Sunday 7 April 2013

IFRS Adoption by 2014 - Is it Possible?

By Carl Pashko

Milestones

The primary objective of adopting IFRS is the belief that a common accounting language around the world is necessary to improve comparability and transparency of financial reporting for investors. Giving investors the ability to compare companies' disclosures regardless of what country they came from, would give investors greater confidence in the transparency of financial reporting. The SEC set forth a number of prerequisites for their decision in 2011 to maintain the mandatory transition date in 2014. These include but are not limited to:

a.) Improving specific accounting standards
b.) Improving the structure and funding of the IASB
c.) Facilitating the use of interactive date under IFRS
d.) Updating the education and licensing of U.S. accountants
e.) Evaluating the early adoption experiences of a limited group of companies
f.) Timing of future rule making
g.) Sequencing of companies required to use IFRS

The accomplishment of these self-imposed milestones will be the deciding factor in whether or not it will be possible to adopt IFRS by 2014.

Joint Projects

As of November 5th, 2009 the two sides have made tremendous progress in their milestone targets. The first major joint project completed by the IASB and the FASB was the Business Combinations project. These standards were intended to eliminate a source of some of the most significant and pervasive differences between the two boards. One of the most important accounting standards going forward is fair measurement. Fortunately, in May 2009 the IASB published an Exposure Draft on fair value measurement that is greatly consistent with the FASB requirements. The two boards have said that their primary objective is to establish the same meaning of fair value in U.S. GAAP and IFRS. By the third quarter of 2010, they will improve all requirements and publish its final standard for fair value measurement.

Revenue recognition is a project that is deeply being tested and evaluated by members of both boards. Both boards agree that developing a single revenue recognition model built on the principle that an entity should recognize revenue when it satisfies its obligation in a contract by transferring goods or services to a customer. This falls in line with many existing requirements, however, they feel that clarifying the differences will improve comparability and understandability. At the October meeting, the boards re-confirmed their plans to regulate a series of workshops to test the concepts proposed. The current goal is to publish their final standards on revenue recognition by the second quarter of 2011.

In 2008 the two boards published a discussion paper about the principles for presenting financial statements. They want to present it in a manner that portrays an entity's cohesive financial picture, disaggregates information so that it is useful in predicting future cash flows, and help users value an entity's liquidity and financial flexibility. They have proposed an idea to remove the option in U.S. GAAP and IFRS that allows entities to present comprehensive income either in a separate statement or directly in equity. They believe eliminating that option will make it easier to compare income statements, and allow more transparent reconciliation. They also discussed the definition of discontinued operations. The current timetable for a published standard of financial statements is set for 2011.

Most of the proposed dates for published standards of the joint projects are set for the second half of 2010 and the first half of 2011. This would indicate that the SEC would have a pinnacle of six months to gather and analyze all of the board's final standards before making a decision of whether or not to adopt IFRS by 2014. Therefore the question is whether six months is ample time to analyze the findings from the joint projects and decide if it is possible to adopt IFRS by 2014. Obviously this is all assuming the two boards are able to meet their current deadlines and agree to a solution for each joint project.
Education

If the United States decides to adopt International Financial Reporting Standards by 2014, who will prepare the current and future accounting college students in time? This is a huge dilemma facing universities around the country right now who are not prepared. In order for public companies to adopt IFRS by 2014, they will need to begin using international standards beginning in 2011. According to an IFRS survey by KPMG, thirty percent of professors believe graduating seniors likely won't have a substantial amount of IFRS education until the 2011 graduating class. Furthermore, forty two percent of professors felt that textbooks with IFRS information will not be ready until the 2010-2011 academic year.

Another problem facing universities, according to Sue Haka, president-elect of the American Accounting Association and a Michigan State accounting professor, is the dwindling number of faculty members. The amount of accounting majors has increased between ten and fifteen percent over the last ten years, while the amount of faculty has decreased by thirteen percent. Haka says what's even worse, is the fact that the average age of accounting professors is fifty six. It would be easier for this older group of professors to retire, than to learn how to teach two different accounting systems. She also believes the universities won't change their curriculum until the SEC sets a firm date. Therefore publishers won't see a demand and won't change textbooks. Another complication is the fact that the universities curriculum is driven from the CPA exam, and until the exam includes IFRS, neither will curriculum.
Is 2014 a Reality?

The SEC will decide in 2011 whether to adopt by 2014 or not. The reality of the matter is that deciding in 2011 is too late. In order for companies and educators to be prepared to successfully transition to IFRS, the Securities and Exchange Commission must decide now if they are going to adopt IFRS and set a deadline immediately. To make a decision and expect public companies to use the system immediately, which is what they will have to do, is not only absurd but nearly impossible. Many companies, educators, and accountant are not moving quickly right now because there is not a set deadline. It is understandable for the SEC wanting to take their time and make the right decision, but if that's the case they need to eliminate their proposed road map and continue to converge into IFRS and do within a reasonable time line. Continuing to converge would give everybody involved enough time to make the necessary adjustments. Educators could prepare curriculum and textbooks, companies will have enough time to train their staff, and the FASB and IASB would have the ability to allocate more time and resources into their joint projects. Cost-benefit is a critical analysis is the accounting field and if applied here the benefits clearly do not outweigh the cost. If the SEC decides it is beneficial enough to adopt IFRS by 2014, the only way of accomplishing that is to set a deadline immediately.

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