measurements, debt/equity classification, financial instruments (amortized cost and impairment), and hedging activities. In addition, the IASB has issued exposure drafts on provisions, income taxes, and rate-regulated entities, and last year issued IFRS 9, Financial Instruments, the first of several standards addressing issues related to the accounting for financial instruments.

A New Order Begins

As 2011 approaches, I am reminded of the Machiavelli quote, There is nothing more difficult than to take the lead in the introduction of a new order of things. Earlier this year, the SEC issued a formal statement supporting convergence and global accounting standards. This follows
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Many are surprised to hear that FASB and the IASB dont always agree on aspects of particular topics. Its important to understand the context of the conver-

In the end, there is no denying the coming changes to financial reporting and the movement toward a single global standard.

gence efforts, as there often is confusion about what convergence is. Convergence is designed to improve the quality of financial reporting and ultimately bring U.S. GAAP and IFRS closer together. Its more about a process than a destination. The focus is on having similar general principles. Many have misinterpreted convergence as meaning the development of identical standards. As the boards continue to work through their agendas, it is important to consider the stability and transparency of the global standards-setting process, and how national standards setters like FASB will play a role in that process once IFRS is adopted as a reporting requirement.

Steps to Consider Today

While the details for U.S. adoption of IFRS have yet to be finalized, many financial executives are evaluating how to deal with the volume of changes coming. And boards and audit committees have an important role in overseeing these efforts, including understanding the potential risks and benefits. Whether its a new, converged U.S. GAAP standard or IFRS, its important to keep in mind that the impacts are not just about accounting. Broad potential impacts include

internal control processes and procedures; statutory and internal reporting; technology; tax planning; treasury and cash management; contracts, legal, and debt covenants; human resources issues, including education, training, and compensation; internal communication; external, shareholder communication; and professional certification, such as through the CPA examination. The coming changes in financial reporting also will impact employees outside finance and accounting, many of whom will be needed to assist in transaction analysis. As a result, those outside accounting will need education and training. Finally, it is not just about the corporate office. Companies will need to push down these reporting changes to local subsidiaries. This may involve new reporting processes and groupwide internal control considerations. Finance executives will need to balance decision making at a corporate level and empowering business units. Company executives should understand the implications of these new financial reporting requirements and begin to set expectations for their organization. In doing so, it will be important to undertake the following: Analyze the impact of the ongoing convergence efforts, including the effect of the proposed new standards on current company initiatives, such as contemplated systems changes or upgrades and tax planning. It also will be important for U.S. companies to understand the changes to U.S. GAAP and the incremental differences from IFRS. Assess the timing of IFRS adoption. Although the specific timing of an IFRS transition is not set, the amount of time U.S. companies may have to prepare may be less than many expect. Take steps to ensure that the time is used to your advantage. Positioning the company for obtaining long-term benefits from an eventual IFRS transition starts with early planning. With sufficient lead time, potential problems and issues can be identified and addressed in a cost-effective manner.

Be aware of potential risks and begin to prepare for the greater use of judgment in applying the new standards. The board and audit committee should understand how management will address these new requirements and their consistent application throughout the organization. It will be important to understand the process around judgments, including how the substance of transactions was assessed, the objectivity of the assumptions used, and the overall reasonableness of the final judgments made. Understand the companys current statutory reporting landscape, including where IFRS is required or permitted, and the implications on future adoption on an entitywide consolidated basis. Be mindful of opportunities where the use of IFRS could translate into longer term benefits, such as increased standardization and centralization of statutory reporting.

Inevitable Movement
The movement toward a single global standard has been difficult, but it will continue. This year, more countries will adopt IFRS as a required basis of accounting. This now includes both full IFRS, for public companies, and IFRS for SMEs, for private companies. There are some who still question the movement to a single set of global accounting and financial reporting standards whether it is desirable or even possible. But for most, I think the discussion has now moved to How do we deal with this? In the end, there is no denying the coming changes to financial reporting and the movement toward a single global standard. With greater understanding of the implications of the coming financial reporting changes, executives can design an appropriate strategy to address key impacts. The board and audit committee can also play leading roles in setting the right tone and can help determine appropriate buy-in from functions and business units. Bringing up key questions now may ultimately determine the optimal adoption approach and help estab lish the proper tone at the top. D.J. Gannon, CPA, is a partner at Deloitte LLP.
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